Another one of President Obama’s disastrous policies is coming to fruition. More and more student loan borrowers are avoiding paying back their loans, and American taxpayers are all on the hook. Two stories at the Wall Street Journal highlight this growing problem. The Hidden Student-Debt Bomb by Jason Delisle explains how the whole scheme works.
Forbearances are thus a double-edged sword. They help borrowers keep their loansin good standing, but they also mean borrowers aren’t making progress on paying down their debts—just the opposite. Enrollments in forbearances are really a negative indicator in the federal loan program, much like delinquency and default.
That is why the latest figures from the Education Department that show steady increases in forbearances are so alarming. Loan balances in forbearance were about 12.5% of those in repayment in 2006. In 2013, they were 13.3%. Today they are 16%, or $125 billion of the $778 billion in repayment.
If student-loan defaults exhibited that kind of growth it would make national headlines. Forbearance growth goes unmentioned, yet it looks a lot like a default given that the borrower isn’t making payments.
Another option is income-based repayment plans, which allow borrowers to suspend or reduce payments on their loans and will also cure a severely delinquent loan. The mechanics of these plans are a little complicated, but for borrowers with incomes below 150% of poverty, payments are zero. Borrowers who earn more than that make payments between 1% and 15% of their incomes. After 10, 20 or 25 years, depending on the program, the government forgives any outstanding balances and taxpayers eat the loss. (Read More)
Delisle goes on to explain how President Obama has “greatly expanded benefits under income-based repayment plans” and continues to promote them, even though “the share of borrowers in default is still trending upward.” That’s despite the government bending over backward to help borrowers avoid default.
The WSJ editorial board then weighed in on the gravity of the situation.
One of the slow-rolling and under-reported government debacles is the rising amount of student-loan debt that is guaranteed by taxpayers and will never be repaid. Thanks to the federal takeover of the student-loan market in 2010, the Education Department now stands behind more than $1 trillion in outstanding debt. Less well known is how the same federal government that has promoted and subsidized this debt is also scheming to make sure it doesn’t have to be repaid. (Read More)
Already borrowers are defaulting at a rate of nearly 20%, and this is just the beginning. Future taxpayers will likely be on the hook for hundreds of billions of dollars in unpaid debts. But of course, the bills won’t come due until Obama is out of office.