Student loan borrowers who don’t 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. Such measures could include payments that reduce the size of the balance; enroll in non-standard repayment plans such as Income-Based (IDR), Extended, or Progressive plans; the carry-over of appropriations; or consolidate their loans.
According to an analysis of longitudinal data on federal student loans, this trend is true even controlling for borrower factors such as age, sex, race, type of institution, program of study, graduation and loan balance. Some of these factors have been linked to a higher probability of default in previous analyzes.
The findings are based on research from The Pew Charitable Trusts which shows that borrowers who end up defaulting often miss payments early on in repayment. Put simply, as the current hiatus on most federal student loans ends on January 31, 2022, early engagement with these borrowers by the federal government and loan officers will be essential to ease the transition to repayment.
An analysis of data from the Department of Education’s Longitudinal Study of Beginning Postsecondary Students examined the relationship between early interactions with the repayment system and the likelihood of default. The work was carried out for Pew by RTI International, a non-profit research organization.
The study followed students who began their post-secondary education in 2004 and tracked their loan repayments through 2015. Due to the limitations of the data set, the effect of withholding on the success of the long-term repayment could not be assessed. Forbearance allows borrowers to defer or suspend payments. Some borrowers may find it easier to get forbearance than to take the borrower’s actions discussed here.
In response to the coronavirus pandemic and the recession that followed, Congress and the administration temporarily suspended payments and interest charges for most loans in 2020 and suspended collection efforts for those in default. . As the hiatus comes to an end early next year, education departments and loan officers must immediately prepare to guide borrowers to a successful repayment.
Tens of millions of borrowers will transition to repayment at the same time. Many will have to fit student loan payments into their budget for the first time in almost two years, while still navigating a confusing repayment system. Repairers must provide specific and targeted assistance to people in financial difficulty.
These data suggest that making a special effort to help borrowers get back on track in the first few months after the break is over could be crucial in avoiding serious negative consequences such as delinquency and default.
Help borrowers restart their payments successfully
Analysis indicates that taking various actions or using available repayment tools, even if borrowers cannot afford full standard payments, can help ensure better repayment success across the portfolio. of loans. The education ministry and services have started contacting borrowers to encourage them to take action before the hiatus ends. Additional steps need to be taken, such as contacting borrowers after resuming payments and identifying best practices for providing assistance at this point, as well as in the first 90 days after a withhold or postponement period.
More specifically, the ministry and loan managers should:
- Allow borrowers who now have lower incomes to enroll or recertify for an IDR plan without a lengthy application process. The education ministry may look for ways to streamline access to IDR plans – in which payments are set based on income and family size – to better manage what is likely to be a request. overwhelming assistance. The government could allow service agents to temporarily enroll borrowers in IDR plans without requiring extensive paperwork, for example by phone, through a website, or through electronic communication. In the long term, the timely implementation of the Fostering Undergraduate Talent by Unlocking Resources for Education (FUTURE) Act, which directs the Internal Revenue Service and the department to securely share the income tax return data of borrowers, reduce administrative barriers and help borrowers register more easily. and stay in IDR plans.
- Automatically allow additional forbearance for those who miss payments immediately after current protections expire to give services more time to reach them. Policymakers should provide a grace period for those struggling after the break is over. They could automatically allow additional short-term periods of suspended payments for those who do not act in the first few months after repayment. This would give management departments more time to reach these borrowers and give them more time to manage automatic debit agreements. This could help ensure that borrowers do not experience negative credit reports.
- Continue and expand the targeted reach of borrowers. Pew research highlights metrics that can help identify risky borrowers before they get into trouble. For example, the Department of Education and Services could target communications to borrowers who are overdue, in difficulty, or who have suspended payments repeatedly or for long periods before the pandemic.
These actions could help reduce the barriers to a successful restart for many. Given the effect of borrower engagement in the first few months of repayment on long-term success, it is imperative that policymakers strive to make the transition from the break as flexible as possible.
Regan Fitzgerald is a Manager and Lexi West is a Senior Associate on The Pew Charitable Trusts Student Loan Success Project.