The Student Loan Default Trap: Why Borrowers Default and What Can Be Done, a new report released on Monday from the National Consumer Law Center’s Student Loan Borrower Assistance Project, addresses questions about the causes of default and the effectiveness of programs intended to assist borrowers in default. Highlights include:
- A summary of existing research
- Results from National Consumer Law Center’s (NCLC) survey of borrowers in default
- A look at the history and effectiveness of student loan rehabilitation and consolidation, and
- Policy recommendations, including suggestions for reforms, to reduce student defaults
Overview: Despite the amount of attention garnered by student loan defaults since the 1990s, few studies provide answers about why borrowers default and how best to help them. The lack of research helps perpetuate unproven theories about default, including the idea that the recession is solely to blame for increased default rates. The stakes are high because vulnerable students attempting to better their lives face severe consequences if they default on federal student loans. The government has nearly boundless powers to collect student loans, far beyond those of most unsecured creditors.
Key Policy Recommendations
We urge policymakers to increase targeted grant aid for students and increase funding for public education. However, as long as loans are the centerpiece of federal student aid, we must:
- Attempt to avoid defaults by holding schools more accountable for poor outcomes and providing better information to students
- Rethink the draconian collection policies that leave vulnerable students with nowhere to turn
- Start by targeting collection efforts to those with resources to pay. Limiting collection in this way should save money for taxpayers. There are significant costs to taxpayers associated with pursuing the most vulnerable borrowers until they die. Under the current system, lenders and collectors profit as the government pays higher and higher collection fees.
NCLC’s Survey of Borrowers in Default: Key Findings
NCLC staff and other advocates administered surveys to 40 individuals in default on federal student loans over one year, beginning in May 2011.
Of the borrowers surveyed:
- 80% were unemployed
- 85% received public assistance
- Nearly 65% attended one or more for-profit schools
- Only 47% completed their education
- 69% neither of the borrower’s parents completed higher education
- The average age of the borrowers surveyed is 43
- 55% had at least one child
- 15% had no high school diploma or GED when they signed up for school
NCLC found a general lack of knowledge about default among those we surveyed.
- 24% of those surveyed did not know they were in default when they sought legal assistance
- 65% did not recall any pre-default communications or contact, although a few acknowledged that they had received phone calls that they did not accept or received mail that they did not open
- Economic difficulties and lack of employment were by far the most commonly cited reasons for default.
The report includes additional recommendations to improve the existing programs for federal student loan borrowers to get out of default (rehabilitation and consolidation) and to help prevent borrowers from defaulting.
NCLC found one indicator in particular that was not reflected in existing studies on causes of default:
- 47% of the borrowers in our survey said they did not believe they should have to pay the student loan debt
- An additional 10% answered yes and no when asked if they should have to pay the debt
- The vast majority of those surveyed who did not believe they should have to pay back their loans expressed serious problems with the schools they attended
- Nearly all (about 90%) of the borrowers who said they should not have to repay their loans attended for-profit schools.
For more about the abuses in the for-profit sector, see the new report released by the U.S. Senate Health, Education, Labor and Pensions Committee this week.
