By our best estimates, there are approximately 7.3 million borrowers holding some $106 billion in defaulted student loan debt. While there's no official line, it's probably safe to say this qualifies as a "crisis."
Over the years a great deal of effort and dollars have been invested into keeping defaults in check. Unfortunately when solutions to nagging problems like this one aren't forthcoming, frustration invariably bleeds into backlash. Just ask the Department of Education and the companies it contracts default collection activities to, which face a seemingly endless barrage of accusations over program mismanagement and putting profits ahead of borrower protections.
Pulling individuals out of default is obviously important but as the saying goes, an ounce of prevention is worth a pound of cure. The easiest way to solve our default problem is to keep them from ever happening, which would be great since the Federal Reserve Bank of St. Louis estimates that nearly one in three borrowers in repayment is delinquent.
Unfortunately, this is where the wheels sort of come off the cart. If you consider the system in place today, there's really no good reason why anyone should ever even come close to defaulting on a federal student loan to begin with.
A Good Starting Point
Federal student loan borrowers don't default until they've missed nine consecutive months' worth of payments, which is about half a year longer than what any other consumer loan offers a borrower. The reasons for letting a debt lapse for so long vary but it largely comes down to some combination of unaffordable monthly payments and borrowers being unaware of the short- and long-term economic relief programs they might be eligible for.
Yet everybody has access to affordable payments. In addition to deferment and forbearance options, Direct Loan borrowers have access to up to three different income-driven repayment (IDR) plans and even borrowers in the legacy bank-based lending program have access to an Income-Sensitive Repayment option. Sure, the income caps, terms and conditions across the programs vary but the fact remains that no borrower experiencing hardship has to choose between paying the electric bill and making their student loan payment.
As option awareness goes, the outreach campaigns loan servicers and the Department employ are remarkably sophisticated in their tone, delivery methods and strategic objectives. Plus, while servicers are required to meet minimum outreach standards at different stages of delinquency, all go above and beyond since the Department utilizes a performance-based evaluation system that assigns servicers additional volume based on how well they minimize delinquencies and maximize borrower satisfaction.
All of this means that the barrage of friendly reminders and offers of assistance borrowers receive begin even before they leave school. Once in repayment, all it takes is missing just one or two payments and a delinquent borrower is guaranteed a cascade of outreach attempts from not only their loan servicer but also their former school. As crazy as it sounds, someone on the verge of defaulting can literally end up receiving hundreds of calls, letters, text messages and email-based offers of help and support.
That's right, not a handful, or even dozens, but hundreds of attempts to provide that struggling borrower with help.
A Better Way Forward
Given just how bad default is for someone's long-term financial health, missing enough payments to let it happen under the existing system represents remarkably irrational behavior. If we're going to turn off the default spigot then we need to understand and fix what's preventing borrowers from making choices that seemingly run against their best interests.
The logical first step is for the Department to instruct its servicers to collect data on why borrowers are not making payments or letting payments lapse for so long. There's no need for speculation about borrowers' motives when every day servicers are speaking directly to thousands of the very people who's behavior we're interested in better understanding. Let's not only find out what's causing the delays but let's ask them directly how effective different types of outreach are. A little research here can go a long way towards informing some meaningful policy.
There are also several obvious and immediate fixes the federal government can employ that would improve outreach, reduce borrowers' decision-making struggles and smooth ongoing eligibility friction.
First, stop preventing servicers and default prevention providers from loading borrowers' cell phone numbers into their autodialing technology. Nearly half of American households today don't even have landline telephones. If there's any legitimate concern about struggling borrowers not being aware of available remedies then it makes absolutely no sense to handicap the efforts of those there to offer help by making them manually dial tens of thousands of phone numbers. All it does is drive up default prevention costs and slow down the ability to generate results. It's ridiculous.
Second, collapse the three highly similar income-driven repayment options with different income caps, terms and conditions into one, single program. A system of patchworks is nice for a quilt but awful for borrowers having to make important financing choices and wondering why some folks are eligible for some benefits that others are not.
And yes, we all know this is more than just a renaming exercise. Congress should be forced to weigh the benefits and costs of these separate plans, find those characteristics that make the best sense for the most people, re-score a single super program appropriately and then apply it to all current and existing borrowers.
Third, simplify the process for maintaining hardship repayment eligibility. Make program re-certification as simple as checking a box on one's tax return or welfare application or unemployment filing that authorizes these agencies to share information with the Department of Education. It was shocking to learn earlier this month how so many struggling borrowers enrolled in IDR plans have dropped out and fallen back into the kinds of plans that create the cycle of payment unaffordability and paralysis that's gotten us here. The last thing we need are government programs that exist to help people in tough times but then create paperwork hurdles that make it nearly impossible for them to reap the benefits.