Student Loan Borrowers With Early Repayment Troubles Are 2.5 Times More Likely to Default

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Student loan borrowers who do not make payments in the first three months of repayment are 2.5 times more likely to default at some point than those who have taken steps to manage their debt. These steps can include making payments that reduce the size of the balance; Enroll in non-standard payment plans such as income-driven plans (IDRs), extended or tiered plans; deferred loans; Or consolidate their loans.

According to an analysis of longitudinal federal student loan data, this pattern holds true even when controlling for borrower factors such as age, gender, race, type of institution, degree program, degree completion, and loan balance. Some of these factors have been linked to a higher probability of default in previous analyses.

The findings are based on research by the Pew Charitable Trusts that shows that borrowers who eventually default often miss payments early. Simply put, as the current moratorium on most federal student loans expires on January 31, 2022, early engagement with these federal government borrowers and loan providers will be critical to helping transition back into repayment.

Analysis of data from the Ministry of Education’s Longitudinal Study of Elementary and Secondary Students examined the relationship between early interactions with the payment system and the likelihood of default. The work for Pew was conducted by RTI International, a non-profit research organization.

The study tracked students who began their post-secondary education in 2004 and followed their loan repayment through 2015. Because of limitations in the data set, the effect of patience on long-term repayment success could not be assessed. Patience allows borrowers to defer or suspend payments. Some borrowers may find it easier to have patience than to take the borrower actions analyzed here.

In response to the coronavirus pandemic and the subsequent recession, Congress and the administration have temporarily halted payments and interest charges for most loans in 2020 and suspended collection efforts for those who are in default. With the pause period approaching early next year, the Department of Education and loan service providers must prepare immediately to direct borrowers to return to successful repayment.

Tens of millions of borrowers will repay at the same time. Many will have to fit student loan payments into their budgets for the first time in nearly two years, while navigating a confusing repayment system. Servers will need to provide specific, targeted assistance to those experiencing financial stress.

This data suggests that making a special effort to help borrowers get on the right track in the first few months after the layoff period ends can be crucial to avoiding serious negative outcomes such as defaults and defaults.

Helping borrowers to successfully repay their payments

The analysis suggests that taking a variety of steps or using available repayment instruments—even if borrowers cannot afford full standard payments—can help ensure greater repayment success across the loan portfolio. The Ministry of Education and providers have begun reaching out to borrowers to encourage them to act before the pause period ends. Further steps should be taken, such as contacting borrowers after payments resume and outlining best practices for providing assistance at that point, as well as in the first 90 days after the forbearance or deferment period.

More specifically, the department and loan service providers must:

  • Allow borrowers who now have less income to enroll or re-qualify for an IDR plan without a lengthy application process. The Department of Education can look for ways to simplify access to IDR plans – where payments are determined by income and family size – to better manage what is potentially an overwhelming demand for help. The government can allow service providers to temporarily enroll borrowers in IDR plans without the need for extensive paperwork—for example, by phone, through a website, or through electronic communications. In the long term, timely implementation of the Resource for Education (Futures) Act — which directs the Internal Revenue Service and department to securely share borrower tax return data — will reduce administrative hurdles and help borrowers register more easily. Bigger and keep in IDR plans.
  • Automatically allow additional tolerance for those who miss payments immediately after existing protection expires to give servants more time to reach them. Policy makers should provide a grace period for those who struggle after the downtime period is over. It can allow additional short-term periods for automatically paused payments for those who don’t act within the first few months of repayment. This would give providers more time to reach these borrowers and give them more time to administer the automatic debit arrangements. This can help ensure that borrowers do not experience negative credit reports.
  • Continue and expand targeted reach to borrowers. Pew’s research highlights indicators that can help identify borrowers at risk before they are in distress. For example, the Department of Education and service providers can direct communications to borrowers who are behind in payments, encountering difficulties, or withholding payments frequently or for long periods before the outbreak of the pandemic.

These actions can help reduce the barriers to a successful restart for many. Given the impact of borrower involvement in the first months of repayment on long-term success, it is imperative that policy makers work to make the transition from pause as flexible as possible.

Reagan Fitzgerald is a Principal and Lexi West is a Senior Associate on the Pew Charitable Trusts Project on Student Borrower Success.

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