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The economy is getting better. Why are so many people still not paying back student loans?

The improving economy doesn't seem to be helping struggling borrowers with student loans.
The improving economy doesn't seem to be helping struggling borrowers with student loans.
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Students aren't just taking on more student loan debt than ever before — many are still struggling to pay it back when they leave college. And while the economy is getting better, student loan delinquency and default rates aren't.

This isn't what you'd expect. It's natural that people start to fall behind on debt when the economy is in a recession. As the recession worsened, delinquency rates climbed for people with all kinds of consumer debt. Eventually, though, as the economy improves, what goes up should come back down.

That's happened with mortgages, car loans, and credit card debt. But so far, it isn't happening with student loans.

Student loans are the exception as the economy improves

By nearly every metric, an even higher proportion of student loan borrowers are struggling with payments today than in 2010, when the unemployment rate hovered close to 10 percent.

The percentage of the outstanding student loan balance with a payment at least 90 days overdue is higher today — 11 percent — than it was in 2010. That's not true for most other types of consumer debt:

student loan delinquency

(Federal Reserve Bank of New York)

Federal default rates, which measure the percentage of borrowers who default on their loans in the first two years of paying them back, spiked as the recession hit. At first, the rising rates were blamed on the poor economy. (If a borrower hasn't made a payment in at least 270 days, the loan is considered to be in default.) But they've just kept getting worse, and default rates are higher now than they have been in 20 years:

default rates

(Office of Federal Student Aid, US Department of Education)

Default rates are a lagging indicator — the economy was a little better in 2011 than in 2009, but it's improved even more since then. But newer Education Department data suggest the trend isn't going to reverse soon.

Of people with loans made through the Education Department's Direct Loan program, 8.6 percent are currently in default, up from 7.5 percent in 2013. A far higher percentage of borrowers with older loans from the now-discontinued Federal Family Education Loan program are in default: 20.9 percent, up from 19.2 percent in 2013.

The fact that student loan defaults continued to climb as the economy improved suggests that something's wrong.

Student loan debt isn't like other debt

No one can say for sure why student loan delinquencies and defaults aren't falling, but student loan experts say there are a few possible explanations.

Student loan debt is lumped in with mortgages, credit cards, and auto loans for the New York Fed's reports. But student loans don't work quite the same way. If you're months and months behind on a credit card payment, eventually your balance will be charged off or referred to a collection agency, and it won't show up in the New York Fed data. if you're behind on your mortgage, it's possible to sell your house (unless you're underwater — and the proportion of people who owe more than their house is worth is falling). And if you're struggling with a lot of consumer debt, you can declare bankruptcy, wipe out your mortgage and car and credit card debt, and start over.

But bad student loan debt never stops hanging around. You can't discharge it in bankruptcy. It's considered delinquent or in default until it's paid back. This could be why the New York Fed hasn't seen delinquency rates for student loans drop as they have for credit cards, auto loans, and mortgages.

Student loan repayment isn't always a simple process. Borrowers can make standard payments for 10 years, or they can repay their debt based on their income. There are also ways to avoid paying without defaulting through a deferment or forbearance. If loan servicers aren't explaining those options, borrowers might stay delinquent who have other paths available to them.

"I've worked with a lot of people who've just come in saying 'I'm in trouble,' and they bring in envelopes that are sealed and they haven't even looked at the information," says Kevin Fudge, manager for government affairs and community relations at American Student Assistance, which works with students in debt.

Many struggling student debtors aren't college graduates

Young college graduates are facing a much better employment picture than they were a few years ago: Unemployment rates for 25- to 34-year-olds with bachelor's degrees are 3.3 percent, down from 6.2 percent in 2010.

But people who graduate aren't necessarily driving the default problem. Most people who take out student loans eventually graduate, but those who don't are much more likely to struggle to pay back their loans:

dropouts and degrees

(Education Sector)

That means an improving employment picture for college graduates might not be reaching many people who are struggling to pay their loans back. Unemployment rates for people with some college but no degree are better than they were a few years ago, too, but they're still higher than the unemployment rate for college graduates.

Is better news on the way?

The Federal Reserve data showed that the delinquency rate ticked down slightly, from 11.8 percent at the end of 2013 to 10.9 percent. A similar drop happened last summer, but the rate climbed back up again — so it's too soon to say if this is an anomaly or the start of a trend.

A more hopeful sign came from Sallie Mae, soon to be known as Navient. "For the 12 million federal and private loan customers we service, delinquency and default rates are improving," CEO Jack Remondi said on earnings call in July.

Of borrowers who started paying their loans back in 2013, just 11 percent were more than 90 days delinquent on payments in the first six months, according to internal data from the company. In 2010, 22 percent of borrowers fell behind in the first six months. The 11 percent rate is the lowest in nine years, Remondi said.

If other student loan servicers are seeing a similar trend, it could mean that better numbers might be on the horizon. Still, it's not yet clear how quickly improving trends for more recent borrowers will affect the overall numbers for delinquencies and defaults.

Economists at the New York Fed say delinquency rates are higher for student loans taken out during the Great Recession, when unemployed workers went back to college to try to get new skills. That group of borrowers might have had a higher default risk than others. And with a 10-year standard repayment window, those loans will be on the books for many more years.