4 Things You Should Know About Student Loan Repayment

Given how frequently student debt is in the news, the lack of data about why many borrowers struggle to repay is surprising. In June, The Pew Charitable Trusts hosted an event with experts from the student loan industry and policy community to shed light on these challenges and launch new lines of work focused on student loans. The event touched on four themes.

Many borrowers face a repayment crisis

The U.S. Department of Education reports that more than 8 million federal student loan borrowers—nearly 20 percent—are in default, having not made a payment in at least a year, and millions more are having difficulty with repayment.

Adam Looney of the Brookings Institution noted that “the biggest group of people who struggle with their loans are what I’d call nontraditional borrowers: students who went back to school, perhaps later in life, who are pursuing a degree part time rather than full time; pursue a certificate or associate’s degree, but not necessarily a bachelor’s degree; and perhaps take classes online rather than in person.” In addition, research indicates that African-American borrowers and those who attended for-profit colleges have particularly high default rates.

Those who owe the least—often less than $5,000—and who might not have completed their program of study default at higher rates than those with larger loan balances, according to James Kvaal of the Institute for College Access and Success. And Joanna Darcus of the National Consumer Law Center noted that some of the problems observed in student loan repayment are related to broader economic challenges. “If you don’t have the ability to pay or don’t earn an income that makes it possible to feed your family and repay your loans, then even having a small balance is going to trip you up,” she said.

High-balance borrowers, many of whom have taken out loans for advanced degrees that result in high earnings after graduation, can face a different repayment problem: Even those who make payments on time may see their balances continue to grow if those payments do not cover the interest that accrues on their loans. Josh Mitchell, a reporter at The Wall Street Journal who has reported on high-balance borrowers, questioned whether the availability of income-driven repayment plans influences students’ borrowing, potentially encouraging them to borrow more. He also expressed concern about the collective weight of student debt on the economy.

The repayment system contributes to borrowers’ struggles

Cheryl Oldham of the U.S. Chamber of Commerce said the repayment system has long been confusing, complicated, and difficult for borrowers to navigate. In addition, this complexity and the administrative hurdles included in some programs present challenges to effective servicing. For example, income-driven repayment plans require borrowers to apply every year. Borrowers who have not submitted the necessary paperwork to certify their income or whose paperwork is not processed on time are dropped from these plans, which can cause their monthly payments to skyrocket. And, as Debra Chromy of the  Education Finance Council observed, getting back into an income-driven plan can “be a very annoying and frustrating process.”

A lack of key data has hindered efforts to find solutions

Panelists agreed that more research on student loan repayment is necessary and pointed to default as one of the areas about which the least is known. Although the federal government holds an enormous amount of data about student loan performance, much of it is not publicly available, limiting understanding of repayment challenges as well as policy solutions that could help.

Servicing was also cited as an area in need of further study. “We don’t have the data that we need to understand what role servicers can play” in improving repayment success, said Julie Margetta Morgan of the Roosevelt Institute. A major related challenge is connecting with borrowers themselves, and Scott Miller of the Pennsylvania Higher Education Assistance Agency called for more research examining how to improve borrower-servicer communication.

The repayment system should put borrowers first

“We have this 50-year-old system that is still in place that is just crying out for modernization,” said Daniel Madzelan of the American Council on Education. He, Matthew Chingos of the Urban Institute, and other panelists said this modernization could be achieved in various ways, including:  

• Automation. Discussions throughout the day highlighted opportunities to streamline or automate administrative processes, such as the annual income recertification process for borrowers enrolled in income-driven plans. Looney said, however, that it will probably be difficult to automate many aspects of the borrower-servicer relationship and that phone conversations will remain a critical element of the system for a long time.
• Outreach. Speakers underscored the importance of early outreach targeted toward the borrowers who are most at risk for delinquency or default. Miller noted the need to better understand the pathways that borrowers take through repayment; the timing of possible missed payments or use of tools to suspend payments, such as deferment or forbearance; and the additional resources that are needed to support those who are likely to struggle.  
• Simplification. Several panelists noted that having many repayment plans to choose from can create confusion, especially around eligibility. Darcus cautioned that if policymakers reduce the number of plans available, they must also make sure that borrowers still get the help they need.
• Evaluation. Several speakers also mentioned a need to rethink the consequences that are imposed as a result of student loan default. These include wage and Social Security garnishment, damage to the borrower’s credit, and ineligibility for additional student aid and federal programs, such as those that help with homeownership, all of which can create additional barriers for borrowers trying to access sustainable long-term repayment options.

Over the next four years, Pew will work to help policymakers, stakeholders, and the broader public better understand these issues, with a focus on the borrowers who struggle the most, and will conduct research to capture borrowers’ perspectives on the reasons for their repayment challenges. When warranted, we will identify and promote effective solutions to ensure that student loan repayment is affordable, flexible, and easy to access.

Sarah Sattelmeyer and Phil Oliff are managers and Brian Denten is an associate with The Pew Charitable Trusts’ student loan initiatives.