Falling Student Loan Default Rates Still Challenge Borrowers

Earlier this week, the Department of Education announced that the cohort default rate for federal student loans, which is one of the more visible metrics used to determine a school’s eligibility to participate in the federal student aid programs, decreased for the second year in a row.
The new rate of 11.8 percent is certainly an improvement over last year’s 13.7 percent, and the Student Loan Ranger is happy to see the continuing downward trend. But there are still a lot of unnecessary defaults to be concerned about.
This blog spent some time last year explaining in detail why these cohort default rates may not be the most transparent way to determine the success rate of student loan borrowers and the schools they attended.
This rate is the percentage of a school’s borrowers who enter repayment on their Stafford loans – other federal loans are not counted in the CDR – in a given federal fiscal year and then default within three years. The latest rate means that out of all of the federal Stafford loan borrowers who entered repayment during the 2012 fiscal year, 11.8 percent defaulted before Sept. 30, 2014. Other defaults are counted in the lifetime default rates, which do not affect schools or loan holders and which to date have not yet been updated for this year.
In the Department of Education’s announcement, it credited the decrease in part, to successful social media campaigns ensuring that more borrowers were aware of and used the income-driven repayment plans such as Pay As You Earn and income-based repayment.
In fact, those campaigns and other industry outreach resulted in a 50 percent increase in the number of borrowers taking advantage of these benefits.
While this is an amazing accomplishment, there is another side of this issue – the trend of borrowers who fail to renew their income-driven repayment plans on time. Close to 60 percent of borrowers fail to do so on time.
Diving deeper into those numbers shows that of those who fail to renew on time, a third of them end up in forbearance or deferment, which can further increase their loan balance due to interest accrual and capitalization, while others go delinquent or ever default before understanding what has caused their payments to increase so significantly.
If this phenomenon continues, it’s possible it will lead to another jump in overall default numbers. As the cohort default rate only includes the first three years of repayment, it’s possible that it could go unrecognized. Both the industry and consumers must continue to work on this issue.
A report issued this week by the Consumer Financial Protection Bureau shows other reasons that the federal Stafford loan default rate is so high. The report was the result of a call for comments issued by the bureau this past spring, which resulted in over 30,000 comments from both student loan borrowers and industry groups regarding the servicing of both private and federal student loans.
The majority of the concerns seemed to revolve around getting appropriate and accurate information to the borrower at the right time. Despite the dozens and dozens of notifications that borrowers receive that outline their options and protections, many commenters reported either not receiving any information about options such as income-based repayment and deferment, or that they received contradictory or incorrect information when making phone inquiries.
Clearly, the current methods of communication to Study Loan borrowers aren’t working if the Consumer Financial Protection Bureau estimates more than one in four student loan borrowers are now delinquent or in default.
The industry needs to continue to find ways to ensure that struggling borrowers know their options and understand how to obtain them.
Source: (http://www.articles.mastercraftindia.com/Article-Site/falling-student-loan-default-rates-still-challenge-borrowers)