In November, the Federal Reserve Bank of New York published a blog post discussing who defaults on student loans. In a companion piece, the branch’s economists investigated the extent to which student-loan defaults coincide with a bad economy. The intuitive answer may seem to be, “Yes,” but the question is important because student-loan repayment depends heavily on employment and income, especially because student loans are difficult to discharge in a New York bankruptcy.
To address the question of how the labor market affects student loans, the N.Y. Fed economists tracked student debtors’ default behavior by dividing them into repayment cohorts timed to the year after they left school. Most student-loan debtors receive a six-month grace period from graduation (or dropping out) to repayment. Thus, the post’s authors treated a debtor who graduated in 2009 as part of the 2010 repayment cohort.
The post tracked the two-year, three-year, and five-year cumulative repayment cohort default rates (CDR) for each repayment cohort from 2004 to 2014, or, graduates from 2003 to 2013. The researchers found that the two-year CDR for the 2004 cohort was less than 10 percent, and its five-year CDR was nearly 20 percent. (These numbers sound worrisome in themselves, even at a time when the labor market was stable.) By contrast the CDR rates for the 2010 through 2012 repayment cohorts spiked considerably. The 2011 repayment cohort, which would have graduated in 2010, had a two-year CDR double the 2004 cohort, and after five years, one-quarter of its members had defaulted on their student loans.
The authors then compared these findings to the Bureau of Labor Statistics’ “unemployment to employment transition rate,” the rate at which people who are unemployed in a given month find work. Higher transition rates are better because they indicate workers are having an easy time finding new jobs. Understandably, the transition rate was lowest around the same time that the repayment cohorts with the highest CDRs entered repayment.
So clearly the economy has an understandably large impact on student-loan repayment. However, the researchers also noticed that even the 2014 repayment cohort still showed an elevated two-year CDR compared to a decade earlier. This too mirrored the employment transition rate: In 2005 the transition rate was around 25 percent and rising. The transition rate for the 2014 cohort was only around 20 percent.
The post also emphasized that the high CDRs were also due to a growing proportion of student-loan debtors coming out of for-profit colleges, two-year degree programs, arts and humanities programs, and non-elite schools, all defaulted on their loans at higher rates. Comparing the CDRs for debtors who finished four-year programs to those of two-year programs showed that between the 2004 and 2014 repayment cohorts, bachelor’s-degree holders’ three-year CDRs were quite stable, between 10 and 15 percent. Meanwhile, two-year degree holders’ CDRs fluctuated from 15 percent to 30 percent.
The N.Y. Fed post can be found here.
The article’s findings demonstrate the importance that employment and income have on debtors’ capacity to repay their student loans, as well as the focus of their studies. To a great degree, student-loan default is not a function of irresponsible debtors but on bad circumstances. Nevertheless, if you are struggling to repay your student loans, and an income-derived repayment plan is not available, then talking to an experienced New York bankruptcy lawyer can help you assess your options. A chapter 7 bankruptcy can help free up income for other debts for student loans, chapter 13 offers options as well.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.
