Straight Talk on Student Loans: Debunking Myths and Addressing the Real Problem
The True Source of Student Loan Woes
College completion aids in alleviating the student loan predicament
New delinquency spikes are on the horizon as federal student loan collections resumed on May 5, 2025. But are the delinquencies caused by an abundance of debt or a failure to graduate?
Mark Kantrowitz, a student finance guru, claims there's a college completion problem, not a student loan problem. Let's dig in to discover the facts.
The Hard-hitting Implications of Collections
With the US Department of Education enforcing collection of defaulted federal student loans on May 5, 2025, borrowers need to know the potential consequences. The feds have some serious tactics up their sleeve:
- Wage garnishment through Administrative Wage Garnishment (AWG) allows the U.S. Department of Education to tap up to 15% of a borrower's income without a court order.
- Income tax refund seizures via the Treasury Offset Program (TOP).
- Offsetting Social Security benefits: up to 15% can go to covering loan debts.
- Bank levies: with a court judgment, the government can snatch funds from your bank account.
- Preventing professional license renewals and revoking driver’s licenses in select states (Montana, Iowa, Oklahoma).
The Federal Reserve Bank of New York predicts that nearly 9 million delinquent student loan borrowers could see a significant credit score drop due to collections actions.
A New Report Warns of Worsening Credit Scores
Recent data from FICO shows the first wave of student loan delinquencies resulted in a one-point drop in the national average FICO score (from 716 in January to 715 in February). Don’t expect things to turn around for delinquent and defaulted borrowers anytime soon.
Challenging the Excessive Debt Stereotype
Contrary to U.S. Education Secretary Linda McMahon's statement on colleges "piling up multibillion-dollar endowments while students graduate six figures in the red," the truth is trickier. Yes, high student loan debt exists, but often goes hand-in-hand with substantial incomes, allowing graduate loan repayments.
Data from the 2019-2020 National Postsecondary Student Aid Study (NPSAS) shows only a small fraction of Bachelor’s and graduate degree recipients leave college with six-figure debt – 0.9 percent and 10.7 percent, respectively. The average student loan debt is closer to $38,000 per borrower.
While graduate students accrue higher debt than undergraduates, it's mostly those in professional programs like medicine, pharmacy, and dentistry. A smaller percentage of Ph.D. and MBA students experience such high debt burdens.
The Real Struggle: Debt Without a Degree
The significant issue lies not with graduates carrying high debt but with those who take on debt without completing their degree. Research consistently shows that students with debt less than their annual income generally repay within ten years.
However, those with debt exceeding their income may require alternative repayment plans, leading to delays in major life events like buying a home, getting married, and having children, as well as pursuing further education and working multiple jobs. Default rates correlate with increasing total student loan debt, but inversely correlate with income and a healthy debt-to-income ratio.
College Dropouts: The Disproportionate Default Risks
The data leaves no doubt: college dropouts are at considerable risk of default. Among undergraduate students, non-completers are nearly four times more likely to default (7.8 percent) compared to graduates (2.1 percent). This amounts to dropouts accounting for 72 percent of all student loan defaults.
Dropout risks are even higher within the Bachelor’s degree programs. Those who dropped out are an astonishing 95 times more likely to default (8.4 percent) than graduates (0.1 percent), making up 97 percent of the defaults within this group.
The Solution: Focus on College Completion
A genuine solution to the student loan challenges requires policymakers and institutions to renounce their focus solely on the amount of student loan debt. Investments in initiatives that support students through graduation are critical, both for equipping them with credentials needed for financial success and for reducing the student loan default crisis.
So, keeping student loan debt in sync with income is vital, but especially challenging for college dropouts.
- Student loan delinquencies could increase significantly in 2025 due to the resumption of collections on defaulted federal student loans.
- The US Department of Education has powerful collection tactics, such as wage garnishment, income tax refund seizures, offsetting Social Security benefits, bank levies, and preventing professional license renewals in certain states.
- Contrary to the stereotype, most students do not graduate with six-figure debt; the average student loan debt is closer to $38,000 per borrower.
- College dropouts are at a disproportionate risk of student loan default, with dropouts accounting for 72% of all student loan defaults among undergraduate students.
- Pursuing initiatives that support students through college completion is essential to addressing the student loan crisis, as keeping student loan debt in sync with income is critical for financial success and reducing the default rate among college dropouts.
