Report: Nearly 5 million Americans in default on federal student loans

Report: Nearly 5 million Americans in default on federal student loans
Nearly 5 million Americans are reportedly in default for their federal student loans. Some analysts say the rising number of student loan defaults is a warning sign of an economic bubble that is about to burst. (Getty Images)

Nearly 5 million Americans are in default on their federal student loan payments, the Wall Street Journal reported Wednesday.

That’s nearly double the number of Americans who were severely behind on payments four years ago. The number of borrowers that haven’t made a payment in at least a year grew by nearly 274,000 in the third quarter alone. And it’s happening despite promising signs for economic growth and job creation, the WSJ reported.

What impact could this have on the economy?

Some analysts say the rising number of student loan defaults is a warning sign of an economic bubble that is about to burst.

“The higher education bubble (one-sixth of the U.S. economy) will likely burst with the force of all previous catastrophes combined — a shock wave so sudden, so large, that it gathers the full force of the savings and loan, insurance, energy, tech, and mortgage crashes, creating a blockbuster-level perfect storm,” Fortune reported in July.

Defaulted student loans represent $84 billion or 13 percent of $631 billion that currently requires payments from borrowers, the WSJ said.

The total student loan portfolio for the government totals $1.37 trillion, according to the WSJ. That amount includes debts that are being repaid, debt not yet requiring payment, and debt from guaranteed loans made by private lenders. Debts that do not yet require payments include loans for students still in school and borrowers who received a temporary hold on their payments due to financial difficulties or other hardships. Additionally, some borrowers are able to get federally approved payment reductions based on income.

Default levels are rising despite improvements in the labor market and economic growth, the WSJ reported. The problem can have a domino effect on borrowers and the economy. Borrowers in default will have a harder time getting loans for cars and homes. In turn, limits on their buying power can also negatively impact economic growth.

Will taxpayers have to pay for this?

When student loans are unpaid, it can also impact the federal budget. Taxpayers ultimately foot the bill when student loans go unpaid, the WSJ says.

Government budget officials say the student loan program is profitable. But it has missed revenue targets due to borrowers missing payments or taking advantage of federal programs to reduce or stave off payments, according to the WSJ.

“It’s kind of phenomenal given all the tools we have at this point to avoid default that this many people are still winding up in default,” Clare McCann, an education-policy analyst at New America, a “center-left think tank,” told the WSJ.

Who is defaulting on payments?

According to the New York Federal Reserve, borrowers that renege on their payments are more likely to have enrolled in for-profit colleges or community colleges. And, they are also likely to have dropped out before they completed their programs, the WSJ reported.