Paying Off Student Loans Is Toughest for People With Low Debt

By Annie Wood
This post first appeared on

While student debt averages nationally and among states hover at around $30,000, researchers at the New York Federal Reserve Bank have found that the rise in defaults has actually impacted borrowers with far less debt.

In a blog post last Thursday, the New York Fed pointed out that student debt averages are driven up by a relatively small number of borrowers. Among the 41 million borrowers, only about 1.8 million borrowers, or about 4 percent, have student debt exceeding $100,000. The New York Fed found the median student loan debt amount to be around $14,000. A significant share of borrowers—39 percent—have $10,000 or less in student loans.

The trouble is, according to the New York Fed’s findings, borrowers who have less debt are having more trouble paying their loans back.

“The highest default rates, at nearly 34 percent, are among the borrowers who owe less than $5,000,” according to the report. The group of borrowers second most likely to default was people with outstanding balances of $5,000 to $10,000 in debt.

One reason borrowers with relatively less debt may have a tougher time, say researchers at the Fed, is that students “may not have completed their schooling, or may have earned credentials with lower pay-offs than a four year degree.” Today, millions of Millennials are working to pay off their student debt with no degree to show for it, while graduates of expensive for-profit colleges find their diplomas essentially useless in securing a job. Without the payoff of a higher salary after graduating to offset a higher student loan balance from a four-year college, a huge share of borrowers are falling behind.

The trend of slipping into default is not one to be ignored. Alarmingly, borrowers’ whose loans came due to repay in 2009 were more likely to go into default than past cohorts examined by the New York Fed. An astounding 26 percent of borrowers were in default within just 5 years of leaving school. This means, say New York Fed experts, college students are falling behind on payments much quicker than before.

Defaulting on student loans can have devastating implications for borrowers, degree or not. Those in default will most likely see a significant change in their credit scores, and may have their wages or tax return garnered in order to make loan payments.

Having wages withheld can make life tougher, especially when it comes to paying rent and other everyday expenses. It’s no wonder that the New York Fed also found defaults to complicate, delay, or derail young Americans from buying homes.

The New York Federal Reserve Bank’s findings on defaults among less indebted Americans sheds light on an important narrative often overlooked, compared to stories of graduates with six-figure debt. It’s not just borrowers with $30,000 or more in loans that are seeing their financial lives strained.

Annie Wood is a Student Debt Reporter at Generation Progress. Follow her on Twitter @anniewood28

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