It’s well known that many borrowers struggle to repay their students loans, with many saying the debt has contributed to decisions to delay homeownership, marriage, starting a family, or saving for retirement. A new report from the Institute for College Access & Success (TICAS) sheds light on the characteristics of borrowers who go over the edge and default on their student loans.
When borrowers default on their loans, the federal government can garnish wages or withhold tax refunds to recoup the funds. In its new report, which analyzes recent federal data on student loan defaulters, TICAS found that the majority of those in default (65%) had incomes below 200% of the federal poverty line for their family size. For 2019, 200% of the federal poverty line for a family of two would be just under $34,000. By comparison, just 36% of non-defaulted borrowers had comparable incomes.
"Policymakers have tried to reduce loan defaults by cutting interest rates and creating new repayment plans, and reducing monthly payments does reduce defaults," said James Kvaal, TICAS president, in a statement. "But the massive scale of the loan default crisis makes clear that there is a lot more work to do, and our policies need to be more carefully designed with students' actual experiences in mind."
The report also found that defaulted borrowers were more likely than non-defaulted borrowers to have a dependent child (51% vs. 26%), be a single parent (20% vs. 8%), be a first-generation student (47% vs. 30%), have attended a for-profit institution (45% vs. 17%), have not completed their program of study (49% vs. 23%), and have less than $10,000 in debt (52% vs. 38%).
"Many borrowers who default are navigating turbulent lives at the same time as they confront a complex student loan system with insufficient financial resources, imperfect information, and inadequate assistance," said Lindsay Ahlman, author of the report and TICAS senior policy analyst, in a statement. "Borrowers who default are largely the same students who entered college with disproportionate barriers to success, and who were more likely to need to borrow to get to and through school. The fact that vulnerable students go on to face higher risk of default compounds the inequities in our system."
Ahlman also spoke with more than 20 student loan experts to gather insights for the report. Most of those experts, she wrote, said that borrowers in default are “almost always” facing some other type of hardship during repayment and that many are living paycheck to paycheck. Data has also shown that many defaulted borrowers may have previously sought out help from other options for relief, such as deferment or forbearance—1 in 4 defaulted borrowers had a prior deferment due to economic hardship or unemployment, Ahlman wrote.
And while borrowers may also turn to income-driven repayment (IDR) as a safety net, the formula that calculates borrowers’ monthly payments on those plans “cannot account for unexpected or ongoing expenses that exceed the basic living allowance provided to everyone in IDR,” Ahlman wrote.
“We do not have enough information or data to understand fully why borrowers may default even when the temporary relief options offered by deferment or forbearance and longer-term options of reduced monthly payment amounts offered by IDR are available,” she wrote. “However, some of the experts we spoke with emphasized that distressed borrowers may be struggling to pay for food, the next month’s rent, or gas or car repairs needed to get them to work. The borrowers we spoke to also highlighted the hardship of facing these tradeoffs.”
Taking into account the feedback from borrowers and student loan experts, as well as the federal data, the report made several recommendations to reduce default, with the “clearest path” being reducing the need to borrow at all by increasing investment in the Pell Grant program.
Ahlman also suggested streamlining all IDR plans into one, and making it easier for borrowers to remain enrolled in IDR. She also recommended automatically enrolling delinquent borrowers in IDR plans, which has been proposed by the bipartisan SIMPLE Act, which NASFAA supports.
“As policymakers show increasing concern about student loan debt, more work is needed to understand how default occurs and the impact it has, and to develop more effective, holistic solutions to prevent this devastating outcome that undermines other crucial policy efforts to close gaps in postsecondary attainment and increase economic mobility,” the report said. “As this work continues, Congress can quickly take clear steps to simplify and improve repayment by streamlining the current array of IDR plans in ways that preserve its key student-centered design features, and by automatically enrolling distressed borrowers in that plan.”
Publication Date: 6/17/2019