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By Robert L. Cain


School’s not for everyone, but hope is.  Hope can overtake someone’s memory of school experience as he or she thinks about wanting to get ahead and the education or training it will take to do it. Stuck in a dead end job, the only hope for something better is more education (or winning the lottery), they come to realize.  They sign up for classes apparently thinking that the problems they had with school would be different than when they were less than successful before.  But the problems are the same, and what’s worse, life happens—the double whammy.


Because they soon remember and experience why school wasn’t for them, their return to school doesn’t last long, but the student loan they got to go back to school does.  It hangs on albatross-like over their financial situation.  They don’t owe much, but apparently it’s enough to keep them from getting it paid off what with the other bills hanging over them and life grabbing them by the heels and dragging them further down.


A recent study by the Urban Institute looked at who is most likely to default on a student loan and discovered something that seems counter intuitive.  It turns out that the people most likely to default on a student loan are those with a balance of less than $5,000.  A low student loan balance usually means they never finished school and so never got the degree they hoped for. The Urban Institute report found “Borrowers who owe less than $5,000 at the start of repayment are the most likely to default within four years; 32 percent of these borrowers defaulted at least once” in the four years after the loan becomes due. On the other end of the scale, people with student loan balances of over $70,000 have a chance of defaulting of less than 1 percent. In fact, the higher the balances, the less likely people are to stop paying.   The reason is simple: those with higher balances most likely finished school, got degrees, and got better jobs.  Those with lower balances didn’t, but they hoped.


The low-balance loan holders added student loan debt to their already overwhelming other debt. They “are more likely to be in collections on some other type of financial obligation” such as utilities collections debt and medical debt. Plus some have retail debt or bank debt, continues the Urban Institute report.


Defaulting on a student loan requires ignoring, or wishing the bill would go away, for considerable time.  Those loans issued by the government don’t go into default until after 270 days, nine months.  Other debts can go into default or collection after 90 days.  And to default more than once on a student loan requires extensive failure to pay debts in a four-year period.  And what’s worse, when a borrower defaults on a loan, it grows.  Interest keeps getting added to the principal balance sometimes adding more than 10 percent to the original loan amount, so a $5,000 debt might grow to $5,500 or more.


The most common delinquent debts other than student loans were utility collections at 35 percent, medical collections at 41 percent, and credit card debt at 24 percent.  Some 75 percent of the defaulters had some other debt or debts in collection when they defaulted, reports the Urban Institute study. As a result, or because of, these bills, the credit scores of the defaulters were most often between 500 and 540.  It’s as if the world ganged up on them and beat down any hope they had of getting ahead.  They saw going back to school, something that had already shown didn’t work for them, as the only way to get a better job and earn enough money to escape the debt trap.


We have to empathize with them, but they are most likely in a hole they won’t be able to climb out of anytime soon.


Even so, as alarming as these figures are, the vast majority of people with student loans of less than $5,000, or any amount for that matter, repay their loans and never go into default, even if they never completed their education and got that hoped-for better job.


It is just that people who have had the most problems in school are more likely to end up with unresolved student-loan debt than are those for whom school worked.  There’s nothing we can do about the educational system’s characteristics that affect people who have difficulty with the educational system, but we can be aware that the people with low student loan balances more likely are in financial trouble than those who are repaying higher balances.

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