Policy Solutions for Student Loan Borrowers in Crisis: 12 Recommendations for Default

By Hugh T. Ferguson, NASFAA Staff Reporter

Student loan reform isn’t simple. The system — from the types of loans and servicers, to the various repayment plans — is complex, and to truly get to the root of the flaws that have led borrowers into financial distress, each component needs to be addressed. In an attempt to do just that, NASFAA has developed comprehensive recommendations aimed at providing policymakers with targeted and tangible solutions to address the long documented, underlying flaws in the current repayment model and default system.

In a white paper released last week, NASFAA put forward more than 30 recommendations, including 12 specifically to improve outcomes and bolster protections for borrowers who are in danger of, or are currently in default.

“When proposing improvements to student loan default, it is important to recognize there are diverse types of borrowers who experience default,” NASFAA writes. “The recommendations that follow aim to provide ample opportunities for borrowers to avoid entering default and, for those who still default, to minimize the punitive consequences that can be life-altering for vulnerable individuals.”

As part of this work, NASFAA formed a coalition with associations, organizations, and think tanks from the higher education policy, advocacy, and research community to help develop these recommendations.

The section of the paper delving into student loan default grouped its recommendations into three principles that would make the default system more borrower friendly, and improve the system in a manner that would help prevent default.

Those principles include creating guardrails within the system to both avoid default and make a return to good standing more easily accessible to borrowers, making default less punitive, and making borrowers who are able to meet their repayment obligations incentivized to make their payments.

Within those principles, NASFAA put forth several recommendations:

  • Bring all borrowers currently in default into good standing as part of the resumption of student loan  repayment following the COVID-related suspension of monthly payments. 

  • Moving forward, automatically enroll delinquent borrowers in income-driven repayment before they enter default, whenever possible.

  • Develop additional safety nets for struggling borrowers who are still at risk of falling into default despite being enrolled in income-driven repayment.

  • Allow defaulted borrowers who enroll and make a payment in income-driven repayment to immediately exit default.

  • Remove the one-time limit on rehabilitation of defaulted loans.

  • Eliminate acceleration of loan balances and use collections mechanisms only in extreme circumstances.

  • Eliminate interest capitalization for borrowers exiting default.

  • Delay credit reporting of default status to provide borrowers with additional time to return to good standing.

  • Remove default from the credit history of any borrower who exits default, and remove all default-related negative credit reporting the first time a borrower completes rehabilitation on a defaulted loan or exits default through the recommended income-driven repayment pathway.

  • Streamline, standardize, and reduce collection fees.

  • Automatically enroll borrowers exiting default through consolidation into income-driven repayment before they return to repayment.

  • Provide consistent, high-quality servicing to simplify and streamline transitions from default to repayment.

The paper also provides a detailed outline of the current financial implications for borrowers in default and the complex steps borrowers must take in order to exit default.


Publication Date: 5/23/2022

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