Student borrowing has been increasing in recent years, as tuition has grown faster than inflation or family income. And with the recession, and high unemployment rates for young workers, default rates may continue to rise for some years. Borrowers who default can face a lifetime of consequences, including inability to borrow for a car or a house, wage garnishment, seizure of tax refunds, or even, in an era when employers increasingly check credit reports, difficulty in getting a job.
Many borrowers, even those who are unemployed or earning little, can avoid default by participating in an income-based repayment program that began in 2009 but is not as widely used as might be expected. Under the program, borrowers who pay 15 percent of their discretionary income for 25 years — 10 years if they are in public service — can have the rest of their federal student loan debt forgiven; in 2014, that will go down to paying 10 percent of discretionary income for 20 years.
“In the age of income-based repayment, there is no reason for a student to default, since even a payment of zero dollars is acceptable payment, if you have zero discretionary income,” Ms. Cochrane said. “But as of April of this year, only about 350,000 borrowers have entered income-based payment, a small subset of the eligible population. Students need to understand the options, colleges need to share the information, and the department needs to make it as easy as possible for students to enroll.”