5 Factors that Contribute to Student Loan Delinquency


When it comes to issues facing financial aid departments, the rapid increase in student loan delinquency is the top concern for most loan professionals. Analyzing data directly from the Department of Education, the Consumer Federation of America released a study in 2017 showing that a total of $137.4 billion in defaulted balances, a 14 percent increase from 2015. While there are many factors contributing to this growing crisis, five in particular should catch the attention of schools looking to decrease their Cohort Default Rates (CDR).

  1. Dropouts are more likely to default

According to a study initiated by the Consumer Reports National Research Center, college dropouts comprise 63 percent of defaulted student loans and are four times more likely to default on their loans when compared to their fellow students who finished their degree. Informing students about the rigors of university academics before they enter school can make a huge difference in ensuring students make the right choice of institution. Once on campus, providing an engaging environment in which students are both challenged and supported can also make a dramatic impact in the overall student retention rate.

  1. Defaulters often lack financial literacy

For more than 30 years, the federal government has required student loan borrowers to receive financial counseling prior to graduation. While this information can help a student avoid delinquency, the type of counseling a student receives can vary greatly from school to school. Some institutions provide in-depth assistance with money management, setting a budget, and understanding repayment options, while others provide just the bare minimum information as required by the Department of Education.

Schools should strive to provide comprehensive, personalized data to their students and help them understand strategies that lead to financial success. Dedicated student outreach initiatives can play a valuable role in this effort. Many institutions are choosing to outsource their student contact centers, allowing their staff to focus on more pressing duties.

  1. Salary expectations are outpaced by reality

Many students who fall behind on their loans do so because their dreams of grabbing a high-salary job right out of college do not match the current reality of the job market. After two or four years living in the relative quiet of a university, graduates are often surprised at the challenges of landing a job that matches their degree and managing their own household expenses. Schools that are committed to guiding their students to the right path from the start – rather than waiting for the exit interview – are helping their future alums increase their chances of success.

  1. Underemployed, unemployed, and giving up

Closely tied to the factor of unrealistic salary expectations is unemployment. While the official national unemployment rate has held steady recently at 4.1 percent, the U-6 rate, or the rate that also includes individuals who are underemployed and those who have abandoned their hopes for obtaining a job, is double that at 8.2 percent. This means that many students are working, but in a position well below what their degree qualifies them for. Underemployed individuals have much greater difficulty meeting their financial obligations, and undoubtedly prioritize necessities such as rent, food, and utilities above their student loan payments.

  1. Decrease in state funds

States have been steadily reducing their funding for higher education, which not only contributes to delinquency, but also to the overall rise in college costs. While the jury is still out on just how much state divestment affects tuition, there’s little debate that decreasing financial support at the state level means an institution must find funding elsewhere – and that often means increasing tuition for students. According to one recent study, for every $1,000 cut from per-student state and local appropriations, the average student can be expected to pay $257 more per year in tuition and fees.

While there’s not a lot schools can do to affect the national unemployment rate or declining funds from the state level, focusing on factors that are within your institution’s control. Managing dropout rates and increasing student financial literacy can help your students avoid student loan delinquency.

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