Today, 1 in 5 federal student loan borrowers—more than 8 million Americans—are in default, and millions more are struggling to make payments. And because many borrowers are still in school or their grace period and are therefore not required to begin repaying their loans, this rate may understate the problem. For example, forthcoming research from The Pew Charitable Trusts indicates that student loan borrowers who do not encounter repayment problems or interruptions are more the exception than the rule.
Federal and state officials from both major political parties, researchers, advocates, and student loan servicers acknowledge that the repayment and servicing systems have serious problems. The challenges are especially acute for borrowers at highest risk of delinquency and default, such as those who owe the least, often less than $5,000, and may not have completed their program of study, among others. Despite research indicating that these borrowers are more likely to encounter distress, the system does not facilitate targeted, timely outreach to them and presents administrative barriers that can prevent them from selecting and then enrolling, remaining, and succeeding in appropriate repayment plans. Other problems include administrative errors in processing payments, inadequate compensation to servicers for assisting high-need and distressed borrowers, and challenges associated with the repayment system’s complexity.
Defaulting on a student loan can lead to serious financial consequences for borrowers, including high collection fees; garnishment of wages, federal income tax refunds, and Social Security or other federal payments; damaged credit; and ineligibility for additional student aid or other federal assistance programs, such as those that support homeownership. Taxpayers are also affected: The federal government spent more than $600 million in fiscal year 2016 paying debt collectors and expects those costs to exceed $1 billion in the coming years. Thus, successful borrowers protect not only their own financial health, but also the federal funds that support the student loan system.
The federal student loan repayment system already provides flexibility for borrowers facing short- and long-term financial hardship, but despite near-universal access to a range of options, borrowers still encounter administrative hurdles. For example, those experiencing protracted financial challenges or whose monthly payments become unaffordable can enroll in a host of income-driven repayment plans. However, these plans involve an onerous annual application process, and if the paperwork is not submitted accurately or is not processed on time, payments can skyrocket. These inefficient administrative processes can also prove costly for taxpayers.
More can be done to keep borrowers who are most at risk of default and delinquency on track. Pew is talking to loan servicers, educational institutions, lending experts, and others to identify effective strategies that can help borrowers achieve long-term repayment success and will conduct research to help policymakers and stakeholders craft solutions to deliver a more affordable, flexible, and simple student loan repayment system.
Sarah Sattelmeyer manages and Rich Williams is an officer with The Pew Charitable Trusts’ project on student borrower success.