WASHINGTON – A new report from The Pew Charitable Trusts highlights significant shortcomings in the nation’s student loan repayment system, where about 1 in 4 of the nearly 400,000 borrowers studied defaulted within five years of entering repayment on their loans and many others frequently missed or paused their payments. Default or failing to repay a student loan can have serious financial consequences for borrowers such as collection fees, wage garnishment, and even ineligibility for other aid programs, such as help with homeownership.
The report, “Student Loan System Presents Repayment Challenges,” is based on a commissioned analysis that involved in-depth interviews and administrative data from borrowers in Texas, benchmarked with nationally representative data, and aims to give researchers and policymakers a better understanding of how people interact with the repayment system, the challenges they face, and the steps that can help struggling borrowers get back on track.
The Trellis Company, a Texas-based organization that acts as a guarantor for the Federal Family Education Loan (FFEL) program provided the data for Pew’s analysis. The report concentrates on Texas, rather than the nation as a whole, because Trellis has a rich administrative data set and similarly robust data were not available at the national level. However, researchers supplemented the Trellis data with structured interviews with borrowers from the dataset and benchmarked this state-focused analysis with nationally representative data to ensure that the Texas findings were generally reflective of what is known at the national level and to create a more complete picture of borrower behavior.
The report divided student loan borrowers into three main groups: those who had defaulted, those who owed more than their original balances, and those who owed less than their original balances, all measured after five years in repayment.
The key findings about the Texas borrowers include:
- Approximately a quarter of borrowers defaulted within five years of entering repayment. Most who defaulted had previously suspended their payments, using tools such as deferment and forbearance. Those who had suspended their payments showed potential signs of distress almost immediately: At the median, they experienced a delinquency in the second month of repayment, but they typically defaulted later in the study period. By comparison, those who defaulted without ever suspending payments did so quickly: 89 percent defaulted by the end of the second year in repayment.
- Those who owed more than their original balances after five years in repayment—21 percent of borrowers—had frequently missed and paused payments. Heavy use of deferment, forbearance, and delinquency—and related interest accrual and capitalization—appeared to make it difficult for borrowers to keep pace with growing balances: Among borrowers who owed more after five years in repayment, a third had balances of 125 percent or more of their initial principal.
- Almost half of borrowers had paid down some principal after five years. However, only 22 percent of borrowers never missed or paused payments.
“This research suggests that Congress and the Department of Education can promote repayment success among borrowers most at risk of delinquency, default, and growing balances by making structural changes to the repayment system,” said Sarah Sattelmeyer, manager of Pew’s project on student borrower success. These actions include:
- Identify at-risk borrowers before they are in distress—in particular by using risk indicators such as borrowers missing payments early, repeatedly suspending payments, having previously defaulted, and churning in and out of school.
- Provide loan servicers with resources and comprehensive guidance on how to prioritize interactions and engagement with high-risk borrowers.
- Eliminate barriers to enrollment in affordable repayment plans, such as program complexity, which make it difficult for at-risk borrowers to make payments based on their incomes.
“The complex, outdated student loan repayment system often undermines borrowers’ efforts to repay their debt,” added Sattelmeyer. “Neither borrowers nor taxpayers are well served by this inefficiency.”
The Pew Charitable Trusts is driven by the power of knowledge to solve today’s most challenging problems. Learn more at www.pewtrusts.org