Avoid Loan Delinquency and Default

A new report suggests that a majority of students struggle to repay their loans.

By + More

Caveat emptor! Your student loan documents probably do not explicitly state "let the buyer beware"—but maybe they should. A sobering report released this month by the Institute for Higher Education Policy, "Delinquency: The Untold Story of Student Loan Borrowing," suggests that a majority of students struggle to repay their loans.

As the cost of a higher education has exponentially increased over the last couple of decades, common sense and anecdotal evidence has suggested this is the case. Unfortunately, policymakers have relied solely on default rates as a measurement tool. Default rates alone paint an incomplete picture, because they exclude borrowers who have difficulty repaying their loans but avoid default.

The new report primarily focuses on the nearly 1.8 million borrowers who entered into repayment on loans obtained through the (now defunct) Federal Family Education Loan Program in 2005 during their first five years of repayment. It details the rates at which borrowers entered not only into default, but also into deferment (a temporary suspension of loan payments for specific situations such as re-enrollment in school, unemployment, or economic hardship); forbearance (temporary suspensions of a borrower's payments because of financial difficulty made at the discretion of the lender); and delinquency (late payment on a loan).

[Learn the 11 steps to relief from federal student loans.]

Overall, only 37 percent of the borrowers in the study managed to repay their student loans throughout the study period without postponing payments or becoming delinquent. Another 7 percent entered into deferment because they re-enrolled in school. A majority, 56 percent, apparently had difficulty making timely payments on their loans.

Examining that 56 percent more closely, the report reveals that 16 percent of the borrowers used deferment and forbearance to postpone their payments and avoid delinquency. More than a quarter, 26 percent, became delinquent but did not default. And about 15 percent became delinquent and defaulted. Overall, an incredible 41 percent of the student loan borrowers became delinquent or defaulted.

Delinquency and default have serious consequences for student loan borrowers. Delinquency can affect borrowers' credit scores and their ability to obtain loans, such as mortgages and auto loans, and the terms upon which those loans are offered. Borrowers who default face even more severe consequences, including wage garnishment, withholding of income tax refunds or Social Security benefits, the turning over of the defaulted loans to collection agencies, and liability for collection and court costs.

The report also reveals important distinctions between borrowers. Undergraduate and graduate borrowers who left without graduating were far more likely to become delinquent or default than those who graduated. Graduate students were far more likely to make timely payments without using deferment or forbearance and less likely to become delinquent or to default than undergraduates.

And students at public four-year and private, nonprofit four-year institutions were more likely to repay their loans on time without resorting to deferment or forbearance and less likely to default than students at public and for-profit two-year institutions and for-profit four-year institutions.

[Get advice from the U.S. News college loan center.]

It is clear that huge numbers of student borrowers struggle to pay back their federal student loans. And, since the study did not include private loans, it may even be understating the magnitude of the problem. A few lessons are clear:

• Student loan servicers, guaranty agencies, financial aid offices, and other organizations should ensure student loan borrowers have the information and counseling they need to avoid repayment problems.

• Students need to carefully consider the amount of debt they are able to take on in order to finance their education. They also need to understand and utilize repayment options—such as forbearance, deferral, income-based repayment, and public service loan forgivingness—to avoid delinquency and default.

• We should all reconsider the effectiveness and the equity of relying on student loans to finance the cost of a higher education.

In the meantime, caveat emptor.

Isaac Bowers is the senior program manager for Educational Debt Relief and Outreach at Equal Justice Works. He was previously an attorney at Shute, Mihaly & Weinberger LLP in San Francisco, where he focused on environmental, land use, and planning issues. A graduate of the New York University School of Law, Bowers also has extensive experience in nonprofit advocacy and outreach.