“The problem is that these plans are difficult to enroll in and remain in, which means that for those really looking for this relief, the system is not meeting that need.”

Twenty-six percent of student loan borrowers in the United States end up defaulting on their loans within five years, according to a new study from the Pew Charitable Trusts.

Pew commissioned the Trellis Company, a Texas-based organization, to conduct an analysis of almost 400,000 borrowers in the state. Researchers then benchmarked their analysis with national data to ensure the Texas findings were “generally reflective” of what is known at the national level.

The study’s findings underscore the severity of the crisis facing America’s 43 million student loan borrowers, who collectively hold $1.5 trillion in student loan debt.

The U.S. Department of Education estimates that each year, more than one million borrowers default on their student loans, defined as having gone at least 270 days without a payment. The consequences of defaulting can be devastating for borrowers, who can face collection fees, wage garnishment, and damage to their credit scores. Payments from federal programs such as income tax refunds and social security can also be withheld.

While the Pew report does not explain why so many students are defaulting, it provides a valuable peek behind the curtain as to what’s happening during repayment, according to Sarah Sattelmeyer, the Manager of Pew’s project on student borrower success.

“There are points of friction in the repayment system that make it tough, even for those who are the most savvy at using the system, to succeed,” said Sattelmeyer. 

These friction points include the overall complexity of the system and, specifically, the difficulty in enrolling in income-driven repayment plans. These plans allow borrowers who are struggling to make their monthly payments to enroll in plans which tie their payments to their income, providing a more affordable option. 

“The problem is that these plans are difficult to enroll in and remain in, which means that for those really looking for this relief, the system is not meeting that need,” Sattelmeyer said. “One of the reasons that they are complex is that people have to submit income information and family size information to enroll and then have to re-submit it every year.”

“Data from 2013 and 2014, which is the most recent we have, shows that more than half of people didn’t recertify by their recertification deadline,” Sattelmeyer said.

Sattelmeyer believes that the obstacles surrounding income-driven repayment plans is having a negative impact on borrowers’ ability to make payments. 

“This option that Congress has created to provide a safety net for people is the hardest thing for them to do and that doesn’t make sense. It’s much easier to pause a payment or stop making payments than it is to enroll in one of these plans that might promote better payment outcomes for so many,” Sattelmeyer said.

Many borrowers are also completely unaware of alternative payment plans. The Trellis Company conducted interviews with Texas borrowers who defaulted and found that many of them had little to no idea about longer-term repayment options, such as graduated or income-driven repayment plans, and not a single defaulter said they had received any information or guidance about repayment options prior to falling behind on their payments. 

“I just thought I just couldn’t do anything about it besides just pay monthly payments in the full amount … And then I had talked to someone and they told me about the new payment plans they had,” read one borrower testimonial. 

The report also identifies warning signs to help determine which borrowers are at risk of default. Most borrowers who default experience delinquency early in repayment and a significant share of defaulters also interact with the repayment system prior to defaulting, such as by requesting deferments or forbearances, which allow you to temporarily stop making loan payments or temporarily reduce how much you pay.

Identifying these warning signs is important, Sattelmeyer said. “It’s really … bringing attention to what’s happening in the system so we can help people before they get too far down and experience too much distress.”

The Trellis Company also examined the demographics of those who default, using several recent studies as reference points. What they found was that borrowers who owe the least, often less than $10,000, and those who may not have completed their programs of study default at higher rates than those with larger balances. 

“There’s a host of reasons why that could be,” Sattelmeyer said. “People with the lowest balances are often those who didn’t graduate, which may mean that they’re not getting a return on investment.” 

Students who attend for-profit institutions also default at higher rates than those who attend non-profit institutions. Borrowers of color, particularly African Americans, and first-generation students also default at higher rates than their peers. 

The report acknowledges that more research is needed into how and why borrowers struggle to make payments and default, but it does make initial suggestions for how the Department of Education and Congress can tackle the issue. 

The first is to identify at-risk borrowers before they are in distress, in particular by using risk indicators such as borrowers missing payments early in the repayment process or repeatedly suspending payments. The report also suggests eliminating barriers to enrollment in affordable repayment plans and providing servicers with resources and guidance on how to prioritize interactions and engagement with high-risk borrowers.

The report also called for a streamlining of repayment rules and further research and reform.

Image via Shutterstock.

Some members of Congress are already trying to take action to minimize student debt. In October, Rep. Bobby Scott (D-VA) introduced the College Affordability Act, an update to the Higher Education Act of 1965, which would lower the cost of college for students and families, hold colleges accountable for students’ success, and expand opportunity for students from all backgrounds. The bill also takes aim at the student loan crisis, aiming to eliminate hidden fees associated with student loans, simplify repayment options, and use more generous repayment terms for low- and middle-income borrowers. 

The legislation would also automatically place borrowers who are more than 120 days behind on payments into an income-driven repayment plan, while also allowing a borrower’s default to be removed from their credit report once the loan is consolidated or paid off.

Sattelmeyer and Pew are also advocating for reforms, including legislation to simplify the recertification process for borrowers enrolled in income-driven repayment plans.

“Right now, for a lot of these people, the government already has this information. When you submit your taxes to the IRS, that income information? They have that,” said Sattelmeyer. “So one of the solutions we’re advocating for is having Congress to direct the IRS to share that information with the Department of Education to help streamline this process.”

Sattelmeyer continues to think about how to further improve the repayment system, and while she agrees more research needs to be done, she also emphasized the value of this report. 

“What this report really does is take a look at the subset of the 43 million borrowers that hold federal loans today and assess where in the process people are struggling, who the system isn’t working for, and things that the Department of Education and Congress can do to make it better,” Sattelmeyer said.