Experts Discuss Plight of Delinquent Borrowers

About 41 percent of student loan borrowers, equating about 712,000 individuals, are delinquent at some point in the first five years after entering repayment, according to an Institute of Higher Education Policy (IHEP) report.

"More than a third of the borrowers in the 2005 repayment cohort seem to be willing and able to use the federal student loan repayment framework in the intended way," the report states. "Other borrowers, about 23 percent, used the repayment tools and options provided by the federal government to postpone their payments, thereby avoiding delinquency."

About 26 percent of borrowers, who entered repayment in 2005, became delinquent at some point, according to the report, and about 15 percent of borrowers became delinquent and then defaulted within the first five years of repayment.

IHEP released the report Thursday in conjunction with a panel discussion (see video below) at the New America Foundation (NAF). Members of the panel, including NASFAA President Justin Draeger, provided some context for the data in the report.

Draeger said more needs to be done at the front end to prevent defaults and delinquencies at the back end. Draeger said many colleges are losing resources due to budget cuts and time due to compliance regulations, diminishing the amount of time spent talking directly to students.

"Those students really need a student success and completion program, not a necessarily specific default prevention program," Draeger said. "Schools that have a comprehensive student success strategies are schools that are de facto dealing with delinquency and default prevention, and so there has to be a culture change in looking at the financial aid office as the office that can have the greatest impact on helping borrowers avoid delinquency and default, it really has to be an institutional effort."

Draeger also offered policy suggestions that he believed would help students avoid delinquency and default, including increased funding and frontloading of federal grants, implementation of an option to repay federal loans through a payroll deduction and keeping annual loan limits low, but allowing aid administrators to increase debt levels for borrowers who were more likely to repay federal loans (as opposed to requiring professional judgment to decrease loan limits as required now).

NAF Federal Education Budget Project Director Jason Delisle detailed how today's students are able to borrow more than ever before.

"The amount of money that a student could borrow on a federally-backed loan was mostly unchanged from 1970s until about 2006-07," Delisle said. "With the passage of a few pieces of legislation, the amount that students could borrow went up by about $3,000 to $4,000 for freshman and sophomores. In 2008, with passage of the Ensuring Continue Access to Student Loans Act, borrowers can now take out $5,500 to freshman and $7,500 as upperclassmen."

Delisle also noted that for the first time, graduate students were allowed to borrow an effectively unlimited amount of federally-backed student loans to pay for college.

"So now we have the federal government directly and entirely in charge of all federal student lending, and for the first time in decades, were letting these graduate students borrow unlimited amounts of money, and undergraduates we’re letting borrow about 50 percent or even more than what they could borrow before," he said.

While such policy changes make the propensity for bigger debt loads and higher default rates an ominous probability, trends in borrower behavior help shed some light on possible solutions.

"The rates of delinquency and default were generally much lower for borrowers who had graduated than for those who had not, suggesting that graduation may be a crucial factor," according to the report. "The exception was two-year for-profits, where rates of delinquency were similar for borrowers who graduated and those who did not."

The report found that borrowers who attended two-year and for-profit institutions were more likely to be delinquent or default than those who attended four-year or private nonprofit colleges. 

According to the report, organizations and lenders who work with borrowers said many of those borrowers are not aware of the options that could have helped them avoid delinquency.

National Consumer Law Center attorney Deanne Loonin said many of the borrowers she helps receive false or misleading information from staff and the Department of Education and collection agencies.

"Let alone reforming the programs, we have to make the existing programs work right," Loonin said. "I see my clients coming to me having been dealing with collection agencies, and everybody on the FFEL side and the DL side uses collection agencies as dispute resolutors and it doesn’t work."

Loonin said the system is driven by a "collection mentality" and conflict of interest when loan holders deal in both collection and dispute resolution.

Other recommended solutions included increased funding for grants, implementation of an option to repay federal loans through a payroll deduction and better limits on lending.

"I think most of us think we’d like to see more grants, scholarships, you know, less reliance on loans, I just think there’s a reality that loans are going to be with us for a while," Loonin said. "So as long as we are so liberal at the front end, in giving out these loans, as a reform measure I’d like to see us look more at outcome-measurements at the front-end, and having who gets to offer the loans linked more to things that we know are indicators of default."

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Publication Date: 3/18/2011

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