And you’re surprised because?…
Liberty Street Economics brings us, “What Americans (Don’t) Know About Student Loan Collections,” in which the authors report on the impact of an added question on student loans to the Fed’s Survey of Consumer Expectations. Its first chief finding is that only 35 percent of the households surveyed correctly answered this question:
If a borrower is unable to repay her federal student loan, what steps can the government take to collect the debt?
A. Report that the student debt is past due to the credit bureaus.
B. Garnish wages until the debt, plus any interest and fees, is repaid.
C. Retain tax refunds and Social Security payments until the debt, plus any interest and fees, is repaid.
The correct answer is all of the above. (You did know that, right? If not, don’t worry, fewer than half of all respondents who had student loans got it right too.) Alarmingly, 28 percent thought it was none of the above.
The survey’s second question was to rate on a scale of one to five how likely it is that a student loan can be discharged in bankruptcy, with one being “extremely unlikely” and five being “extremely likely.” Here, the authors’ findings are confusing because their chart says that 37 percent gave a 5, but the text says those 37 percent marked 1. It’s the type of mild error that is both understandable yet deeply annoying. The average response was 2.4, suggesting that “U.S. households overestimate the ease with which student loans may be expunged from their balance sheets.”
It gets worse: In a parenthetical, the authors state that “reported federal recovery rates on defaulted direct student loans exceed [pdf] 70 percent.” (Emphasis original) The link is to ED’s student loan overview in its budget proposal for FY2014, which began in October 2013. On page S-32, it provides a table estimating that for all the subsidized Stafford loans disbursed in 2014, nearly a quarter will go into default (so much for those subsidies), and up to 9 percent of all PLUS loans will do so as well. I’m guessing this already takes IBR into account without estimating substantial future enrollments, which I think are likely. The net present recovery of subsidized Stafford loans that’s also net of collection costs is predicted to be nearly 90 percent.
So the bad news is that American households don’t know the full extent of the consequences of defaulting on student loans. The good news is the government is going to be paid vastly more than it would if these were credit cards. Oh, that’s bad news for the student-loan-illiterate debtors. Oops.