In light of a new study finding college students more likely than ever to default on their student loans, students must be aware of various repayment options and strategies to avoid default, Boston University officials said.
The average size of student loan debt has increased 58 percent since 2005, while the average credit card loan balance and average balance on car loans have decreased, according to a study released by FICO Labs Wednesday.
“You can always default on your loan, obviously, but my understanding is if you make money below the poverty line, you basically don’t have to repay things anyway, it can change your loan terms,” said Johannes Schmieder, a BU economics professor.
In 2005, the average student loan debt was $17,233, whereas in 2012 the average was $27,253, according to the study.
Students were more likely to default on their student loans in 2012 than in 2005 due to significant growth in the amount of debt new graduates carry, the study stated.
Frederic Hyunh, FICO’s senior principal scientist, said he was not surprised by the results of the study as student loan default rates have been increasing.
“We’ve been hearing for quite some time regarding some of the dangers in the student loan sector,” he said. “We have come across previous studies that indicated student loan debt is increasing — defaults are increasing.”
Consumer interest regarding the student loan and the student loan sector has increased, which prompted FICO’s research, Hyunh said.
“We basically wanted to corroborate this to better understand what we’re seeing in terms of the growth of outstanding debt — being able to qualify that as well as measuring how well the consumers with student loan debt are repaying those sort various obligations,” Hyunh said.
For federally subsidized loans, Schmieder said students have the option of entering the Income-Based Repayment Plan, which allows borrowers to pay back their loans based on their current income in relation to the poverty line.
“They basically calculate your disposable income, and that’s only your income above the poverty line. Of that you have to pay a certain percentage,” he said. “In some ways there are some mechanisms that allow people to really limit their loan payments, and I wonder if some people just don’t realize that.”
Schmieder said there are also options available for students who struggle to find jobs after college and go to graduate school, thereby adding to their debt.
“It seems if you are unemployed, you can definitely get a deferment,” he said. “Then you don’t have to repay it until you have a job again. For that reason I’m not completely sure I understand why there’s a sudden increase in these defaults unless people really make these kinds of mistakes.”
Some students said they are concerned that while college prices have spiked in recent years, entry-level position salaries have not gone up.
“A lot of people don’t consider that the starting wages and the starting positions just aren’t earning that much, so it’s getting progressively harder and that’s a factor,” said Ana Delcid, a College of Communication sophomore.
Delcid said it is still difficult for recent college graduates to find a job after graduation.
“Job markets aren’t getting any better,” she said. “It’s harder to find a job and there’s just, overall, less security for people to be able to prosper right after college.”
Azura Ge, a College of Arts and Sciences freshman, said the weak job market might be contributing to student loan defaults.
“It’s really hard for students who can’t afford that money to go to college. I think colleges should lower their tuition,” she said. “There are a lot of people getting higher education so it must be more competitive to get jobs.”
Brandon Siegenfeld, a School of Management sophomore, said college graduates’ salaries have not increased to match the increase in rising college tuition.
“We had the recession, so salaries haven’t increased over this amount of time even though the price [of higher education] is going up, so it’s not reflected in the salary increases,” he said.
Siegenfeld said the high cost of college has caused unfortunate divisions between schools based on the income of students’ families and their abilities to afford tuition.
“It definitely limits the ability for talent to enter college. It makes it more separated by income level, which is not a good thing,” he said.
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