Five Myths about Student Loan Delinquency

People who default on their loans aren't the only ones who have a hard time. 

A recent report, Delinquency: The Untold Story of Student Loan Borrowing, finds that the majority of student loan borrowers never default on their loans, yet millions have difficulty repaying their obligations and become "delinquent" nonetheless. Student loan defaults tend to get all the attention, but that paints an incomplete picture of the range of difficulties student loan borrowers experience. To fill in and correct that picture, here are five common myths that the report addresses. 

Myth 1: Delinquency is less serious and common than defaulting. 

There is a false dichotomy between defaulters and everyone else, who supposedly does fine. In reality, many borrowers have difficulty making their monthly payments but avoid default. For every defaulter, at least two borrowers became delinquent. 

Default has very serious consequences, including potential garnishment of the borrower's wages and damage to his or her credit record. But delinquency without default also has ramifications, such as difficulty getting future credit for needs such as mortgages, car loans and consumer loans. These consequences highlight the need to prevent delinquencies as well as defaults. 

Myth 2: Students who graduate from college don't become delinquent or default. 

Borrowers who graduate are less likely to be delinquent, but many do have difficulty repaying. This is particularly true for students at community colleges and for-profit institutions. At public two-year institutions, 42% of borrowers who graduate are delinquent at some point in their first five years of repaying, though only about 10% of the students at community colleges borrow in the first place. At for-profit two-year institutions, about 57% are delinquent or default despite graduating, and the overwhelming majority of students at these institutions borrow. Both kinds of college tend to serve low-income, first-generation and nontraditional students, who tend to be relatively uninformed about borrowing in general. 

Borrowers who have graduated from four-year public or private nonprofit institutions are much more likely to be repaying their loans on time. Still, almost 20% of them become delinquent at some point during their first five years of repayment. 

Myth 3: The students who become delinquent are the ones who borrow the most. 

It may seem counterintuitive, but student-loan borrowers with relatively low levels of debt are more likely to become delinquent or default. This fact may be related to how many years they're in school before they begin repayment, whether or not they are able to complete a degree or what kind of program they enter. Many borrowers who drop out face a double problem: They have problems repaying their loans and they lack a degree that could help them improve their financial well-being. 

Myth 4: Low-income students don't need to borrow to go to college. 

Federal student grant programs were initially meant to take care of low-income students and others who otherwise wouldn't enroll. Over time, however, the value of Pell Grants has eroded, and federal budget challenges may force additional decreases. This is especially problematic when states are also slashing their need-based aid programs. As a result, low-income students increasingly must take on student loans to meet the ever-increasing costs of college. In 2007-08, 46% of low-income undergraduates, a higher proportion than the 39% of all undergraduates, were borrowing. 

Myth 5: Borrowers understand their various repayment options. 

Over time the federal government has introduced a range of repayment options to make loan payments more manageable, including varying loan terms and the possibility of postponing payment temporarily in times of financial hardship. Most student loan borrowers undergo federally mandated entrance and exit counseling sessions while enrolled in college, and they hear about the various repayment options there. But many borrowers withdraw from school unofficially and never go through the process. Although a lender can often point a struggling borrower toward a repayment option, many borrowers don't hear anything until they are already delinquent or in default. Overall, almost a quarter of borrowers use repayment options to postpone their monthly payments to avoid becoming delinquent, and others use them only after they have already become delinquent. 

Student financial aid, including grants and loans, plays a key role in supporting students' access to and success in college. Despite increases in grant funding, the number of student loan borrowers has continued to increase, and total indebtedness has grown too. We need to dispel the misconceptions associated with delinquency and reframe the policy conversation to focus not only on defaulters but also those who are delinquent and haven't yet defaulted. 

Michelle Asha Cooper, Ph.D., is the president of the Institute for Higher Education Policy, an independent nonprofit organization that is dedicated to increasing access and success in postsecondary education around the world.