Dealing With Debt: 1992-93 Bachelorís Degree Recipients 10 Years Later - Debt Management (Stafford Loans)

Debt Management (Stafford Loans)

Among bachelor’s degree recipients with no further degree enrollment, 39 percent had taken out Stafford loans as undergraduates (table 14). Among this group, 12 percent had consolidated some or all of their loans (table 15). They may have chosen to take this step for convenience, to obtain a fixed interest rate, or to extend the payment period.3 Five percent of borrowers with no additional degree enrollment had ever taken a deferment because of a disability, volunteer service, or other approved reason (table 16);4 and 12 percent had ever been in forbearance due to financial hardship (table 17).

Ten percent of bachelor’s degree recipients with no further degree enrollment who took out Stafford loans as undergraduates had defaulted at least once—that is, did not make any payments for 9 months and had not been granted a deferment or forbearance (table 18). However, 45 percent of those who had defaulted later re-entered repayment. Graduates who defaulted had borrowed more, on average, than those who did not default ($10,000 vs. $7,600).

Large loans were associated with default: 20 percent of borrowers with $15,000 or more in Stafford loans defaulted at some point, compared with 7–8 percent of those who borrowed less than $10,000 (figure C). Those who started off with the highest salaries in 1994 were less likely than those with lower salary levels to have defaulted.

The percentage who defaulted was also related to deferment and forbearance: 21 percent of those who had ever deferred and 20 percent of those who had ever been in forbearance defaulted, compared with 9 percent of those who had not deferred and 8 percent who had not been in forbearance. Nevertheless, about 80 percent of those with deferments or periods of forbearance did not default.

Note that the federal government calculates cohort default rates based on the percentage of borrowers who enter repayment on a federal student loan during a particular federal fiscal year and default by the end of the next fiscal year. For fiscal year (FY) 2002, the cohort default rates were 4.0 percent for students who attended public 4-year institutions and 3.1 percent for students who attended private not-for-profit 4-year institutions (U.S. Department of Education 2004a). One would expect the rate shown in this analysis (10 percent) to be higher because it covers a much longer time period.

On average, students did not have difficulty dealing with their debt right away. The average length of time between graduation and the first deferment, forbearance, or default was 4–5 years (tables 16, 17, and 18).

3 Extending the payment period reduces monthly payments but increases total interest charges.

4 The most common reason for a deferment is enrollment in graduate school, but this analysis group is limited to those who did not go on to graduate school.