On this episode, we’re joined by Betsy Mayotte, Founder and President of The Institute of Student Loan Advisors (TISLA), to break down the latest federal student loan data and what it means for millions of borrowers.
Transcript:
Jeffrey Snyder, Broadcast Retirement Network
We’re gonna welcome back to the program, Betsy Mayotte. She is the founder of the Institute of Student Loan Advisors.
Betsy, it’s always great to see you. Thanks for joining us this morning.
Betsy Mayotte, The Institute of Student Loan Advisors
Of course, nice to see you.
Jeffrey Snyder, Broadcast Retirement Network
It’s a pleasure to see you. I wish it was under some better news. The new federal student loan information came out.
I had reached out to you to come on and just talk about student loans. You sent me this information. I’m kind of depressed.
Why don’t you give us a top line here, Betsy?
Betsy Mayotte, The Institute of Student Loan Advisors
Well, the top line is that student loan, the percentage of borrowers that are in default on their student loans is, if it’s not at a historic high in the entire history of the program, it’s darn close to it. We’ve got over 9 million borrowers who are in active default on their student loans. And to add insult to injury, Jeffrey, there’s also data out about our more recent grads, so people that have graduated since COVID started, so since 2020.
And about one in four of recent grads are 90 days past due or more of their loans. So it’s affecting their credit and they are headed for default if they aren’t already in default.
Jeffrey Snyder, Broadcast Retirement Network
I mean, I’m looking at the numbers that you sent me, $234 billion, to put it in real number terms. That’s like a small economy, small country’s economy, Betsy. We’ve had you back on and some of your student loan colleagues on to talk about some of these changes, rule changes that have occurred.
Is the delay in the restarts and and or the restarts, the problem here, is it a culmination of affordability? Is it forgetfulness? What is it that has led to where we are?
Betsy Mayotte, The Institute of Student Loan Advisors
It’s sort of, it’s a combination of things that led to what I’m calling the perfect storm for default. So if you might remember that during COVID, the government, for the first time ever in the history of the program, they actually paused student loan payments, which was the right thing to do. And then they kept extending that pause, which again was the right thing to do.
But I started to get nervous then because when we talk student loan data, we talk a lot about who’s the most likely to default, but what isn’t talked about hardly at all is who’s the least likely to default. And that’s where this comes in. The people least likely to default are literally just the people who are in the habit of making their payments.
When we took 40 million people that were in the habit of making their payments and took them out of that habit for years, and then we changed the rules, the economy changed dramatically. There’s a lot of people that are going into repayment, that have gone into repayment for the first time in years over the last year where healthcare costs have increased dramatically. Gas prices, of course, is the big story.
Food. House freeze, housing costs, like everything. So it really has become the perfect storm of all these different events.
The rule changes, the long pause in payments, and then the spending power that consumers have.
Jeffrey Snyder, Broadcast Retirement Network
I think you touched on this, but let me ask you, people that are not gonna default are the people that are making payments. What generations of people are we talking about? So like I’m a Gen Xer, there’s Gen Z, there’s Millennial, there’s Boomer.
Who are the people? I don’t wanna group them by male, female, but I mean, are they in certain generations or is it just, it cuts evenly across the board?
Betsy Mayotte, The Institute of Student Loan Advisors
I’m glad you asked that question because I think this is something that people don’t realize. Student loans are not ageist. People think, including policy makers, I think they think student loan debt is a young person’s issue, or generation you wanna ascribe that to.
Excuse me, but the fact of the matter is half of all borrowers over the age of 30, a quarter over 45, and the fastest growing population age group wise are the over 65s. And if you look at the default data, the older a borrower is, the more likely they are to default.
Jeffrey Snyder, Broadcast Retirement Network
That’s interesting. I’m wondering why that is, because they have, no offense, they have less time left. So they’re like, I’m gonna shift my priorities to caregiving, to my retirement, to other priorities.
I laugh, but it’s not funny. I’m sorry.
Betsy Mayotte, The Institute of Student Loan Advisors
But I think part of it now, and we’re getting a little beyond my wheelhouse here because I am not an economist.
Jeffrey Snyder, Broadcast Retirement Network
I am a- But you play one on TV. I’ve seen you on Law and Order.
Betsy Mayotte, The Institute of Student Loan Advisors
I think, especially as we get into the 60 year old ranges, or maybe even the late 50 year old ranges, the income, the responsibilities increase. You’re paying for your own kid’s college. You’re trying to desperately save for retirement.
But also your income is, the increases in your income are slowing down. So there’s not as much wiggle room in the budget.
Jeffrey Snyder, Broadcast Retirement Network
So let’s go back, something that I think it’s right in your wheelhouse. So I apologize for kind of taking you out of the wheelhouse. It’s not my intent, but I was interested in your feedback on that.
Let’s go back to kind of writing the ship, because how do I prevent myself, if I’m getting these paid notices and say I’m late, I haven’t made a payment, what’s my first step? Is it to make a partial payment or should I, who do I call? What do I do?
Betsy Mayotte, The Institute of Student Loan Advisors
Well, your first step is to call whomever the loan holder is. And it really depends as if you are delinquent or if you’re actually in default. If you’re not actually in default yet, call your servicer right away, ask for what’s called a forbearance to bring your account current.
And then while you’re there, talk about the different payment plans you have at your disposal and see which one is best gonna fit your budget moving forward. If you’re actually in default, where the loan is actually transferred over to the Department of Education, by the way, soon to be Treasury. Treasury is taking over the collection of defaulted loans.
Then you can talk about either consolidating the loan out of default, which for most people I actually don’t recommend anymore, or what’s called loan rehabilitation, where you make nine consecutive payments of an amount based on your income. And once you do that, they take your loan out of default, so back in good standing, and they remove the default line from your credit report like it was never there in the first place, which can, it won’t completely repair your credit, but it’ll take the sort of the big whammy off of it.
Jeffrey Snyder, Broadcast Retirement Network
So, I mean, this does, just for my benefit and the audience benefit, this nonpayment, it’s not like this doesn’t have an impact. This has an impact on your credit report, which presumably would impact other large purchases like buying a home, going for future loans, like education loans, et cetera. So this is impactful.
Betsy Mayotte, The Institute of Student Loan Advisors
It is, and it’s something people don’t think about, about how defaulting on your loan can affect other aspects of your financial life. Like if you have, say, a credit card with a variable interest rate, it could be that that interest rate goes up because of that hit to your credit. It’ll make it more difficult or more expensive for other debt.
But the other thing is, I run into people that are like, well, I just can’t pay, so I’m gonna let it default. They can garnish my wages. Here’s the thing.
Defaulting is almost always more expensive for you, both monthly and in the long term, than trying to find a way to afford one of the payment options available to federal student loan borrowers. The reason for this is the loan’s not a default. You’re gonna be eligible for a plan based on your income.
And the most they’re gonna be able to utilize is 15% of your adjusted gross income minus an allowance based on your family size. If you default, they’re taking 15% of your paycheck. So that’s 15% of your gross.
So that’s more monthly. In addition to that, they’re adding up to 24% in collection costs to the loan. So again, defaulting is almost always more expensive, both short-term and long-term.
Jeffrey Snyder, Broadcast Retirement Network
So if I’m a future student, college student, or a parent of one or a guardian of one, should I be afraid of taking a student loan, a federal student loan? I mean, hearing all this makes me, you know, I don’t even have kids. I have nieces and nephews who are nowhere near college, but it makes me fearful because I think about the impact.
So should I rethink my college and also how I finance and maybe look at other alternatives or it’s still a good instrument to use? I’m trying to figure out where I go.
Betsy Mayotte, The Institute of Student Loan Advisors
Federal student loans do have many, many, many options if you can’t afford the payment. So now listen, I think the least amount of debt is the best amount of debt. So you should always look at the amount that you’re going to have to borrow for the total college degree before you enroll and figure out what that monthly payment’s gonna be and see if that’s gonna be edible, you know, in the first place.
But in my opinion, federal student loans, if you have to borrow, are still the best instrument versus private, versus taking a home equity loan, versus borrowing from retirement. I still think federal student loans are the safer bet because of, you know, deferments, forbearances, lower payment options that are available.
Jeffrey Snyder, Broadcast Retirement Network
And also the interest rate tends to be lower than in the private market. Is that a fair statement?
Betsy Mayotte, The Institute of Student Loan Advisors
These days, not always.
Jeffrey Snyder, Broadcast Retirement Network
Okay.
Betsy Mayotte, The Institute of Student Loan Advisors
You know, if you have really, really good credit and really, really good debt to income, there are some people that are able to get private loans that have a lower interest rate than the federal loans right now. But most of the time, you know, federal student loans are gonna have the lower interest rate. But again, it’s not about just about the interest rate, it’s about all the safety nets.
Like federal student loans have discharges if you should be disabled or pass away, or if you work in public service, you can get the loans forgiven and that kind of thing. And private student loans just don’t have those.
Jeffrey Snyder, Broadcast Retirement Network
Yeah. Yeah. I mean, that makes sense.
Here’s a economic, kind of quasi-economic question, but I wanna ask you about the Fed raise rates. Does that at all find its way to the student loan rates, at least in the short run, because they raised, I don’t even remember what the, but raised maybe a quarter point.
Betsy Mayotte, The Institute of Student Loan Advisors
It was a quarter, yeah. Is a quarter, but does that flow through to- It won’t for federal loans, at least for this year. Federal student loan interest rates are based on the 10-year treasury bill and they set the rates.
So if you borrow on or after July 1st, 2026, your rate’s gonna be X, no matter what the Fed does with the interest rates. It will affect private loan interest rates though.
Jeffrey Snyder, Broadcast Retirement Network
My last question for you, and I promise I’ll let you go into other things. I know that you often will speak to policymakers both locally and nationally. If you could tell them or give them some feedback and or some suggestions, what would be in Betsy Mayotte’s suggestion box?
What would you tell these representatives? I mean, within, without, we don’t have, we don’t have to wave a magic wand, but some practical steps.
Betsy Mayotte, The Institute of Student Loan Advisors
Yeah, I do think, I think some of the changes that were made under H.R.1 last year are going to harm borrowers, especially parent borrowers for the longterm. It is gonna exacerbate the default problem that we started off this segment talking about, again, especially for Parent PLUS. I think, and that will also end up affecting the budget.
These loans are already a loss to the U.S. taxpayer, and I think it’ll increase that loss. So I do think they need to wobble a bit on some of the decisions that they made under H.R.1 around the repayment plans and around some of the other safety net, the changes that we haven’t seen yet that aren’t gonna be effective until next year.
Jeffrey Snyder, Broadcast Retirement Network
Yeah, well, that’s good advice. Hopefully someone’s listening. I know people are listening, but hopefully they’re listening and writing things down because I know that there’s still time left in the term even before the new Congress comes in in January.
But that’s another conversation. Betsy, may I add, it’s always a pleasure to talk to you. Thanks for joining us, and we look forward to having you back very soon.
Betsy Mayotte, The Institute of Student Loan Advisors
Thanks.
