40% of Student Loans Could Be in Default by 2023, and Here’s Who’s to Blame

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There’s big trouble brewing in the world of student loans, and many people don’t even realize it.

Sure, there’s the $1.4 trillion in outstanding college debt that is sure to scare your cap and gown off. But a new report by the Brookings Institution highlights a looming default crisis that could shake the U.S. economy.

Using new data on student borrowers who entered college for the first time in 2003-04, Brookings senior fellow Judith Scott-Clayton concluded that by 2023, the cumulative student loan default rate for that group will top 40%. Yep, the report says nearly half of that faction will have stopped paying back their student loans for at least nine months.

Right now, the student loan default rate for that group is around 25%. The most recent U.S. Department of Education data shows the default rate for those who took out loans in 2014 has ticked up to 11.5%.

Comparing the numbers, you can see we’re in for a major increase in defaults. But why?

For-Profit Colleges Drive the Student Loan Default Rate

Drill into the numbers further, and you’ll see that nearly 70% students who took out loans in 2004 to attend for-profit universities will likely default by 2023.

These types of institutions include the controversial — and now shuttered — ITT Technical Institute, Corinthian College and DeVry University.

Public university student borrowers who started college in 2003-04 are projected to have a 26% default rate in the next five years.

The projected gulf in default rates comes as Education Secretary Betsy DeVos freezes Obama-era regulations on for-profit colleges, such as rules erasing student loan debt of borrowers who were defrauded by such schools.

In the conclusion of the study, Scott-Clayton recommends ramping up regulations on for-profit schools, although she doesn’t discuss specifics.

Default Rate Is at ‘Crisis Levels’ for Black Students

The gap in default rates between students at public and for-profit schools is dramatic, but the difference in default rates among races is even more stark.

“Debt and default among black college students is at crisis levels, and even a bachelor’s degree is no guarantee of security,” Scott-Clayton wrote in the study. “Black (bachelor’s degree) graduates default at five times the rate of white (bachelor’s degree) graduates… and are more likely to default than white dropouts.”

By 2023, the default rate for black borrowers who started college in 2003-04 is projected to hit 73.3%. It’s largely due to labor market that’s less favorable for these graduates, according to a previous Brookings study.

In the previous study, Scott-Clayton recommended a pay-as-you-earn model of student loan debt repayment, in which debt service would be based on your income.

But what should you do if you’re among the millions of students we’ve discussed so far?

What Can I Do if I’m Heading Toward Student Loan Default?

First, if you’re struggling to pay back your student debt, you’re not alone. And you could be on the way to breaking free from that debt, like this guy, with a few simple tips.

Try refinancing with a site like Credible. Jammie Proctor, an engineering graduate, saved more than $6,500 on his student loans using that route.

Then, to save some extra cash, try savings apps or start a side hustle.

You may also consider moving back home if that’s an option, like Kelly Russell.

If you’ve already defaulted on your student loan, make sure you get yourself on an income-driven repayment plan. And head to the Federal Student Aid website for other tips on dealing with default.

But until there are some major regulatory changes to the country’s university system, it’s likely the need for such services will continue to grow.

Alex Mahadevan is a data journalist at The Penny Hoarder.