Guest Post: Ed Dept Must Do a Better Job Helping Borrowers Avoid Default

By Leo Kornfeld

The Department of Education recently announced that the national student loan default rate has risen to over 8 percent and we know that this measure provides only a limited view of the troubles that borrowers are having repaying their student loan debt. In the current economy, we can only expect things to get worse unless the Education Department tackles this problem head-on.

Among the defaulters are a large percentage of unemployed college students. It’s bad enough to be unemployed; however, when you add to this difficulty with being classified as a defaulter, you are really in trouble. Defaulting on federal student loans results in a lifetime of financial purgatory — it destroys your credit, making it impossible to obtain a credit card, car loan, and home loan, and it puts you at risk of having your wages garnished, and your tax refunds intercepted by the IRS.

This disaster however can be avoided because there are options available for low income, unemployed college students and others to avoid going into default on federal loans. However, the Education Department has not done nearly enough to communicate these options so that the borrowers, who are already suffering in this difficult economy, fully understand they have alternatives to facing the lifetime punishment of being classified as a defaulter.

These options are:

• Unemployment and economic hardship deferments: These options allow borrowers to temporarily stop making loan payments, if they are unemployed or are in financial distress. Qualifying borrowers can obtain these deferments for up to three years. Obtaining a deferment is an especially good alternative for borrowers with federally subsidized loans because interest does not accrue on these loans while they are in deferment. Borrowers who have already defaulted on their loans, however, are not eligible to defer their loans.

• Forbearance: Borrowers who are struggling to repay their loans can request a forbearance from their lenders. Forbearance allows payments to stop temporarily or decrease for a specific amount of time. The lender may grant forbearance of the principal, interest or both. This can be an especially helpful alternative for delinquent borrowers who are on the verge of defaulting. However, this can also be an expensive option for borrowers because interest continues to accrue on the loans while they are in forbearance.

• Income-Based Repayment (IBR): Congress created the Income-Based Repayment program in 2007 to help financially struggling borrowers who are having trouble repaying their federal student loan debt.  Currently, borrowers in IBR do not have to make payments on their loans that exceed 15 percent of their discretionary income, and can have their remaining debt forgiven after 25 years. However, most borrowers are better off using this option only to obtain temporary relief. Otherwise they could face higher loan costs over the lifetime of their loans because of the extended repayment period.

When I was in Washington in the 1990s, we were struggling with the problem of reducing sky-high default rates. To accomplish this, we engaged in a campaign to communicate the dangers of defaulting every way known to mankind — to students, financial aid directors, parents, and the news media. Once the word got out and students understood the consequences, the default rated dropped to about 4 percent. I used to brag that the student loan default rate was better than the American Express Default rate.

The Department of Education needs to launch a similar campaign now so that all borrowers understand the consequences of defaulting and fully understand the options available to them.

The campaign should include an aggressive training component to insure that the financial aid community fully understands the consequence of being classified as a defaulter and the options available to a borrower who is willing but unable to make payments.

In addition, borrowers need to continuously be informed of the available options as well as the severe consequence of being a defaulter. This information should be provided in writing and in face to face conversations with the borrower when the loan is initiated as well as when payment is to begin.

The Department also must insure that student loan servicers participate in training programs to insure that they understand all of the repayment options and are communicating them to borrowers. Some of this is already being done, but the results clearly indicate that these efforts need to be improved.

The Education Department should also make use of the news media as another way to assist in communicating the problem to all parties.

Lastly, the Department of Education plan should try to streamline the repayment options available, and simplify the steps that struggling borrowers must follow to take advantage of them. As part of this effort, the Department should develop betters tools to help these borrowers choose the plan that is most helpful to them.

The Education Department must move expeditiously, or we will see a far higher default rate than 8 percent. For the sake of student loan borrowers who are suffering, the Education Department needs to make communicating these options its No. 1 priority.

Leo Kornfeld was a presidentially-appointed student aid official in both the Carter and Clinton administrations. Under President Carter, he served as the director of the Bureau of Student Financial Assistance at the Department of Health, Education, and Welfare where he focused on improving the federal government’s ability to collect on federal student loans. As a senior Department of Education official in the Clinton administration, he led the agency’s efforts to create and manage the Direct Loan program. In addition to his public service, he has held top management positions with Citibank and Automatic Data Processing (ADP), and has held key positions with Information Technology and Computer Consulting  firms  serving over a hundred colleges and universities. His views are his own and do not represent those of the New America Foundation.