"There’s a big disconnect. The people who take out the loans are the people who have the least financial literacy."
Shawna Upton is the first person in her family to go to college. To pay her tuition, she needed student loans.
“I signed any paper on the dotted line,” says the Massachusetts native. “Coming from a lower-income background, I didn’t have a safety net. And I didn’t have anyone to help—no parents or guidance counselor.” She borrowed $50,000 to finance her four-year education at the University of Massachusetts.
When her loans came due after the six-month grace period following graduation, Upton said she didn’t understand the repayment process. She’d make a payment, then accidentally miss one. She accrued late fees. Two years later, she found out her loan was in delinquency, the designation given when payments are 90 days late. “I was overwhelmed with the process, and there was no one to tell me how serious it was,” says the now 28-year-old. “There’s a big disconnect. The people who take out the loans are the people who have the least financial literacy.”
Today, Upton works for a nonprofit group that organizes students on college campuses around the country on social issues, including affordable higher education. She has been able to pay only the minimal amount on her loan, which covers just the interest—and still owes $50,000. “I’m five years out of school, and still have the same amount of debt I did when I graduated,” she says.
Although nationally the median debt of borrowers—just above $20,000, according to the Federal Reserve’s Survey of Household Economics and Decision making—is much less than Upton’s, she is not alone in experiencing serious problems navigating repayment. Forty-three million American adults—1 out of every 5—have federal student loans. According to the U.S. Department of Education, close to 3 million direct loan borrowers were more than 30 days delinquent in 2017 and close to 20% of borrowers—more than 8 million—were in default, which means their payments are 270 days past due.
And that’s before COVID-19 hit.
When the pandemic pummeled the economy in March 2020, Congress responded with the Coronavirus Aid, Relief, and Economic Security (CARES) Act—which included a provision allowing federal policymakers to pause payment requirements and interest charges for most borrowers and suspend collection efforts for borrowers in default. The pause has been renewed through a series of executive orders and is now scheduled to end Jan. 31, 2022, when borrowers will have to resume payments.
Survey research by The Pew Charitable Trusts last summer found that almost a quarter don’t know about the loan pause. More than a third say they haven’t been contacted by the Department of Education or a loan servicer about options, such as continuing to pay, during the pause. Half of those affected by the pause said they were unsure when they would be required to resume payments. These findings demonstrate that the Department of Education will need to take significant steps to ease borrowers back into repayment, especially those who stumbled before the pause began.
Shawna Upton says she doesn’t know when she needs to start making payments again and dreads navigating the system set up by her loan service provider, whose communications never go straight to her inbox. Upton must remember to log into a separate portal to read any emails from her provider and check the status of her loan.
“Will the payments be what they used to be? Do we have to recertify our incomes? I’ve had no communication, and it’s a huge disservice to those of us trying to pay off loans,” she says. “I’m in a wait-and-see position with my loan debt—and also my life.”
The desire for more information from loan servicers is hitting home as an increasing number of Americans use student loans to pay for higher education. “Over the last generation, there has been a sea change in how students and families pay for college,” says Michele Streeter, associate director of policy and advocacy at The Institute for College Access and Success (TICAS), a nonprofit organization. The majority of college students rely on loans. At the beginning of the Great Recession in late 2007, federal student debt stood at $516 billion. Since then, it has tripled to over $1.5 trillion, according to Streeter.
“But without federal student loans, many students would not be able to attend college—especially those for whom a college degree can provide the most life-changing economic benefits,” Streeter says.
In 2018, Pew began to survey the student loan repayment landscape, identify ways to make repayment affordable, and improve the process for borrowers who are most likely to run into repayment problems, all by exploring ways to contribute to policy discussions and the broader public’s understanding of student debt issues. One fact that many find surprising is that the borrowers most likely to default on student loans are those who owe the least—less than $10,000. They often have low incomes and may not have completed their course of study. The work grows out of Pew’s long-standing concern with family finances, and student loans are playing an increasingly important role in Americans’ financial lives.
“Unaffordable student loan debt is a significant barrier to short-term financial stability and longer-term economic mobility. It’s a kitchen table economic issue,” says Travis Plunkett, senior director of Pew’s housing, labor, and education team. “Every month, borrowers are paying part of their paycheck into their student loan debt.”
Even Americans who receive significant financial support for college from other sources are borrowing money to go to school. Veterans are taking out substantial loans to pay for higher education despite the comprehensive Post-9/11 GI Bill signed into law in 2008. The benefits cover full tuition and fees at public colleges and universities as well as housing allowances and stipends to cover books and other supplies. This law, in conjunction with the Yellow Ribbon Program run by the Department of Veterans Affairs (VA), also provides partial-to-full coverage of tuition and fees at private colleges and universities.
Borrowers often do not realize the problems associated with missing loan payments. When student loan borrowers consider their monthly expenses, such as mortgage or rent, food and utilities, medical bills, and credit card bills, they often decide that missing a student loan payment does not have immediate consequences, according to Plunkett. But by missing a month or two of payments, borrowers can easily fall behind—and slip into delinquency. “And there are significant consequences of delinquency, such as debt collection, a hit on your credit report, and wage garnishing,” he says. Plunkett also pointed out that, unlike every other form of household debt, student loans cannot be reduced or eliminated in bankruptcy when borrowers get into severe financial trouble except in very narrow circumstances, which can extend debt repayment for decades.
Still, even as the price of a college degree continues to rise and students take out more loans, the long-term financial benefits of a four-year-college degree remain indisputable. According to the Pew Research Center, adults who have attained at least a bachelor’s degree, on average, tend to earn more and accumulate more wealth than adults who have not completed college.
But not all Americans start from the same playing field. First-generation college graduates, like Upton, are more likely to incur education debt than those with a college-educated parent, according to the Center. And these first-generation graduates not only are more likely to incur debt in the first place, they’re also more likely to have greater amounts of education debt still outstanding. Borrowers of color and those who don’t complete a degree have even worse outcomes: Research indicates that Black borrowers, for example, have fewer resources than their White peers with which to finance a college degree, they borrow more than White peers do while in college, and they earn less afterward. Their loan debt is more likely to rise after leaving school than the debt of their White peers, and they are more likely to default on their loans.
Kendrick Harrison experienced these hardships, and more, during his years in college. The All-American athlete from Oakland, California, earned scholarships after high school graduation but he wanted to join the Army, promising himself that he would honor his grandfather’s request that he get an education and attend college after his service. He served in Iraq, but a mortar attack on his unit in 2005 sent metal through his torso and arm, and he was honorably discharged. He returned home, found work in a manufacturing company, and he and his wife had three children.
By 2016, the couple had settled in Las Vegas and was running a nonprofit sports program for disadvantaged youth. Harrison decided the time was right to take advantage of the GI Bill and study psychology and business to help fellow veterans suffering from post-traumatic stress disorder.
Like Upton, Harrison was the first in his family to go to college. And like her, he was unsure how to choose a school or navigate the admissions process. While searching on the internet for information, he saw a pop-up ad for an accredited, for-profit college that promised a degree tailored to his interests. Within minutes of uploading his information, Harrison was contacted by a school representative who called to discuss classes and payment.
“I didn’t know what Federal Student Aid was,” says Harrison. “I had the GI Bill, and that funding was supposed to cover everything.” Harrison says that the school reps told him that the VA pays GI tuition benefits late and that federal aid would arrive quicker, so he should apply for federal loans to cover his living expenses.
“They helped me fill out all the paperwork. As a first-generation student, I didn’t have any frame of reference for how the process was supposed to work,” he says. Within a week, he was enrolled as a student and could see in his school account that the VA was paying for his tuition with his GI benefits. But he didn’t receive any of the federal aid that the school told him to apply for, and was unable to pay for living expenses for his family. After three semesters, he had been charged with $50,000 in federal student loans—but he never saw any of the money credited to his account.
Harrison earned a place on the honor roll. But three months before his scheduled graduation, the school closed, leaving him without a degree and no way to retrieve the federal aid that was sitting in his account. Though the GI Bill took care of some $30,000 in tuition, Harrison still owed $56,000 in federal financial aid. Because of these cascading financial problems, he and his now family of eight—he and his wife were also caring for nephews—experienced a variety of consequences: Harrison’s credit score dropped 100 points, and he was unable to get a consumer loan to help him pay back his student loan or his living expenses. At the same time, his family was also evicted from their home and his car was repossessed.
“How are there consumer protections when you buy a car, but not when you buy an education?” says Harrison. “Education is supposed to give us a boost up and put us in a better place. But it worked out the other way for my family.”
Pew analyzed data from the Department of Education that showed veterans are borrowing a substantial amount of debt despite having access to significant federal veterans’ benefits. Just over one-quarter of student veterans (27%) took out federal or private loans in the 2015-16 academic year. The amount they owed—a median of $8,000—was more than the $7,500 median debt owed by non-veteran undergraduates that year. The issue has taken on a higher profile recently as lawmakers and advocates express concerns about mounting student debt, including indebtedness among veterans.
When the repayment pause lifts in January, many borrowers will once again face difficult personal financial choices about paying for living expenses and pressing bills, and research shows that they may have trouble resuming payments. Two-thirds of borrowers said in last summer’s Pew survey that it would be difficult for them to start repaying if they resumed the following month. About a third—31%—said they had enrolled in new repayment plans, consolidated their loans, continued making payments, or worked to get their loans out of default during the pause.
And while the pause may have provided a respite for those choosing which bills to pay, it didn’t solve the problem that many borrowers simply don’t have enough money to afford a student loan payment.
Claire Bradfuhrer was grateful for the pause. The 32-year-old mother of two graduated from George Mason University in Virginia in 2015 with bachelor’s degrees in political science and music—and $30,000 in federal loans. Since graduation, she had been paying the minimum amount—based on her income while on active duty in the military and giving music lessons on the side—thanks to an income-driven repayment (IDR) plan, which helps borrowers manage their loans by basing monthly payments on income.
Then came a divorce and extra expenses associated with it; Bradfuhrer couldn’t make the payments, and her loan went into default. With penalties and interest, her student loan debt climbed to more than $40,000.
To many borrowers, the repayment process is very difficult to navigate. Each of the eight separate federal loan servicers, the companies hired by the Department of Education to collect and help borrowers manage payments, has its own way of approaching its customers, with its own systems and rules. Three of them are getting out of the student loan servicing business, resulting in the Department of Education transferring the accounts of millions of borrowers to new servicers, something that could further confound borrowers when they have to resume payments this winter.
“All borrowers need a clear and consistent message that they can depend on,” says Plunkett. “The pause is an ideal time to establish longer-term reforms in an already complex system.”
Today, Bradfuhrer has managed to get her loan out of default, has a full-time job at the Department of Defense, and continues to teach music lessons on the side 23 hours a week. Still, she can only afford less than $100 in payments, “which will never pay off the interest,” she says.
IDR plans have grown in popularity in recent years, with 30% of borrowers now enrolled in one of the five IDR options. These plans peg monthly payments to income and family size. For some borrowers, that can mean a $0 monthly payment and loan forgiveness after 20 to 25 years, depending on the plan. Research has found that borrowers using IDR have much lower rates of delinquency and default than their counterparts in other plans.
But the experience of borrowers like Bradfuhrer demonstrate the design of IDR plans must be improved. Pew’s survey of borrowers in IDR found that, although 61% of respondents said the need for a lower payment was the most important reason they chose to enroll, nearly half of those currently or previously in an IDR plan said that amount was still too high. In addition, 44% of respondents who have ever enrolled in an IDR plan say the process was somewhat or very difficult to navigate. And 72% of those who are or were in IDR plans, and who started repayment, say they owe more or approximately the same as what they originally borrowed, compared with 43% who had never been enrolled in an IDR plan.
“Pew focus groups have shown that loan balances that never budge may cause borrowers to give up on repayment,” says Plunkett. “When borrowers see little to no progress, it can cause major frustration or sap the motivation to repay.”
This fall, the Department of Education will consider reforms to IDR plans, and Pew is encouraging the department to redesign them to make them more affordable, limit the balance growth that impedes repayment, and ensure borrowers, especially low-income borrowers, can enroll easily and stay enrolled in order to encourage repayment.
In addition, the fall presents another opportunity. When the pause is lifted in the new year, the entire student loan system could be overloaded as tens of millions of borrowers transition back into repayment at the same time, a likely strain for loan servicers. Pew is urging the Department of Education and Congress to take steps before repayment resumes: Identify at-risk borrowers before they are in financial distress. Reach out to them before repayment restarts to discuss their options for successful resumption of payments. Ensure easy access to affordable payments by allowing borrowers to enroll in IDR plans without requiring extensive paperwork. And after the pause ends, provide a grace period for struggling borrowers.
In the meantime, borrowers such as Shawna Upton, Kendrick Harrison, and Claire Bradfuhrer remain in a state of suspension, with plans on hold while grappling with the system designed to help them improve their lives.
“I took out a loan and I’ll pay it back,” says Bradfuhrer. “But the fact that I’ve been paying for so long and I still owe more than I took out is crazy.”
Carol Kaufmann is a staff writer for Trust.