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Examine the Scope of Student Loan Borrower Distress

It's no secret that many borrowers are struggling to pay off their student loans. In the past, the Student Loan Ranger has discussed rising default rates.

The equally-telling deferment, forbearance, and delinquency rates also continue to rise, and reporting from the Chronicle of Higher Education suggests that even the new and sobering Department of Education three-year cohort default rates actually under-report the financial distress of borrowers.

First, some background on the three-year rates. Congress included a provision in the Higher Education Opportunity Act of 2008 mandating the move to a three-year rate to get a more accurate picture of how many borrowers ultimately default on their federal student loans.

The most recent two-year rate (consisting of borrowers whose first loan repayments came due between Oct. 1, 2009 and Sept. 30, 2010 and who defaulted before Sept. 30, 2011) was 9.1 percent. This was up from the previous rate of 8.8 percent.
In contrast, the recently announced national three-year rate (for borrowers whose loans entered repayment between Oct. 1, 2008 and Sept. 30, 2009, and who defaulted before Sept. 30, 2011) was 13.4 percent. The increase, revealed by the transition from the two- to three-year rates, was reflected in every educational sector: The rate for public institutions increased from 7.2 to 11 percent; private nonprofit institutions rose from 4.6 percent to 7.5 percent; and for-profit schools jumped from 15 to 22.7 percent.
This increase is a bad sign for borrowers, who face a slew of nasty consequences for defaulting on student loans. Defaulting on federal loans, in particular, can result in seizure of tax refunds, garnishment of wages, and the taking of a portion of Social Security payments without a court order.
It's also a bad sign for schools. Institutions with default rates that are too high lose their eligibility for federal financial aid. Starting in 2014, this will occur if 30 percent or more of an institution's borrowers default for three consecutive years, or if an institution's default rate exceeds 40 percent in the most recent three-year period, as measured by the three-year cohort default rate. According to the Chronicle20 schools would lose eligibility if that rule was in effect this year.
In order to ensure they will avoid sanctions, some institutions are taking steps on their own to reduce defaults for at least the few years measured in the cohort default rates. Others are hiring companies that specialize in default management to lower their default rates, including one that has used private investigators to track down borrowers, the Chronicle notes.
But because these institutions are acting to protect their own eligibility for student loans rather than in the best interests of their former students, they may not be giving the best advice to borrowers. 
For example, as Stephen Burd at Higher Ed Watch reports, at least one school has drastically reduced its default rate by aggressively encouraging borrowers to utilize deferment or forbearance. And while forbearances may be available, many borrowers might be better off in an extended repayment plan or an income-driven plan such as Income-Based Repayment or Pay As You Earn, which will allow them to pay down their loans and protect against interest capitalization.
To the Student Loan Ranger, making sure borrowers are getting sound financial advice is incredibly important because deferments and forbearances are relatively short-term options, and defaults are a long-term problem that extends far beyond even the new three-year cohort default rate. In fact, according to a Chronicle study of unpublished data, the three-year cohort default rate may be a vast underestimate. 
The Chronicle's data can't be directly compared to the cohort default rate—the former looks at loans and includes PLUS loans; the latter looks at borrowers and does not include PLUS loans. But, to the Student Loan Ranger, the numbers are scary: 20 percent of the federal loans that entered repayment in 1995 have gone into default. Over the same timeframe, 31 percent of loans made to community college students and 40 percent of loans to students at for-profit colleges have gone into default. 
These staggering numbers suggest the true scope of and unrelenting severity of financial distress that student loan borrowers face. The Student Loan Ranger will continue to do what we can to help, including keeping you up to date on this blog, Twitter (use #studentdebthelp), and Facebook, and by providing comprehensive resources like our free webinars and our new eBook. The Student Loan Ranger urges you to check them out if you or someone you care about is worried about student loans.
Isaac Bowers is a senior program manager in the Communications and Outreach unit, responsible for Equal Justice Works' educational debt relief initiatives. An expert on educational debt relief, Bowers conducts monthly webinars for a wide range of audiences; advises employers, law schools, and professional organizations; and works with Congress and the Department of Education on federal legislation and regulations. Prior to joining Equal Justice Works, he was a fellow at Shute, Mihaly & Weinberger LLP in San Francisco. He received his J.D. from New York University School of Law.
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