The Department of Education recently announced that two- and three-year college loan default rates are the highest they have been in nearly two decades, despite the fact that federal student loan borrowers have more tools at their disposal than ever before to make the monthly payment a manageable percentage of their income.
The rising rates are proof that college alumni simply aren’t getting the message about ways to make student debt affordable. According to a recent survey of student loan borrowers conducted by American Student Assistance, 70 percent of respondents said they were confused about their repayment options. In addition to marring borrowers’ own credit records with default, such widespread confusion is having a devastating impact on our national economy: 75 percent of survey respondents indicated student loan debt affected their decision to purchase a home, while 63 percent said their debt affected their ability to make large purchases, like a car, and nearly 50 percent said student debt impacted their ability to start a small business.
Recently, the Obama administration announced it has charged the Department of Education to proactively email student loan borrowers about income-based repayment as a solution to student loan indebtedness. This is a good first step but more must be done. Many borrowers are still unable to navigate the byzantine application process for income-based repayment. Who will they turn to with questions or problems that are not resolved in one email or phone call?
ASA’s own experience has shown that student loan repayment works best as a “contact” sport. What produces lower delinquency and default rates is proactively reaching out to borrowers, one-on-one, to engage them in conversation before they get into trouble.
In contrast to the national trend, default rates at ASA, which currently maintains on behalf of the Education Department a portfolio of approximately $35 billion Federal Family Education Loans for 1.2 million borrowers, are on the decline. ASA’s two-year default rate for fiscal year 2011 stands at just 4.5 percent, less than half the national rate of 10 percent and down from the organization’s FY 2010 rate of 5.5 percent. ASA’s three-year cohort default rate dropped from 10.7 percent to 8.2 percent, while the national three-year default rate rose year-over-year, from 13.4 percent to 14.7 percent. Additionally, 94 percent of all the student loan borrowers ASA works with have loans in good standing (neither delinquent nor defaulted).
The Education Department simply does not have the adequate funding, manpower and resources to provide the in-depth debt management counseling and personalized attention that can turn around escalating defaults. Meanwhile, private loan servicers, contracted by the federal government to collect student loan payment, are not incentivized to do so. Their business model is sustained when borrower interaction is kept to a minimum.
Instead, we should institute a new model of borrower support in the student loan program. Colleges and universities, which have a responsibility and interest in ensuring their alumni are financially competent, must look to expand their role on the back-end of student borrowing. They can do this by getting more involved in helping their new alumni navigate the maze of repayment options through partnerships with experienced, independent third party service providers. Colleges should implement education debt management programs that raise alumni awareness of repayment options during the payback period, offer additional personal assistance to resolve billing disputes or correct mistakes, and offer neutral advice in the borrower’s long-term interest.
Employers benefit from an educated workforce and they can also get involved. Financial worries and stress reduce productivity and student loan problems are solvable with good, timely advice. This can be done through employee assistance programs. At ASA, we actually assist employees in repaying their education debt. It is a powerful recruitment and retention tool.
Talking student loan borrowers through their options so they can select the right repayment plan has the potential to cut default rates in half. As the national dialogue continues on college affordability and student debt, we shouldn’t overlook this commonsense solution to help alleviate the student debt crunch.
Paul Combe is president and CEO of Boston-based American Student Assistance.