Studying student loans often resembles the parable of the blind man and the elephant. As comprehensive answers to many of the most interesting questions about student loans are locked inside non-public administrative datasets, researchers must form an impression based on incomplete snapshots here and there. A new report from the Pew Charitable Trusts sheds some more light on what we know about student loans. Three new facts about how borrowers repay their loans leap out.
Pew partnered with the Texas-based Trellis Company, which guarantees hundreds of thousands of federal student loans, to conduct the analysis. They looked at 400,000 borrowers in Texas with loans under the now-defunct guaranteed federal loan program. Though sampling limitations mean Pew’s sample is probably not nationally representative, it is likely close enough to be a reasonable approximation of what the typical student borrower experiences.
Fact #1: Half of student loan defaulters attend college for a year or less.
The best predictor of whether a student borrower will default on her loans is whether she finished college. In other words, most student loan defaulters are dropouts. Thanks to the Pew report, we now know that most defaulters dropped at fairly early in their college careers. Half of student loan defaulters completed one year or less of their undergraduate degree programs.
By contrast, 45% of non-defaulters made it to the fourth year or higher. People who fail to complete college tend to earn less money and feel worse about the “investment” they made in their education, and consequently are less likely to stay current on their loan payments. While the link between college non-completion and student loan default is well-established, the key insight from the Pew report is just how little college future student loan defaulters complete before dropping out.
Fact #2: Balances increase because borrowers stop making payments.
After entering repayment, federal student loan borrowers have many options to stop making payments on their loans—though interest generally accrues while they do so, leading to rising balances. The Pew data shows that an overwhelming majority of student borrowers who saw their balances increase after entering repayment stopped making payments at least once.
Many of these “balance increasers” went back to school, either to finish their undergraduate degrees or try for a graduate credential. Sixty-one percent of borrowers whose balances rose recorded an in-school deferment in the first five years after entering repayment.
But the most common factor among borrowers who owe more now than they did at repayment is forbearance, a loan status that allows any borrower to stop making payments for up to three consecutive years, for any reason or no reason at all. Eighty-eight percent of borrowers who saw their balances increase used a forbearance at some point; more than half used forbearance three times. More remarkable is that 93% of borrowers who never used forbearance have made progress paying down their loans.
Options such as forbearance were created to relieve borrowers of the financial pressure of student loan repayment. But in the long run, these options have the opposite effect. Excessive use of forbearance increases borrowers’ balances, making it even more difficult to pay off their loans.
Fact #3: Deferment and forbearance delay – but do not prevent – default.
Twenty-four percent of borrowers in Pew’s sample defaulted within five years of entering repayment, a figure which aligns with other estimates. But it’s informative to look at how long it takes for borrowers to default. Default is defined as failing to make a payment for 270 days, so by definition one cannot enter default for nine months after entering repayment. Add in a six-month grace period, and a borrower could conceivably default in the second year after entering repayment, despite never paying a single dollar toward her student loans.
This is precisely what we see in the data. Forty-five percent of defaulters in Pew’s sample enter default in the second year of the repayment cycle, including the vast majority of borrowers who never used a deferment or forbearance. This is consistent with a number of borrowers never even attempting to make payments on their loans. Borrowers who do use deferment or forbearance tend to default later in the repayment cycle. But they default nonetheless, suggesting that these loan statuses are more delaying tactics than actual remedies for the factors that lead borrowers to default in the first place.
Identifying those factors, of course, is the heart of the proverbial elephant. Only through understanding why borrowers default, or else fail to repay their student loans, can we solve the student loan nonpayment problem. Thankfully, these new data get us a little bit closer to answering those questions.