With well over 4.6 million Americans defaulting from their federal loan, which includes nearly 275,000 Americans in the past three months, are federal student loans going to lead to the failure of the American economy? Well no, but the massive spike in student loan defaulting should raise some alarm bells for both borrowers as well as lenders.
Consider this, at the end of the third quarter of the fiscal year this year, 22 percent of borrowers in repayment, or over 5 million individuals, went delinquent on their student loans. A delinquent student loan is considered any loan that has not been paid for 90 days after a scheduled payment. Delinquent loans move to default after 270 days for most federal loans. According to the Wall Street Journal, defaulted federal student loans totaled almost $84 billion this year.
Furthermore, some students are facing a tougher situation. Those who hold both federal and private loans may experience harsh penalties for failing to pay a private loan. Additionally, private loans have fewer avenues for forgiveness or relief, so you can quickly see why federal loans become a distant second for those looking to prioritize their student debt.
But what are the risks of defaulting? Well, for those who are considering default, you will not be in a great situation. According to the Federal Student Aid Office of the Department of Education, individuals who fail to pay their loan risk penalties such as: mounting interest payments, loss of deferment eligibility or the ability to be placed on a payment plan, loss of access to future credit, garnished wages, and an inability to buy or sell assets.
Looking at the Bigger Picture
Student loan debt could have long-term effects on the American economy. This is because young adults are no longer buying homes, and in fact, this generation of young people are buying homes 35 percent less frequently than the previous generation. Many economists point to student debt as one of the factors in this decline.
Even with a strong economy and low unemployment, loan defaults can greatly affect the countries economy. This is because federal loan defaults will be the responsibility of the taxpayers, and the federal budget will need to account for the growing default rate.