The New Federal Student Loan Numbers Are In (And They're Ugly)

We're going to welcome back to the program Betsy Mayotte. She is the founder of the Institute of Student Loan Advisors. Betsy, it's always great to see you. Thanks for joining us this morning. Of course. Nice to see you. It's a pleasure to see you. I wish it was under some better news. The new federal student loan information came out. I had reached out to you to come on and just talk about student loans. You sent me this information. I'm kind of depressed. Why don't you give us the top line here, Betsy? Well, the top line is that student loan, the percentage of borrowers that are in default on their student loans is, if it's not a historic high in the entire history of the program, it's darn close to it. We've got over 9 million borrowers who are in active default on their student loans. And to add insult to injury, Jeffrey, there's also data out about our more recent grads, so people that have graduated since COVID started, so since 2020. And about one in four of recent grads are 90 days past due or more of their loan. So it's affecting their credit and they are headed for default if they aren't already in default. I mean, I'm looking at the numbers that you sent me, $234 billion, to put it in real number terms. That's like a small country's economy, Betsy. We've had you back on and some of your student loan colleagues on to talk about some of these changes, rule changes, that have occurred. Is the delay in the restarts and and or the restarts the problem here? Is it a culmination of affordability? Is it forgetfulness? What is it that has led to where we are? It's a combination of things that led to what I'm calling the perfect storm for default. So you might remember that during COVID, the government, for the first time ever in the history of the program, actually paused student loan payments, which was the right thing to do. And then they kept extending that pause, which again was the right thing to do. But I started to get nervous then because when we talk student loan data, we talk a lot about who's the most likely to default. But what isn't talked about hardly at all is who's the least likely to default. And that's where this comes in. The people least likely to default are literally just the people who are in the habit of making their payments. When we took 40 million people that were in the habit of making their And then we changed the rules. The economy changed dramatically. There's a lot of people that are going into repayment that have gone into repayment for the first time in years over the last year where health care costs have increased dramatically. Gas prices, of course, is the big food freeze, housing costs, everything. So it really has become the perfect storm of all these different events, the rule changes, the long pause in payments, and then the spending power that consumers have. I think you touched on this, but let me ask you, the people that are not going to default are the people that are making payments. What generations of people are we talking about? So like I'm a Gen X or there's Gen Z, there's millennial, there's boomer. Who are the people? I don't want to group them by male, female, but I mean, are they in certain generations or is it just it's cut evenly across the board? I'm glad you asked that question because I think this is something that people don't realize. Student loans are not ageist. You know, people think, including policymakers, I think they think student loan debt is a young person's issue. What generation do you want to ascribe that to? Excuse me, but the fact of the matter is half of all borrowers over the age of 30, a quarter over 45, and the fastest growing population age group wise are the over 65s. And if you look at the default data, the older a borrower is, the more likely they are to default. That's interesting. I'm wondering why that is, because they have, no offense, they have less time left. So they're like, I'm going to shift my priorities to caregiving, to my retirement, to the more other priorities. I laugh, but it's not funny. I'm sorry. But I think part of it now, and we're getting a little beyond my wheelhouse here because I am not an economist. But you play one on TV. I've seen you on Law and Order. I think, especially as we get into the 60-year-old ranges, or maybe even the late 50-year-old ranges, the income, the responsibilities increase. You know, you're paying for your own kids' college. You're trying to desperately save for retirement. But also your income is, the increases in your income are slowing down. So there's not as much wiggle room in the budget. So let's go back to something that I think it's right in your wheelhouse. So I apologize for kind of taking you out of the wheelhouse. It's not my intent, but I was interested in your feedback on that. Let's go back to kind of writing the ship, because how do I prevent myself, if I'm getting these paid notices and say, I'm late, I haven't made a payment, what's my first step? Is it to make a partial payment? Who do I call? What do I do? Well, your first step is to call whomever the loan holder is. And it really depends as if you are delinquent or if you're actually in default. If you're not actually in default yet, call your servicer right away. Ask for what's called a forbearance to bring your account current. And then while you're there, talk about the different payment plans you have at your disposal and see which one is best going to fit your budget moving forward. If you're actually in default, where the loan is actually transferred over to the Department of Education, by the way, soon to be Treasury, Treasury is taking over the collection of defaulted loans, then you can talk about either consolidating the loan out of default, which for most people I actually don't recommend anymore, or what's called loan rehabilitation, where you make nine consecutive payments of an amount based on your income. And once you do that, they take your loan out of default, so back in good standing, and they remove the default line from your credit report like it was never there in the first place, which can, it won't completely repair your credit, but it'll take the sort of the big whammy off, off of it. So I mean, this, this does just for my benefit and the audience benefit, this non-payment, it's not like this doesn't have an impact. This has an impact on your credit report, which presumably would impact other large purchases, like buying a home, going for future loans, like education loans, etc. So this, this is impactful. It is. And it's something people don't think about, about how, how defaulting on your loan can affect other aspects of your financial life. Like if you have, say, a credit card with a variable interest rate, it could be that that interest rate goes up because of that hit to your credit. It'll make it more difficult or more expensive for other debt. But the other thing is, you know, I run into people that are like, well, I just can't pay, so I'm going to let it default. They can garnish my wages. Here's the thing. Defaulting is almost always more expensive for you, both monthly and in the long term, than trying to find a way to afford one of the payment options available to federal student loan borrowers. The reason for this is the loan's not a default. You're going to be eligible for a plan based on your income. And the most they're going to be able to utilize is 15% of your adjusted gross income, minus an allowance based on your family size. You default, they're taking 15% of your paycheck. So that's, you know, 15% of your gross. So that's more monthly. In addition to that, they're adding 24%, up to 24% in collection costs to the loan. So again, defaulting is almost always more expensive, both short term and long term. So if I'm a future student, college student, or a parent of one, or a guardian of one, should I be afraid of taking a student loan, a federal student loan? I mean, hearing all this makes me, you know, I don't even have kids. I have nieces and nephews who are nowhere near college, but it makes me fearful because I think about the impact. So should I rethink my college and also how I finance and maybe look at other alternatives? Or it's still a good instrument to use. I'm trying to figure out where I go. Federal student loans do have many, many, many options if you can't afford the payment. So now listen, I think the least amount of debt is the best amount of debt. So you should always look at the amount that you're going to have to borrow for the total college degree before you enroll and figure out what that monthly payment is going to be and see if that's going to be edible, you know, in the first place. But in my opinion, federal student loans, if you have to borrow, are still the best instrument versus private, versus taking a home equity loan, versus borrowing from retirement. I still think federal student loans are the better, the safer bet because of, you know, deferments, forbearances, lower payment options that are available. And also the interest rate tends to be lower than in the private market. Is that a fair statement? These days, not always. Okay. You know, if you have really, really good credit and really, really good debt to income, there are some people that are able to get private loans that have a lower interest rate than the federal loans right now. But most of the time, you know, federal student loans are going to have the lower interest rate. But again, it's not about just about the interest rate. It's about all the safety nets. Like federal student loans have discharges if you should become disabled or pass away. Or if you work in public service, you can get the loans forgiven and that kind of thing. And private student loans just don't have those. Yeah. Yeah. I mean, that makes sense. Here's a economic, kind of quasi-economic question, but I want to ask you about the Fed raised rates. Does that at all find its way to the student loan rates, at least in the short run, because they raised, I don't even remember what the, but raised maybe a quarter point, but is the quarter, but does that flow through to... It won't for federal loans, at least, at least for this year. Federal student loan interest rates are based on the 10 year treasury bill and they set the rates. So if you borrow on or after July 1st, 2026, your rate's going to be X, no matter what the Fed does with the interest rates. It will affect private loan interest rates though. My last question for you, and I promise I'll let you go on to other things. I know that you often will speak to policymakers, both locally and nationally. If you could tell them or give them some feedback and or some suggestions, what would be in Betsy Mayotte's suggestion box? What would you tell these representatives? I mean, you know, within, you know, without, we don't have, you know, we don't have to major wave a magic wand, but some practical steps. Yeah. I do think, I think some of the changes that were made under HR 1 last year are going to harm borrowers, especially parent borrowers, for the long term. It is going to exacerbate the default problem that we started off this segment talking about, again, especially for Parent PLUS. I think, and that will also end up affecting the budget. You know, these loans are already a loss to the U.S. taxpayer, and I think it'll increase that loss. So I do think they need to wobble a bit on some of the decisions that they made under HR 1 around the repayment plans and around some of the other safety net, the changes that we haven't seen yet that aren't going to be effective until next year. Yeah. Well, that's good advice. Hopefully someone's listening. I know people are listening, but hopefully they're listening and writing things down, because I know that, you know, there's still time left in the term, even before the new Congress comes in in January. But that's another conversation. Betsy, may I add, it's always a pleasure to talk to you. Thanks for joining us, and we look forward to having you back very soon. Thanks. Well, thanks for watching. And don't forget, we're back again tomorrow morning with another great expert on another great topic. You can tune in right here, Monday through Sunday at 7.30 a.m. Eastern Time. And don't forget to subscribe to our daily newsletter, The Morning Pulse, for all the news in one place, delivered directly to your email box. Check it out at our website.