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The Student Loan Default Trap Why Borrowers Default and What Can Be Done

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The Student Loan Default Trap Why Borrowers Default and What Can Be Done THE STUDENT LOAN DEFAULT TraP WHY BORROWERS DEFAULT AND WHAT CAN BE DONE NCLC® NATIONAL CONSUMER July 2012 LAW CENTER® © Copyright 2012, National Consumer Law Center, Inc. All rights reserved. ABOUT THE AUTHOR Deanne Loonin is a staff attorney at the National Consumer Law Center (NCLC) and the Director of NCLC’s Student Loan Borrower Assistance Project. She was formerly a legal services attorney in Los Angeles. She is the author of numerous publications and reports, including NCLC publications Student Loan Law and Surviving Debt. Contributing Author Jillian McLaughlin is a research assistant at NCLC. She graduated from Kala­ mazoo College with a degree in political science. ACKNOWLEDGMENTS This report is a release of the National Consumer Law Center’s Student Loan Borrower Assistance Project (www.studentloanborrowerassistance.org). The authors thank NCLC colleagues Carolyn Carter, Jan Kruse, and Persis Yu for valuable comments and assistance. We also thank Emily Green Caplan for research assistance as well as NCLC colleagues Svetlana Ladan and Beverlie Sopiep for their assistance. We also thank the amazing advocates who helped out by surveying their clients, including Herman De Jesus and Liz Fusco with Neighborhood Economic Development Advo­ cacy Project and Meg Quiat, volunteer attorney at Boulder County Legal Services. This report is grounded in and inspired by the author’s work with low­income clients. The findings and conclusions in this report are those of the author alone. NCLC’s Student Loan Borrower Assistance Project provides informa­ tion about student loan rights and responsibilities for borrowers and advocates. We also seek to increase public understanding of student lending issues and to identify policy solutions to promote access to education, lessen student debt burdens, and make loan repayment more manageable. www.studentloanborrowerassistance.org ABOUT THE NATIONAL CONSUMER LAW CENTER NCLC® Since 1969, the nonprofit National Consumer Law Center® (NCLC®) has used its expertise in consumer law and energy policy to work for consumer justice and NATIONAL economic security for low­income and other disadvantaged people, including older CONSUMER adults, in the United States. NCLC’s expertise includes policy analysis and advocacy; consumer law and energy publications; litigation; expert witness services, and LAW training and advice for advocates. NCLC works with nonprofit and legal services organizations, private attorneys, policymakers, and federal and state government and CENTER courts across the nation to stop exploitive practices, help financially stressed families ® build and retain wealth, and advance economic fairness. 7 WINTHROP SQUARE, BOSTON, MA 02110 5 617-542-8010 5 WWW.NCLC.ORG the student loan default trap WHY BORROWERS DEFAULT AND WHAT CAN BE DONE TABLE OF CONTENTS Executive Summary 3 Introduction 8 Measuring Student Loan Defaults 9 Research on Risk Factors for Default 10 NCLC’s Survey of Borrowers in Default 16 Do Existing Programs Work for Financially Distressed Borrowers? 20 How Did We Get Here? A Look at the History of the Rehabilitation 23 and Consolidation Programs Effectiveness of Rehabilitation and Consolidation: Show Us the 26 Numbers Policy Recommendations 27 Introduction 27 I. Support Research on Default Policies 27 II. Create More Accurate Default Rate Calculations and Close Loopholes in 29 the Sanctions System III. Support Effective Default Aversion Programs 29 IV. Improve Current Post-Default Programs 31 V. Create a More Efficient and Equitable Collection System 32 VI. Provide Real Relief for Borrowers Harmed by Abusive School Practices 34 VII. Restore Safety Net for Student Loan Borrowers 34 Endnotes 35 Appendix A Selected Research Reviewed for This Report 41 Appendix B Survey of Borrowers in Default on Federal Student Loans 43 ©2012 National Consumer Law Center www.nclc.org The Student Loan Default Trap 5 1 Appendix C Borrower Delinquency Letter 44 Appendix D Economic Hardship Deferment Request Form 45 Charts Chart 1 Default Rates and Completion 12 Chart 2 Student Loan Cohort Default Rates by Education Sector (2009) 13 Chart 3 Ten-Year Default Rate Among 1992–93 Bachelor’s Degree Recipients, 14 by Race/Ethnicity Chart 4 NCLC Survey Demographics by Race 17 Chart 5 Parental Educational Attainment of NCLC Survey Respondents 18 2 5 The Student Loan Default Trap ©2012 National Consumer Law Center www.nclc.org EXECUTIVE SUMMARY Despite the amount of attention garnered by student loan defaults since the 1990s, few studies provide answers about why borrowers default and how best to help them. The lack of research helps perpetuate unproven theories about default, including the idea that the recession is solely to blame for increased default rates. The stakes are high because vulnerable students attempting to better their lives face severe consequences if they default on federal student loans. The government has nearly boundless powers to collect student loans, far beyond those of most unsecured creditors. This report addresses questions about the causes of default and the effectiveness of pro­ grams intended to assist borrowers in default, including a summary of existing research, results from National Consumer Law Center’s (NCLC) survey of borrowers in default, and policy recommendations. Research on Risk Factors for Student Loan Default The most commonly cited characteristics associated with default are: • Lack of Completion • Low Incomes and Unemployment • Type of Institution • Race and Ethnicity • Lack of High School Diploma • Lack of Information about Borrowing Although these factors are frequently cited in studies, it is often difficult to determine cause and effect. For example, lack of completion was the most commonly cited risk fac­ tor for default in the studies we reviewed for this report. This does not necessarily mean that graduation causes lower default rates largely because failure to complete is associ­ ated with other characteristics such as low incomes and higher unemployment rates. NCLC’s Survey of Borrowers in Default NCLC staff and other advocates administered surveys to 40 individuals in default on federal student loans over one year, beginning in May 2011. We created this survey because of the lack of information in this area, but also because we observed many of our clients getting behind on payments during the transition out of default. NCLC Borrower Survey Of the borrowers surveyed: 80% Unemployed 85% Receive Public Assistance ©2012 National Consumer Law Center www.nclc.org The Student Loan Default Trap 5 3 Nearly 65% Attended One or More For­Profit Schools Only 47% Completed Their Education 69% Neither of the Borrower’s Parents Completed Higher Education Significantly, the average age of the borrowers surveyed was 43. Just over half, 55%, had at least one child. And 15% had no high school diploma or GED when they signed up for school. We found a general lack of knowledge about default among those we surveyed. Twenty­four percent of those surveyed did not know they were in default when they sought legal assistance. Sixty­five percent did not recall any pre­default communications or contact, although a few acknowledged that they had received phone calls that they did not accept or received mail that they did not open. We also asked the borrowers to express in their own words why they thought they were in default. Economic difficulties and lack of employment were by far the most commonly cited reasons for default. We found one indicator in particular that was not reflected in the existing studies on causes of default. Forty­seven percent of the borrowers in our survey said they did not believe they should have to pay the student loan debt. An additional 10% answered yes and no when asked if they should have to pay the debt. A few of the borrowers in our survey who did not believe they should have to pay men­ tioned disabilities or health issues. The vast majority who did not believe they should have to pay back their loans expressed serious problems with the schools they attended. Nearly all (about 90%) of the borrowers who said they should not have to repay their loans attended for-profit schools. Do Existing Programs Work for Financially Distressed Borrowers? Pre-Default Programs/Default Aversion Default aversion programs include counseling and other targeted programs to reach borrowers before they default. There is mixed evidence on the effectiveness of default aversion programs. Some studies have shown that those who complete their educational programs are less likely to default regardless of counseling. Post-Default Programs: Evaluating Rehabilitation and Consolidation Rehabilitation and consolidation are the two main options currently available to federal student loan borrowers seeking to get out of default. Many view rehabilitation as a supe­ rior program because it requires borrowers to make a series of payments before “escap­ ing” default. We found some limited research showing a higher re­default rate after consolidation compared to rehabilitation. Overall, consolidation is much faster than rehabilitation, mainly because a borrower in default does not have to make any preliminary payments to qualify. Further, there is no resale requirement for consolidation as there is for rehabilitation of guaranteed (FFEL) loans. The main advantage of rehabilitation relates to credit reporting. However, this benefit is often oversold. 4 5 The Student Loan Default Trap ©2012 National Consumer Law Center www.nclc.org The rehabilitation resale requirement has been a major problem for borrowers, particu­ larly during the credit crisis when there were few buyers for the loans. Another problem is that collectors routinely deny borrowers reasonable and affordable payments. Policy Recommendations A key recommendation is to increase targeted grant aid for students and increase funding for public education. We must also attempt to avoid defaults by holding schools more accountable for poor outcomes and providing better information to students. We must rethink the draconian collection policies that leave vulnerable students with nowhere to turn. We should start by targeting collection efforts to those with resources to pay.
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