How defaulted student loans could affect future borrowers

Having strong credit and risk management software is important for financial institutions of all sizes. Especially with the economy working its way back to full strength, more consumers are considering large purchases—homes, cars—and could be looking toward loans to help them achieve their goals.

This blog has previously discussed the potentially rocky future that current students and recent college graduates face. The U.S. government is considering alternative options to ease the burden on these future borrowers, but recent research suggests that a change needs to be made quickly.

According to a report by the Consumer Financial Protection Bureau (CFPB), almost one-third of all borrowers who have received student loans have either defaulted on their debt, or are in deferment or forbearance. This could also mean that some individuals are in such poor shape, that they have been given a temporary break on repaying back their loans. 

Specifically, out of the $1 trillion in outstanding student loans, $214 billion are in deferment or forbearance and $89 billion are in default. CFPB student loan ombudsman Rohit Chopra told Business Insider that defaulting on student loans can have serious consequences that are beyond standard credit issues. Individuals could see their tax refunds taken away or even have wages garnished by a court order.

"We have a student debt system that leaves the most vulnerable, least sophisticated borrowers to fend for themselves," explained a contribution piece in The Atlantic. "And we're seeing the unfortunate results in our default rates." 

While banks cannot guarantee that all borrowers will be able to avoid defaulting on student loans, having comprehensive lending software in place can assist in choosing the most creditworthy clients. That way, there is a smaller chance of them having issues making payments and the financial institution can remain profitable.

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