WASHINGTON–A new report from Pew Charitable Trusts has found student loan borrowers with early repayment troubles are 2.5-times more likely to default.
Noting the pause on federal student loan payments was set to expire—before being extended again by the Biden Administration—Pew Trusts advised in releasing its findings, “policymakers should engage with this group to lower odds of repayment challenges.”
“Student loan borrowers who do not make payments in the first three months of repayment are 2.5 times more likely to default at some point than those who did take steps to manage their debts,” Pew Trust said. “Such steps could include making payments that reduce balance size; enrolling in nonstandard repayment plans such as income-driven (IDR), extended, or graduated plans; putting loans in deferment; or consolidating their loans.”
According to an analysis of longitudinal federal student loan data conducted by Pew Trusts, the pattern holds true even when controlling for borrower factors such as age, gender, race, institution type, degree program, degree completion, and loan balance. Some of these factors have been linked to higher likelihood of default in previous analyses, noted Pew Trusts.
‘Critical to Help’
“The findings build on research by The Pew Charitable Trusts that shows that borrowers who eventually default often miss payments early in repayment,” the organization said. “Simply put…early engagement with these borrowers by the federal government and loan servicers will be critical to help with the transition back into repayment.”
Pew Trusts noted an analysis of data from the Department of Education’s Beginning Postsecondary Students Longitudinal Study examined the relationship between early interactions with the repayment system and the likelihood of default. The work was conducted for Pew by RTI International, a nonprofit research organization.
About the Analysis
According to Pew Trusts, the study tracked students who began their postsecondary educations in 2004 and followed their loan repayment through 2015.
“Because of limitations in the dataset, the effect of forbearance on long-term repayment success could not be evaluated,” the analysis notes. “Forbearance allows borrowers to postpone or suspend payments. Some borrowers may find it easier to obtain a forbearance than to take the borrower actions analyzed here.”
When the pause on payments on federal student loans does finally end—it currently is extended through May 2022—Pew Trusts noted many borrowers will “have to fit student loan payments into their budgets for the first time in close to two years, while navigating a confusing repayment system. Servicers will need to provide specific and targeted assistance to those in financial stress.
“This data suggests that making a special effort to help borrowers get on track in the first few months after the pause ends could be crucial in avoiding serious negative outcomes such as delinquency and default,” Pew Trusts continued.
Helping Borrowers Get Restarted
Pew Charitable Trusts advised to Department of Education and loan servicers to:
- Permit borrowers who now have lower incomes to enroll in or recertify for an IDR plan without a lengthy application process.
- Automatically allow additional forbearance for those who miss payments immediately after current protections expire to give servicers more time to reach them.
- Continue and expand targeted outreach to borrowers.
The full report can be found here.