Reforms Could Combat Rising Student Loan Defaults

Equal Justice Works

The most recent student loan default rates released by the Department of Education show that sadly, but not surprisingly, default rates rose for the sixth year in a row.

Each default is not an abstraction, but a person experiencing personal distress and real financial hardship. Much of this is needless, because small tweaks to already existing programs could go a long way toward eliminating it, in the Student Loan Ranger's opinion.

The cohort default rates measure the percentage of a school's borrowers who default on their loans over a specified period of time. The two-year rates measure the percentage of borrowers who enter repayment on their federal student loans during a particular federal fiscal year and default prior to the end of the next fiscal year.

The more accurate three-year rates - which Congress mandated as part of the Higher Education Opportunity Act of 2008 - calculate the percentage of defaults prior to the end of the second fiscal year after borrowers enter repayment.

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Starting next year, only the three-year rates will be calculated. But in the meantime, the Department of Education is releasing both sets of rates. Both indicate that borrower distress is still rising, with the two-year rate rising from 9.1 percent in fiscal year 2010 to 10 percent in 2011 and the three-year rate rising from 13.4 percent in fiscal year 2009 to 14.7 percent in 2010.

The department's rates also put numbers on the human toll. The three-year default rates indicate that 600,545 borrowers who entered repayment in 2010 defaulted before the end of 2012. That's more than half a million borrowers who are facing some of the consequences of defaulting on federal student loans, including seizure of tax refunds, garnishment of wages and the partial taking - without a court order - of Social Security payments.

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The Student Loan Ranger argues it is imperative that Congress take affirmative steps to end this needless misery. It should begin, as President Barack Obama has requested, by allowing all borrowers to enroll in Pay As You Earn, the new income-driven repayment plan that caps payments at 10 percent of a borrower's income and provides for forgiveness after 20 years.

Congress should then require all federal student loan servicers to personally contact borrowers who are delinquent, in a hardship deferment or in forbearance and offer to enroll them in Pay As You Earn. This should help greatly reduce the number of defaults.

After accomplishing this, Congress can get to work on the more complex job of simplifying student loans.

Of course, the default rate is also a way to ensure institutions of higher education are held to a level of accountability. Starting in 2014, institutions where 30 percent or more of borrowers default for three consecutive years or where the default rate exceeds 40 percent in the most recent three-year period will lose their eligibility for federal financial aid. As the Chronicle of Higher Education reports, 104 institutions are on track for sanctions next year.

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This accountability would be lost if at-risk borrowers are enrolling in highly protective income-driven repayment plans like Pay As You Earn and therefore are not defaulting.

However, there are other means of ensuring accountability. The Student Loan Ranger feels the president's plan to tie college financial aid to performance should be pursued with vigor. And the Department of Education's revised gainful employment rules, under which career-oriented programs would lose the ability to receive federal student aid if graduates' debt-to-income and debt-to-discretionary-income ratios are too high, should be extended to all institutions of higher education.

These could increase accountability for institutions while providing much needed protections for millions of suffering borrowers.

Isaac Bowers is a senior program manager in the Communications and Outreach unit, responsible for Equal Justice Works's 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.