How Colleges Are Playing With The Student Loan System — And Harming Borrowers In The Process

Colleges are paying a cottage industry of consultants to help them avoid government scrutiny, but those efforts may end up hurting their former students, according to a new report from the Government Accountability Office.

The GAO study looked at how colleges manage their “cohort default rate,” or the share of their students who defaulted within three years of starting repayment. In order to remain eligible to receive federal financial aid, the school’s cohort default rate must remain below a certain level.

The idea is to hold schools accountable when too many of their students experience the worst possible student loan outcome — default — a sign that colleges are likely not preparing students for the job market. work.

But the GAO report suggests that in reality, colleges are masking their students’ difficulty by hiring consultants to essentially game the system, likely to the detriment of borrowers.

Having trouble paying your student debt? Here’s what you need to know.

These companies reach out to struggling borrowers on behalf of the school and offer to help them avoid defaults, which ideally would put students back on the right path to repayment. and help the school stay in compliance with regulations. But of the nine companies providing this service and reviewed by the GAO, five, which work with 800 schools, encouraged borrowers to suspend their loans, essentially a temporary pause during which interest on the loan continues to grow.

Companies pushed for forbearance on other options that could have put borrowers on a sustainable repayment path, such as plans that allow borrowers to repay their loans as a percentage of their income, the GAO found.

“When you see people relying on abstentions for years, it suggests that a short-term solution has become a long-term solution and then you have to ask yourself, who is it really a long-term solution for?” said Ben Miller. , senior director of post-secondary education at the Center for American Progress, a left-leaning think tank.

While forbearance can certainly help borrowers who are experiencing a temporary shortage of income – such as when they are between jobs or have some sort of medical emergency – the GAO report illustrates the cost to borrowers of leaning on long-term abstention. A borrower with a loan of $30,000 and an interest rate of 5.7% who spends three years on forbearance would end up paying $6,742 more over the 10-year term of the loan than a borrower who does not. never uses forbearance.

The GAO data also indicates that, in many cases, long-term forbearance simply postpones default for troubled borrowers, rather than preventing it all together. Among borrowers in the 2013 cohort who used forbearance for at least 18 months, 9.4% defaulted in the year immediately following government default monitoring. But during the period the government was monitoring defaults, only about 1.7% defaulted.

“When you’re on something for 18 months and that window seems to end very conveniently by the time we care about it for accountability purposes, it’s hard not to look at that and say it’s ‘a set of tactics pursued to benefit the schools and not the students,’ Miller said.

While forbearance may not be the best repayment option for borrowers, it benefits both the colleges and the companies they hire to help them manage their default rate. Committing to forbearance typically takes significantly less time than applying to enter an income-based repayment plan — a payment program that allows borrowers to stay current on their loans, work toward cancellation and repay their debt as a percentage of their income.

Since some of the advisory firms are paid based on the number of borrowers they bring in, however they do so, there is an incentive to push borrowers towards the faster option of abstention.

One company did this by offering borrowers a gift card to switch to forbearance. Others contacted delinquent borrowers and only sent them a forbearance request, without informing them of other options, the GAO found. One company even went so far as to send borrowers a forbearance request along with a letter telling borrowers (mistakenly) that they could lose access to food stamps if they failed to repay their debt.