Defaulting on student debt is bad news for a number of reasons. First, it can wreak havoc on a borrower's credit score, making it difficult, more expensive, and sometimes impossible to secure financing for other purposes. Defaulting on student loans can also result in wage garnishment -- a punishment that, by nature, makes an already trying financial situation even more taxing. 

It's for this reason that student loan holders are encouraged to do everything in their power to avoid defaulting on their debt. And in September 2019, the U.S. Department of Education reported some positive news in this regard: The federal student loan default rate declined from 10.8% in 2015 to 10.1% in 2016, representing a 6.5% drop. 

On paper, this data points to a positive trend. But in practice, the numbers aren't so simple.

A group of college students walking out of class.

Image source: Getty Images

Default rates can be manipulated

While a decline in federal loan defaults is a good thing, it's hard to bank on the numbers presented by the U.S. Department of Education for one big reason: Educational institutions have the ability to mess around with them. 

Simply put, colleges can paint a picture of lower default rates among borrowers by encouraging students who are struggling with their debt to delay their payments through protections like deferment or forbearance. Both options allow borrowers to hit pause on their payments. With deferment, interest doesn't accrue while payments aren't being made. With forbearance, it does. And while these options are instrumental in saving many students from default, one unfortunate side effect is that they wind up masking the fact that borrowers are indeed struggling to keep up with their loan payments. 

Why would educational institutions push borrowers to avoid default? It's simple: High default rates can render colleges unable to participate in federal student aid programs. This year, 15 faced sanctions due to their numbers. It's no wonder, then, that such institutions would go to great lengths to keep their default numbers to a minimum. 

A better way to track student debt?

Some experts are opposed to the current system of tracking student loan defaults. They recommend that the U.S. Department of Education instead measure the number of students whose loan balances decline, or fail to decline, after a certain amount of time once their repayment period kicks off. Unfavorable numbers would then result in sanctions against offending colleges. 

But this would be easier said than done. The popularity of income-driven repayment plans means that many students' loan balances don't decline steadily until their earnings increase. That's because these repayment plans calculate monthly payments as a percentage of income, and since recent graduates are often stuck with entry-level salaries, it could take years to see a substantial drop in what they owe. 

It's not just federal defaults at play

While the aforementioned data refers to a decline in federal student loan defaults, it doesn't speak to the default rate among private loans. For a federal loan to land in default, a borrower must go 270 days without making a payment. For a private loan, default can happen much sooner. There are no preset guidelines for what constitutes default, though 90 days without a payment is a common benchmark. 

At the end of the first quarter of 2019, 1.5% of private student loans are 90 days or more past due, according to our Student Loan Debt Statistics for 2019. And while private student loans represent just a small fraction of total outstanding student debt, it's crucial to keep an eye on default rates there as well. 

A problem that isn't going away

It's pretty clear that the student debt crisis is in no way close to resolving itself. Even if default rates do continue to wane, and legitimately so, those numbers don't necessarily speak to the hardships borrowers face in order to avoid that fate.