Fact Checked

Some colleges found dodging rules to lower student loan default rates

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Universities in danger of losing the ability to participate in federal student aid programs may be attempting to evade regulatory oversight designed to address a significant student loan default problem facing the U.S., according to a recent U.S. Government Accountability report.

The GAO report — which puts federal student loan default at $149 billion as of September 2017 — showed that a handful of universities and colleges worked with consultants who encouraged borrowers with past-due payments to put their federal student loans in forbearance. Forbearance allows borrowers to temporarily stop making payments on their loans while still incurring interest on the balance.

Why do this? If too many borrowers from a school have student loan defaults within the first three years of repayment, the school may lose access to federal student aid programs, including collecting federal loan payments from new students — often a main source of revenue. Loans in forbearance, however, are not considered to be in default, which can help a university keep its place in the financial aid program.

Why does this matter?

While forbearance can help borrowers in the short term — for example, during a financial emergency, like a job loss or unexpected medical costs — it can have potentially detrimental long-term effects. For example, the GAO found that if the typical borrower with a $30,000 loan balance spent their first three years of repayment in forbearance, they would end up paying an additional $6,742 in interest. That’s a 17% increase.

Some people, like Rep. Rosa DeLauro, the ranking Democrat on the House Labor, Health and Human Services and Education Appropriations Subcommittee, have argued that Congress and the Department of Education should take steps to end the practice, by stopping consulting agencies from taking advantage of borrowers in this way.

The GAO itself recommended that Congress update the current accountability system — specifically asking for more transparency in how default rates are reported, and for a revised system that counts students in forbearance as part of the school’s cohort default rate.

Why should you care?

If you’ve had past-due payments on your federal student loans and attended a school that used a default-management consultant, you might have been affected.

According to the report, consultants working for certain universities often incentivized students with past-due loans to apply for forbearance. The report notes that some consultants offered gift cards to borrowers to encourage applying for forbearance, while others simply mailed or emailed forbearance applications to borrowers with past-due balances — potentially suggesting forbearance was the borrower’s only option.

What can you do?

If you’ve considered putting your own student loans in forbearance to avoid defaulting (or if you’ve been led to believe that forbearance is your only option), you should know you may have other options that might be better for your financial situation. The Department of Education’s Federal Student Aid website offers information on various options for managing repayment of your federal student loans.

Here are a few other strategies to explore that may also help make your debt more manageable.

  • Make more than the minimum payment. When possible, try and pay more than the minimum payment on your monthly student loan bill. The faster you pay down your loans, the less interest you’ll pay. Even paying an extra $20 a month may have a real effect on your interest costs. 
  • Consolidate and refinance. Consider refinancing and consolidating your loans with a lender with lower interest rates. Not only can this lower your interest costs, but it could help you keep your sanity if you have multiple student loans. You may even be able to consolidate your federal student loans. 
  • Pursue a job with loan forgiveness. Some employers — namely those in teaching and public service — offer student loan forgiveness to qualifying employees. This money is typically awarded after meeting certain requirements and may cover part or all of your loans.