$1 Trillion in Student Loans and 7 Million Borrowers in Default

NEW YORK (MainStreet) — The student loan market—lenders, borrowers and regulators—had to wake up and smell the coffee twice this summer, first when the total amount of public and private loans crossed the $1 trillion mark and again when public loans alone made by the Department of Education topped $1 trillion.

Many believe that the recent flap over Stafford and PLUS loan rates is a distraction from a larger problem—the sheer dollar amount of those loans. The principal and interest borrowers owe would continue to spike even in a more forgiving interest rate environment.

In a blog post last week, the Consumer Financial Protection Bureau found that another student loan debt barrier had been broken: over of 7 million borrowers were in default on public and private loans.

That third milestone might be more worrisome than the first two, as the race to reduce payments and stop the rising tide of defaults seems to have become more frantic on the government side, both from the loan originator—the Department of Education—and a regulator, the CFPB, with alternative payments being increasingly touted as a solution.

It's not surprising that stressed out borrowers are embracing alternative payments, which usually means making lower payments over a longer term. Borrowers of federal loans looking to reduce their payments can choose a plan where their monthly payment can be tied to a portion of their income.

"Roughly a third of Direct Loan borrowers in repayment, deferment or forbearance are enrolled in an alternative repayment plan," said Rohit Chopra, the CFPB's student loan ombudsman in a blog last week, referring to federal loans. "Most of these borrowers are enrolling in plans that don't require income documentation."

"Based on the average balances we estimate for borrowers in each plan, it's possible that many borrowers in plans not based on income might be better off with an income-based plan," Chopra said. "If borrowers were aware of and able to easily enroll in income-based plans through their servicer, many federal student loan defaults could have been avoided."