Today the news comes in the form of an announcement by the Education Department that says they have “overstated student loan repayment rates…for 99.8% of all colleges and trade schools in the country.” The truth is that at over 1000 colleges “more than half of students had defaulted or failed to pay down their debt” in the first seven years of holding their loans.
This is frightening because if those students had the average amount of debt ($30,000) and a typical interest rate of 6.8%, they’re now facing an extra $17,000 of debt to pay down. Their loans grew by over half in those 7 years that they couldn’t make a payment.
Borrowers who can’t make payments on their student loans will go into default, but typically they can’t wipe away these debts with bankruptcy protections. While this obviously has crippling effects on individuals holding large amounts of student loan debt, it’s also a false positive for financial institutions holding that debt. On the outside, it looks like an asset (just like those toxic mortgages did 10 years ago), when in reality, many of the loans may turn out to be valueless.
Just for good measure, one of the companies holding much of this student loan debt — Navient — has just been sued by the Consumer Financial Protection Bureau for misleading practices while collecting on their loans.
The whole thing is just getting worse and worse as college costs continue to rise and the income disparity between college and non-college educated people is at an all-time high.