Delinquency the Untold Story

7/28/2019 Delinquency the Untold Story

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BY AlisA F. CunninghAm

gregorY s. Kienzl, ph.d

March 2011

report BY

nstitute or Higher

ducation Polic

Accessa

ndSuccess

Accounta

bility

Diversity

Finance

GlobalIm

pact

Delinquency:The Untold Story ofStudent Loan Borrowing


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t i h eca pcy (ihep) is an independent, nonprot organization that is dedicated to access and success in

postsecondar education around the world. Established in 1993, the Washington, D.C.-based organization uses uniue research and innovative

programs to inorm ke decision makers who shape public polic and support economic and social development. IHEPs Web site, www.ihep.org

eatures an epansive collection o higher education inormation available ree o charge and provides access to some o the most respected

proessionals in the elds o public polic and research.

institute For higher eduCAtion poliCY

1320 19th Street, NW, Suite 400

Washington, DC 20036

202 861 8223 telephone

202 861 9307 FACsimile

www.ihep.orgWeB


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March 2011

A report prepAred BY

Institute or Higher Education Polic

Delinquency:The Untold Story ofStudent Loan BorrowingBY AlisA F. CunninghAm

gregorY s. Kienzl, ph.d


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Ackw

The authors would like to thank the Institute or Higher Education Polic (IHEP) sta and senior associates who contributed to this

report, including Michelle Asha Cooper, president; Brian A. Sponsler, research analst; Aleis J. Wesaw, research associate; Thomas

D. Parker, senior associate; Sand Baum, senior associate; Jill Jones, research intern, and Khadish Franklin, graduate ellow.

We appreciate the eedback and advice provided b all participants at the roundtable discussion held December 2010 in Washington

D.C. In addition, we beneted rom suggestions oered b a number o other reviewers, including Tia T. Gordon at TTG+PartnersLaura Perna at the Universit o Pennslvania, and Ken Redd at the National Association o College and Universit Business Ocers

Also, we thank the numerous individuals who agreed to be interviewed or this stud, and who provided helpul background

contet on the issues.

Finall, we are grateul or the nancial support rom the American Student Assistance, ECMC/CA, Great Lakes Higher Education

Guarant Corporation, Teas Guaranteed, and USA Funds, as well as the knowledge imparted b their sta.

The views epressed in this report are those o the authors and do not necessaril refect the views o IHEP, the reviewers, or the unders

DELINqUENCy: THE UNTOLD STORy OF STUDENT LOAN BORROWING02


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Table of Contents

INSTITUTE FOR HIGHER EDUCATION POLICy 03


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Executive Summary

To better understand the impact o borrowing and student indebt-

edness, this report eamines the repament eperiences o

student loan borrowers using data provided b ve o the

largest student loan guarant agencies. It eamines more than

8.7 million borrowers with nearl 27.5 million loans who entered

repament between October 1, 2004 and September 30, 2009.

The primar ocus is on the nearl 1.8 million borrowers whoentered repament in 2005. This report is a snapshot o

borrower eperiences, but it can help inorm polic discussions

about student loan programs and the tools available to help

borrowers avoid delinuenc and deault.

Caac Bw Ba:ec rayBorrowers in the 2005 cohort aced a range o circumstances

and options as the started repaing their loans, and continued

to do so as the moved along the path o tring to meet their

repament obligations. The stud looks at whether these

borrowers became delinuent at some point during that period

or availed themselves o various options to postpone or dela

repament during their rst ve ears in repament.

t c a ay.About 37 perceno borrowers managed to make timel paments withou

postponing paments or becoming delinuent, representing

almost 667,000 borrowers in the 2005 cohort with nearl

$13.1 billion in loans. In other words, more than a third o the

borrowers in the 2005 repament cohort seem to be willing

and able to use the ederal student loan repament rame-

work in the intended wa.

Student nancial aidincluding grants and loansplas a ke role in supporting students access to

and success in college. yet, despite periodic increases in grant unding, students and their amilies

have increasingl relied on borrowing to cover more o the costs o higher education. As the number

o student borrowers has increased and their cumulative indebtedness has grown, so too has concern

about whether the resulting debt levels are manageable and about the long-term impact o student

loan debt on other lie choices and consumption patterns. Absent more complete data, policmakers

have oten ocused on deault rates, which are an incomplete measure o the range o eperiences o

contemporar students, including those who ma have diculties repaing their student loans. Deault

rates do not include the man borrowers who become delinuent on their ederal education loans, but

manage to avoid deault. These borrowers ace some o the same conseuences as borrowers who

deault, but until now, the size and signicance o this group has not been recognized or been part o

the polic discussion about deault prevention and nancial literac in general.



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t aa a y ay a

. Other borrowers, about 23 percent, used the repa-

ment tools and options provided b the ederal government

to postpone their paments, thereb avoiding delinuenc.

Some o these borrowers11 percentused onl deerment,

mostl because the re-enrolled in college. But 12 percent o

borrowers used orbearance (oten in combination with deer-

ment) to postpone monthl paments. These borrowers were

aware o ederal repament options and used them or the

intended purpose.

t a cy w a. Although

repament options were available and could have been used

earlier, more than one ourth o the borrowers who entered

repament in 200526 percentbecame delinuent on their

loans at some point, but did not deault. Most o these

borrowers eventuall used deerment and/or orbearance as

tools to avoid deault (21 percent), while a smaller proportion

(5 percent) was able to resolve the delinuenc, presumabl

b making paments to get their account current.

t a. About 15 percent o borrowers not onl

became delinuent, but also had deaulted on their loan(s) at

some point during the rst ve ears o their repament term.

In total, 41 percent o the borrowers aced the negative conse-

uences o delinuenc or deault. It is important to recognize

that or ever borrower who deaults there are at least two

others who were also delinuent on their student loans, but

successull avoided deault. These data illustrate that man

more borrowers are having dicult repaing their loans in a

timel manner than is generall recognized when the ocus is

on deault rates alone. These patterns are both a cause or

concern and an opportunit or improvement.

Ky dc Bw Ba:W d Wa a W

Given the breadth o repament behaviors these borrowers

ehibited, it is important to better understand what tpes o

borrowers were or were not able to make paments on time.

Bw ba a w

bw aa.

Most o the borrowers who let postsecondar education withou

graduating had dicult in repaing their loans33 percent o

undergraduate borrowers who let without a credential became

delinuent without deaulting, and 26 percent deaulted.

Fort-eight percent o undergraduate borrowers who gradu

ated with a credential were repaing in a timel manner, but

21 percent became delinuent without deaulting and 16

percent deaulteda considerabl lower number than among

nongraduates, but still signicant.

Bw ay a a

y a a.

A third or less o borrowers at our-ear, public or private

nonprot institutions became delinuent or deaulted on thei

loans, while nearl hal or more (45 percent and 53 percent

respectivel) o their borrowers were making timel pamentson their loans.

In contrast, onl one-uarter to one-third o borrowers at or

prot and public two-ear institutions were making timel

paments on their loans, and more than hal o all borrowers

in these sectors were delinuent or had alread deaulted.



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Bw ay c a by

a aa.

Most borrowers who entered repament in 2005 last borrow-

ed ater onl a ew ears o enrollment37 percent ater just

one ear o college or less, and an additional 18 percent

ater two ears.

O those who last borrowed ater enrolling one ear or less,

two-thirds either became delinuent (30 percent) or deaulted

(34 percent), compared with 21 percent and 6 percent, respec-

tivel, o borrowers who last borrowed in their ourth ear.

Ca bw a acay ky bc -

, wc a ca c a acc

a a w cy a.

O borrowers who started repament in 2005, those who let

school without a credential, last borrowed ater attending onl

one ear o college or less, or attended a public two-ear or

or-prot institution were ar more likel than their counterparts

to become delinuent or deault during the rst ve ears o

the repament.

Man, i not most, borrowers who entered repament ater

leaving college without a credential became delinuent o

deaulted. For our-ear public and private nonprot institutions

the percentage o noncredentialed borrowers who were delin

uentbut did not deault (30 percent and 27 percent, respec

tivel)was twice that o those who deaulted (15 percent and

11 percent, respectivel). The opposite is true or two-ear or-

prot institutions, where hal o borrowers without a credentia

deaulted and 26 percent were delinuent without deault.

The rates o delinuenc and deault were generall much

lower or borrowers who had graduated than or those whohad not. However, even among borrowers who successull

completed their programs at two-ear or-prot institutions, 27

percent became delinuent without deault and 30 percent

had alread deaulted. Borrowers who graduated and las

attended our-ear public and private nonprot institutions had

much lower rates o delinuenc or deault. However, almost a

th o this group became delinuent at some point, although

5 percent or ewer deaulted.



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o F dc

The goal o this stud has been to shine a light on the ull range o

borrower repament patterns, and particularl on students who

became delinuent on their student loans, but did not deault.

The number and percentage o borrowers in this stud who are

known to have had dicult in repaing their loans, particularl

those who became delinuent, but did not deault, is consider-

abl higher than the numbers usuall discussed in polic circles,

where the ocus is primaril on deault. The ull scope o the

problem is worrisome considering that more than two in ve

borrowers who entered repament in 2005 became delinuent

on one or more o their loans at some point during the repamentperiod covered b this stud. While nearl two-thirds o these

delinuent borrowers had not deaulted, this group is too large to

continue to ignore. This stud conrms that ar more students

than generall recognized enter repament and encounter a

range o nancial challenges with negative conseuences that

include delinuenc, damaged credit scores, and alternative

repament options that ma increase overall interest paments.

The initial ndings o this stud provide important rst steps to

understanding the broader scope o borrowers eperiences

with student loans. But there is much more to do, and lowering

rates o delinuenc and reducing deaults will reuire a

serious commitment rom man dierent stakeholders who

care about college access and success. From a public polic

perspective, student success should be viewed as not onl

access to college, but also persistence to a degree or certi-

cate, and the eective management o student loan debt. I, in

an era o limited resources, students must increasingl borrow

to help cover the cost o their education, then what additional

support do the need to help ensure that the have a successuleducational and repament eperience? Reraming the debate

about student loan debt to include the causes and conse-

uences o delinuenc could go a long wa toward improving

borrowers eperiences, enhancing the student loan program,

saving tapaers mone, and perhaps contributing more

broadl to higher education as a whole.



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Introduction

For man students, borrowing is essential to enroll in and

complete college. Man pa back their loans without incident or

interruption, but or some, loans can become unmanageable

and the all behind on paments or stop paing altogether. I

borrowers become delinuent (i.e., ail to make monthl

paments within 60 das o the due date), the delinuenc ma

be reported to credit bureaus and become part o their credit

record. Generall, i borrowers eceed 270 das o delinuenc

the will be considered in deault on their loans, with serious

conseuences to their nancial utures.1 In contrast, deermen

and orbearance provisions are designed to address repamen

diculties b allowing borrowers to temporaril suspend the

For decades, the benets o postsecondar education have been recognized as an increasingl

essential component o the nations economic and social well-being. Policmakers have called or majorincreases in educational attainment, both to compete with other nations and to reduce the participation

and graduation gaps between underserved students and their more afuent peers. However, man

challenges eist or meeting these goalsnot onl academic preparation, college awareness, and

institutional capacit, but also overcoming the nancial barriers created b rising college prices and

stagnating amil incomes, which have been eacerbated b the current economic downturn. In this

contet, student nancial aid, including grants and loans, plas a ke role in supporting students access

and success in college. yet despite periodic increases in grant unding, students and their amilies have

increasingl relied on borrowing to cover more o the costs o higher education. Federal student loans are

now the single largest source o nancial aid available to both undergraduates and graduate students.

1It is 360 das or Federal Famil Education Loans or Direct Loans held b the U.S. Departmen

o Education.



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2See glossar or more inormation. Also, see http://ederalstudentaid.ed.gov/datacenter/cohort.html.

repament o their loans to avoid delinuenc. Participation in

these programs is oten an indication that current circumstances

make it dicult or impossible or borrowers to repa their debts.

As the number o student borrowers has increased and their

cumulative indebtedness has grown, so too has concern about

whether the resulting debt levels are manageable and what the

long-term impact o student loan debt will be on other lie

choices and consumption patterns. Without more complete

data, policmakers have oten ocused on cohort deault rates.

In scal ear (Fy) 2008, or eample, about 3.4 million ederal

student loan borrowers entered repament nationwide, and

almost 240,000 borrowers deaulted on their student loans b

the end o the net scal ear (U.S. Department o Education

2010a, 2010b). But cohort deault rate calculations are an incom-plete measure o the range o eperiences o contemporar

students, including those who ma be struggling to repa their

student loans. For eample, the understate deaults that occur

ears ater students leave college; to address this issue, the

Department o Education has recentl introduced measures that

are better able to capture the problems borrowers are having in

repament, including three-ear cohort deault rates.2

However, these measures still do not include the man

borrowers who become delinuent on their ederal education

loans, but manage to avoid deault. These borrowers ace

some o the same conseuences as borrowers who deault

including negative impacts on their credit records, but unti

now this group has not been part o the polic discussion

about deault prevention and nancial literac in general.

Eamining these issues raises a number o uestions:

How man borrowers become delinuent, but do not deaul

on their student loans?

Do borrowers use ederal repament options to postpone

paments and avoid delinuenc?

How man and what percentage o borrowers manage to

repa their student loans on schedule without having to post

pone or dela paments?

What are the characteristics o the borrowers in each o these

groups? How do the dier?



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To answer these and related uestions about the impact o the

reliance on borrowing and student indebtedness, this report

eamines the repament eperiences o student loan borrowers,

using data provided b ve o the largest student loan guarant

agencies on more than 8.7 million borrowers with nearl 27.5

million loans who entered repament between October 1, 2004

and September 30, 2009, with a ocus on the nearl 1.8 million

borrowers who entered repament in 2005. The data include

inormation about the specic loans taken out b each borrower;the tpes o loans, loan amounts, and specic repament

events; and select borrower characteristics such as age, gradu-

ation status, and last institution attended (see Box 1).

To complement the uantitative analsis, this report also discusses

the conseuences o delinuenc and deault on student loan

borrowers, including the eect on their credit scores and uture

abilit to borrow. In addition, it provides some contet on ederal

loans and repament options.

Although the stud is a snapshot o borrower eperiences, it can

inorm polic discussions about student loan programs and the

tools available to help borrowers avoid delinuenc and deault

Some borrowers nd it hard to make paments, but still manage

to do so in a timel manner; others, or one reason or another

do not. The act that some borrowers are able to avoid delin

uenc b using deerment, orbearance, or other repament

options indicates that the sstem is working or them. It seems

likel that more borrowers could be using those tools. There arerisks inherent in borrowing or college, especiall or disadvan-

taged students, but making sure borrowers have the inormation

on their repament options when the need it could help miti

gate those risks. The patterns o loan delinuenc, deerment

and orbearance revealed in this stud provide an importan

window into the challenges acing man borrowers.

10 DELINqUENCy: THE UNTOLD STORy OF STUDENT LOAN BORROWING


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The data used in this analysis relied on borrower- and loan-level inormation or students who entered repayment between October 1

2004 and September 30, 2009. The data were provided by ve large student loan guaranty agencies: American Student Assistance, ECMC

(ormer CSAC/EdFund data only), Great Lakes Higher Education Guaranty Corporation, Texas Guaranteed, and USA Funds. Student loan

guaranty agencies are state agencies or nonprot organizations that insure student loans made through the Federal Family Education

Loan Program (FFELP) against deault. When a borrower deaults, the guaranty agency reimburses the lender or the balance remaining

on the loan and then may collect on the deaulted loans ater they have paid claims to the lender. Guarantors also play a role in providing

inormation to students and nancial aid oces on nancial literacy in general and on debt management and loan repayment options.

They also provide training and guidance to participating lenders and schools (U.S. Department o Education 2009a).

Box 1: daa sc

Together, the ve guarantors represented the majorit o ederal

Staord loan volume made through the FFEL program over the

ve-ear period (U.S. Department o Education 2009b). This

cohort was likel to be representative o the broader student

borrower population. However, in addition to the loan volume

held b other guarant agencies, the Direct Loan program was

responsible or a substantial amount o ederal student loan

volume overallalmost a uarter o new loan volume in Fy

2009 (U.S. Department o Education 2009a). These borrowers

were not included in the stud. The FFEL programs origination

o loans was discontinued in 2010; all new ederal loans are

now made through the Direct Loan program. Guarant agen-

cies will still manage eisting FFEL portolios until the under-

ling loans are paid in ull.

The guarantors provided borrower inormation that was not

individuall identiable; it included inormation on loan origina-

tion and repament dates; individual loan amounts; and loan

events, which occurred during the repament period, such as

deerment, orbearance, delinuenc, and deault. The data

include onl ederal loanssubsidized and unsubsidized Sta-

ord loansGraduate PLUS loans, and consolidation loans.

To answer the research uestions, multiple denitions were

devised based on the available data and the borrowers eperi-

ences in repament. For eample, one measure ocused on

whether a borrower had ever been delinuent, while another

eplored whether a delinuent borrower ever used options

such as deerment and orbearance. These events were aggre-

gated into a classication o borrowers according to their

repament status (see tABle 2). The eamination also includes

dierences based on a number o borrower characteristics

including loan tpe, institution tpe, age, and graduation status

To conduct the analsis, several assumptions were made. Fo

eample, some students ma have loans held with one o the

other guarantors or the Direct Loan program; unortunatel, this

cannot be uantied, although it is likel to be a airl smal

number, especiall or the 2005 repament cohort. This stud is

based on what is known about the loans in the portolios o the

ve guarantors. Thus, onl the last institution tpe is reported

regardless o where the borrower started or enrolled beore

initiating repament. Some outliers were ecluded, including

borrowers with 30 or more loans and those who ell outside the

probable college-age range. This eclusion aected a minis-

cule number o borrowers. Both undergraduate and graduate/

proessional borrowers are included in the data, and borrowers

could have varing durations o repament, depending on

when the rst entered repament. In large part, the repor

ocuses on borrowers who entered repament in 2005, as the

have the longest repament period.

In addition to the borrower data provided b the guarantors, anumber o phone interviews were conducted with guarant

agenc ombudsmen, eperts rom organizations that under

stand risk management and the calculation o FICO credit

scores, and eperts rom communit-based organizations tha

do credit counselingthese people provided background o

the analsis, helped put the uantitative analsis in contet

and made suggestions or uture research.

11INSTITUTE FOR HIGHER EDUCATION POLICy


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Student Loans

in Context

When borrowing, students have a number o choices, including

a range o ederal student loans as well as non-ederal alterna-

tives. The majorit o borrowers obtain loans through the ederal

Staord loan program; o these borrowers, 86 percent borrowed

through the subsidized loan program, 64 percent through the

unsubsidized program, and 50 percent rom both (National

Center or Education Statistics 2008). Some undergraduatestudents participate in the campus-based Perkins loan program;

others obtain private, state, or institutional loans; and some

parents borrow through the ederal Parent Loans or Undergrad-

uate Students (PLUS) program. In addition, graduate students

can borrow through the Grad PLUS program.

Each o these loan tpes has dierent terms and conditions, and

some are more avorable to the borrower than others. For

eample, with subsidized Staord loans, the ederal government

pas the interest or borrowers while the are in school and

during the si-month grace period ater the leave. For borrowers

with unsubsidized loans, interest starts to accrue when the loan

is disbursed, and the have the option o paing the interest odeerring it while the are enrolled. For both, repament o the

loan principal and interest begins si months ater leaving

school. The amounts students ma borrow in a ear and cumu-

lativel are limited b ederal statute.4 I students need more

unds, the can turn to private loans, which oten have less avor

able conditions (such as higher interest rates) and lack some o

The purpose o ederal student loans is to enable students to attend postsecondar education institu-

tions and move toward completing a degree or certicate. A substantial number o students depend on

loans to nance their postsecondar educationin 200708, 39 percent o all undergraduates borrowed

to help nance their education, up rom 34 percent in 200304 (U.S. Department o Education 2004,2008). Certain groups o students are more likel to borrow than others: those enrolled in higher priced

public, private nonprot, and or-prot institutions; those attending on a ull-time basis; and those with

greater nancial need (Cunningham and Santiago 2008).3

4Loan limits var depending on students dependenc status, class level, and some other actors. For

more details, see http://studentaid.ed.gov/PORTALSWebApp/students/english/studentloans.jsp.

3Other groups are less likel to borrow, but ma instead work ull time, drop their enrollment to

part time, or take other measures to nance their education.



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the repament protections o ederal student loans. However,

private loans are usuall onl available to students i the have a

avorable credit histor or a co-signer with good credit.

Ater borrowers leave school or are no longer enrolled at least

hal timewith or without completing a credentialStaord

loan borrowers have a si-month grace period beore entering

repament.5 Over the ears, the ederal government has created

a variet o options to encourage repament and make loan

paments more manageable (Department o Education, Student

Aid on the Web): 6

Cc ray pa. Various tpes o ederal student

loan repament plans are available to students, each with

dierent terms and structures. For eample, standard repa-

mentrepament o the loan over 10 earshas the highest

monthl pament, but the lowest amount o interest over the lie

o the loan. An etended repament plan lengthens the term othe loan to lower monthl paments; in the graduated pament

plan, paments begin at lower amounts and graduall increase

over time. Other options take the borrowers income into account

with pament levels tied to income and other actors. Income-

based or etended repament generall produces the lowes

monthl paments, but higher total interest over time.

la Ca. Federal loan consolidation makes repa

ment administration easier b combining several loans into a

single new loan.7 It usuall lowers monthl paments or the

borrower b providing access to the alternative pament plans

mentioned above that reduce monthl paments. These plans

increase the loan term, so the total interest paid over the term

is higher.8

d. Borrowers are able to deer (temporaril sus

pend) their loan paments i the meet certain criteria. These

include enrolling at least hal time in school or eperiencing

economic hardship or unemploment. Borrowers do not have

to make paments on the loan principal until the deermentends. The interest paments on subsidized Staord loans are

made b the ederal government during the deerment period

Unsubsidized Staord loan interest paments can be paid

monthl or deerred, but are tpicall added to the principa

balance at the end o the deerment period.5Repament can be dened as a period in which the loan is amortizing and the principal balance is

going down; thus, a deerred loan would not be considered in repament. However, repament can

also be thought o as borrowers entering repament ater the grace period. For this stud, we dier-

entiate between active repament and being in the repament term. Onl borrowers who are

making paments toward principal are in the active repament categor; those who are in deerment

or orbearance, or have become delinuent, are in the repament period without paing down the

principal on their loans.6See the glossar or more inormation.

7Consolidation was also used to lower the interest rate on one loan.8Subsidized Staord borrowers who consolidate lose the interest benet during a deerment.



16/44

Fbaac. At their discretion, lenders ma grant a orbear-

ance that temporaril suspends a borrowers paments.

Forbearances are tpicall granted in three- or si-month incre-

ments up to a limit o ve ears. A orbearance is generall a

more epensive option than deerment because interest

continues to accrue, even on subsidized loans. The borrower

does not make principal paments; he or she can make

interest-onl paments or have the interest capitalized and

added to the principal when the orbearance epires.

These repament options have dierent long-term and short-term

eects on students nancial situations. Students can use an

option to decrease their monthl paments or to postpone

pament or a certain period. Some borrowers reuire onl a short-

term solution, such as orbearance or deerment, while or others it

makes more nancial sense to restructure their loan entirel.

When borrowers are unable or unwilling to make their pament

on time each month, at some point the become delinuent on

their loans. When a borrower is 60 to 120 das delinuent, the

loan holder is reuired b ederal law to report the delinuenc

to a national credit bureau. Such a delinuenc can remain on a

borrowers credit report or up to seven ears ater it is reported,

making it dicult or the person to borrow in the uture (Amer-

ican Student Assistance 2010).

I delinuencies continue or nine months (270 das), the lende

will declare the borrower in deault and le a claim.9 Borrowers

deault or a number o reasons, rom unemploment to illness

to ailure to le deerment or orbearance reuests on time to

simpl reusing to meet their nancial obligations. The penalties

or deault are severe: Loan paments can be deducted rom a

borrowers wages, income ta reunds can be withheld, or the

account can be turned over or collection. In addition, deaul

has longer-term impacts on students credit ratings and eligi-

bilit or student aid.10(see Box 2.) Man studies have eamined

the actors that contribute to deault, but ew have eamined the

etent o delinuenc or the characteristics o delinuent borrowers

who do not deault.

9A claim would be led with the guarant agenc under FFELP. As o Jul 1, 2010, FFELP no longe

originates loans. Under the Direct Loan program, a claim is not led; rather, a demand letter is sent

directl to the borrower rom the Department o Education. For FFEL or Direct Loans held b the

Education Department, loans are considered in deault when the are 360 das past due.10For eample, the deault will show up on the credit histor or up to seven ears. In addition

deaulters can be sued or the entire amount o the loan; the are liable or an collection o

court costs; and, the might not be able to renew a proessional license.



17/44

Signicant research has been conducted to examine the actors that predict or are associated with student loan deault (see Gross e

al. 2010 and McMillion 2004 or summaries o various research studies). Most o the literature is ocused on precollege, college eects

postcollege, and background characteristics o students who deault on education loans. Background characteristics include gender

race, ethnicity, amily income, age, and the students level o preparedness or college (Flint 1994; Herr and Burt 2005; Volkwein and

Szelest 1995). In addition, a plethora o studies have evaluated the between-college and within-college impact on a students likelihood

o deaultingincluding the number o semesters enrolled at an institution, college major, and employment statusor have ocused on

postenrollment variables such as income, personal and amily history, and nancial literacy (Steiner and Teszler 2003; Thein and Herr

2001; Volkwein and Szelest 1995; Woo 2002). Little research has been conducted on students who have diculty repaying their loans

and who become delinquent, but do not deault.

Box 2: Cc s la dc

The penalties or deault on ederal loans are serious and wide-

ranging. The include garnishment o a portion o the borrowers

wages or withholding o income ta reunds, Social Securit

benets, or other public benets. Unlike most other loans,

student loans are not dischargeable through bankruptc. The

borrower is not eligible or additional Title IV student aid until the

loan is repaid or ormal arrangements have been made to repa.

In addition, deault can have other long-term eects outside the

government penalties. These conseuences can be grouped

into a number o themes:

Cc. The ederal government and guarant agencies

that own deaulted loans ma turn them over to collection

agencies. Deaulters are liable or the original principal balance,

all accrued interest, court costs, and an collection ees, which

are all added to the outstanding balance.

iac Bw C sc. Delinuenc and

deault have a negative eect on credit ratings, such as the

FICO score. The eact impact on the credit score depends on

eactl what lenders report to the national credit bureaus,

which pull together inormation to create the credit prole that

goes to FICO. Delinuencies on student loans are onl one

part o the euation and ma be treated dierentl depending

on whether a borrower is chronicall late or generall has a

good pament histor. However, delinuencies o 90 das o

more are highl likel to have a negative impact.

iac F Bw. I a borrowers credit score is

negativel aected, it will have ramications on his or her abilit

to borrow in the uturemortgages, auto loans, and othe

consumer loansas well as on the terms o an uture borrowing

Generall, higher FICO scores signi less risk or lenders, which

usuall leads to more avorable terms or new loans, and vice

versa. I deault is refected in lower credit scores, a borrower

ma not be oered or be able to aord an new loans.

Borrowers who are delinuent on student loans, but do not

deault, ma not ace all these conseuences; or eample, theremain eligible or nancial aid and would likel not have their

income or benets withheld. However, depending on their etent

delinuencies aect borrowers credit scores and their abilit to

borrow in the uture.

Sources: FinAid.org, Oce o the FSA Ombudsman (www.ombuds

man.ed.gov), and background interviews.



18/44

Characteristics and

Repayment Behaviorof Borrowers

df Bw pa: dac,

e, a la Caacc

During the ve-ear period, about 8.7 million borrowers included

in the available data began repament; together, these borrowerstook out nearl 27.5 million loans totaling $148 billion. Borrowers

most oten received subsidized Staord loansabout 71

percent o borrowers obtained one or more o these loans.

About 60 percent o borrowers had received one or more unsub-

sidized Staord loans. In addition, 25 percent o borrowers had

consolidation loans.13 Man o the borrowers in the stud took

out more than one tpe o loan; in act, 53 percent obtained both

subsidized and unsubsidized Staord loans. Borrowers in the

stud took out almost our loans on average, with a median totaamount o over $9,500.14

Overall, borrowers in the dataset who had entered repament an

time during the ve-ear stud period had a range o demo-

graphic and enrollment characteristics (see tABle 1).

The borrower-level data available or this stud include inormation about borrowers who began

repament on their student loans between October 2004 and September 2009. The ocus is on

borrowers who began repaing their loans in 2005 and what happened to them in the rst ve earsater entering repament.11 To better understand these borrowers, selected characteristics were

eamined, including inormation about the loans the took out, the tpes o colleges the attended,

and other actors. This was ollowed b a detailed eamination o borrowers eperiences in repa-

ment so ar, including whether the ever used repament optionsspecicall deerment and

orbearanceor became delinuent during the ve-ear period.12

11 The 2005 cohort includes borrowers who entered repament throughout the ear.12 Unortunatel, the stud cannot take into account all tpes o repament plans that can be used

to avoid delinuenc, such as graduated repament or income-based repament.

13 The percentages do not sum to 100 because students oten took out more than one kind o loan14 I borrowers who consolidated are removed, the median total loan amount was approi

matel $7,040.



19/44

A e i ray

Twent-nine percent o those entering into repament were

between the ages o 21 and 24 earsthe age at which tradi

tional students would tpicall have graduated or let college and

started to repa their loans. One uarter o borrowers began

repament when the were between 25 and 29 ears old; thusthe majorit o borrowers in the stud were less than 30 ears old

A substantial proportion o these borrowers refect non-traditiona

paths in college, with 27 percent between the ages o 30 and 44

and 11 percent 45 and older when the entered repament.

la i A B e ray15

About 45 percent o the borrowers had enrolled at public o

private, nonprot, our-ear institutions, 23 percent and 22

percent, respectivel.

Onl 12 percent o the borrowers in the stud had been enrolled

in public two-ear institutions beore starting repament. This isnot surprising, as communit college students are less likel to

borrow than students attending other tpes o schools, because

o lower tuition, part-time status, ailure to appl or nancial aid

or some other reason (Cunningham and Santiago 2008).

Twent-seven percent o borrowers in the stud had been

enrolled at a two- or our-ear or-prot institution. This ma

seem disproportionatel high given the relativel low percentage

o undergraduate students who attend or-prot institutions

overall, but a ver high proportion o students who enroll at or

prots borrowalmost 88 percent in 200708 (National Cente

or Education Statistics 2008).

h ga l16

At the time o their last loan, almost 68 percent o borrowers

reported that the were undergraduate students, with 31

percent obtaining their last loan ater onl one ear in college or

less, and an additional 14 percent ater two ears.

About 14 percent o these borrowers were graduate or proes-

sional students. The rest were either borrowers who had las

obtained a loan in the later undergraduate ears or those o

whom data was missing.

tABle 1

Age When entered repAYment 200409 2005

Under 21 ears old 8 7

2124 ears 29 28

2529 ears 25 26

3044 ears 27 27

45+ ears 11 12

institution tYpe lAst Attended

Public our-ear 23 25

Private nonprot our-ear 22 24

For-prot our-ear 16 11

Public two-ear 12 11

For-prot two-ear 11 9

Other 8 8

Missing 9 14

highest grAde level

First-ear undergraduate 31 24

Second-ear undergraduate 14 13

Third-ear undergraduate 7 7

Fourth-ear undergraduate 13 13

Fith-ear undergraduate 3 3

Graduate student 14 16

Missing 19 24

loAn tYpe (multiple loAns possiBle)

Consolidation 25 36

Subsidized Staord 71 67

Unsubsidized Staord 60 55

Grad PLUS 2 *

Number o borrowers 8,711,724 1,779,222

*GRAD PLUS WAS NOT AVAILABLE FOR 2005.

NOTE: INSTITUTION TyPE WAS BASED ON THE LAST INSTITUTION A BORROWER ATTENDED BEFORE ENTERING

REPAyMENT. OTHER INSTITUTIONS INCLUDED FOREIGN INSTITUTIONS, PRIVATE NONPROFIT TWO-yEAR AND

LESS-THAN-TWO yEAR, AND PUBLIC AND FOR-PROFIT LESS-THAN-TWO yEAR. GRADE LEVEL WAS BASED ON THE

yEAR CERTIFIED FOR FINANCIAL AID. MISSING PRIMARILy REFLECTS UNAVAILABLE DATA FOR MANy BORROWERS

WITH CONSOLIDATION LOANS.

SOURCE: GUARANTOR DATA FILES, AUTHORS CALCULATIONS

15 The dataset includes inormation or onl the last institution attended and not an other institu

tions that a borrower might have attended. This would mean, or eample, that borrowers who

started at communit colleges and transerred to our-ear institutions would be classied with

our-ear institutions, with a possible eect on classication o borrower behavior. Note tha

roughl 9 percent o the borrowers were missing data on the last institution attended. This

occurred in large part because o unavailable data or consolidation loans.16 Highest grade level is dened as the level certied b the institution or the purpose o the las

loan awarded to a borrower; it signies up to, but could be less than. In most cases, this variable

shows the highest level attained b borrowers beore leaving college. However, in a small numbe

o cases, a person borrows with another guarantor later or continues enrollment without borrowing

this would not be captured in the data. A substantial proportion o borrowers (19 percent, primaril

those with consolidation loans) did not have responses or this variable.

Select Characteristics of the Study Populationand the 2005 Cohort (%)



20/44

For the purpose o analsis, it is helpul to ocus on borrowers

who had the most ears o repament (or non-repament) histor.

Thus, the ollowing section ocuses on the almost 1.8 million

borrowers in the stud who started repament in 2005.17

Ca Bw Ba:

ec ray

A primar goal o this stud was to dene the number and propor-

tion o borrowers who have dierent repament eperiences, and

the data provided or this analsis allow a detailed eamination o

these eperiences. Borrowers in the 2005 cohort aced a range o

possibilities as the started repaing their loans and continued todo so as the moved along the path o tring to meet their obliga-

tions. This stud cannot capture all the nuances o borrower epe-

riences; rather, it is a snapshot o events that occurred during the

stud period and does not address the timing or recurrent

compleities o borrowers use o debt management options.

However, the available data can be used to classi borrowers into

a number o mutuall eclusive categories that give a broad sense

o their repament eperiences. The categories are based on the

events fagged in the data: Securing a deerment or orbearance

avoiding or becoming delinuent, and entering deault.

One wa o looking at these borrowers is to take into account

whether those in the stud period availed themselves o various

options to postpone or dela repament during their rst ve

ears in repament or became delinuent at some point during

that period.18

At one end o the spectrum are the active repaers, those who

managed to make timel paments without ever postponingpaments or becoming delinuent. About 37 percent o borrowers

were repaing their loans without taking an mitigating actions

representing almost 667,000 borrowers in 2005 with nearl $13.1

billion in loans. Whether the ound making timel paments eas

or dicult and whether the restructured their loans into other

repament plans to make the paments more manageable are

not captured in the available data.

Borrowers Who Entered Repayment in 2005 by Loan Repayment Status

tABle 2

% in speCiFiC BorroWer groups % in AggregAted BorroWer groups

Repament without event 37 37

Deerment onl (in-school enrollment)* 7

23Deerment onl (economic hardship)* 4

Forbearance onl 6

Forbearance and deerment 6

Delinuenc onl 5

26Delinuenc and deerment 5

Delinuenc and orbearance 8

Delinuenc with deerment/orbearance 8

Deault 15 15

* AN ESTIMATED TWO-THIRDS OF BORROWERS DEFERRED BECAUSE THEy WERE STILL IN SCHOOL; THE REMAINDER CITED ECONOMIC HARDSHIP. BASED ON ESTIMATES FROM THREE OF THE FIVE GUARANTORS.

NOTE: PERCENTAGES DO NOT SUM TO 100 DUE TO ROUNDING. INCLUDES BORROWERS WHO USED CONSOLIDATION LOANS. SEE APPENDIx TABLE 1 FOR NUMBERS OF BORROWERS IN EACH CATEGORy AND FOR THE DISTRIBUTION

OF BORROWERS WHO DID NOT HAVE CONSOLIDATION LOANS.


17 Their characteristics are similar to those o the ull stud population (see tABle 1). 18 See Appendi Table 1 or the number o borrowers in each categor.



21/44

The remaining 64 percentmore than 1.1 million borrowers with

over $25.3 billion in loanswere not activel repaing their loans

or at least a portion o the stud period and are likel to be a

source o concern to varing etents.

About 23 percent o the borrowers who started repament in

2005 were able to use orbearance and/or deerment to post-pone paments and avoid delinuenc during the stud

period. It is dicult to assess the eact circumstances that

prompted this group o borrowers to postpone repaing their

loans. For eample, 11 percent o borrowers used onl a

deerment. Although deerments can be used or economic

hardship, estimates rom three o the ve guarant agencies

that participated in the stud suggest that about two-thirds (7

percent) o deerments or these borrowers were or students

who had re-enrolled in college.19 Borrowers ma reuest and

be granted a orbearance or a multitude o reasons; these

borrowers might have needed some level o assistance to

postpone repaing their loans.

Twent-si percent o the borrowers in the 2005 cohort became

delinuent on their loans but did not deault. Most o these

borrowers (21 percent) used deerment or orbearance to avoid

deault, while a smaller proportion (5 percent) were able to

resolve their delinuenc, presumabl b making paments to

get their account current.20

At the other end, the snapshot shows that about 15 percent o

borrowers not onl became delinuent, but also had alread

deaulted on their loans at some point during the repament

term, despite the availabilit o mitigation tools.

The eperiences o this cohort o borrowers can be divided into

our broad categories: (1) Those who were activel repaing their

loans and making on-time paments; (2) those who used deer-

ment, orbearance, or both to postpone paments and did not

become delinuent; (3) those who became delinuent one o

more times during the ve-ear period, but did not deault; and (4)

those who deaulted.

The number and percentage o borrowers in this stud known to

have had dicult in repaing their loansparticularl those who

became delinuent, but did not deaultis considerabl highethan what is usuall discussed in polic circles, where the ocus is

primaril on deault alone. The ull scope o the problem is worri-

some: More than two in ve borrowers who entered repament in

2005 became delinuent on one or more o their loans (including

deault) at some point during the repament period covered b

the stud. Another set o borrowers (not as well dened) avoided

delinuenc onl b taking mitigating action to postpone pamen

on their loans or various reasons and periods o time.

Ky dc Bw Ba:

W d Wa a W

Given the breadth o repament behaviors these borrowers

ehibited, it is important to understand what tpes o borrowers

were able to make paments on time and what tpes were not

Man actors are known to be associated with deault behavior

including institutional characteristics, borrower background

and ailure to complete the program o stud (Dnarski 1994

Steiner and Teszler 2003; Volkwein and Cabrera 1998; Woo

2002).21 It is likel that at least some o those actors are associ

ated with other borrower behaviors, such as the use o mitiga

tion options and the likelihood o becoming delinuent. Some o

these actors were available in the stud data or eploration and

can provide contet or thinking about policies and practices

that could be used to increase the number o borrowers who

repa on a timel basis. This analsis o borrower characteristicsocuses on the 1.1 million borrowers entering repament in 2005

who did not have consolidation loans.22 The distribution and

numbers o all borrowers and those who did not consolidate

their loans is shown in Appendix tABle 1.

19 The percentage was not available or all guarantors, and the tpes o deerments could not be

separated out in a large proportion o the data. Thereore, subseuent analses do not break

out the tpes o deerments.20 Note that the options could have been used beore or ater the delinuenc.

21Also see McMillion (2004) and Gross and colleagues (2009) or summaries o relevant literature22 Borrowers with consolidation loans have been ecluded owing to the lack o ke data, such a

last institution attended and graduation. Thus, some o the numbers ma dier rom thos

presented earlier.



22/44

An initial eamination o the behavior o these borrowers reveals

that those who encountered problems in repament diered rom

their counterparts who did not. Some o these dierences are

outlined below. (see Appendix tABles For detAils.)

Bw ba a w

bw aa. The delinuenc and deault rates oborrowers diered between those who earned a credential and

those who dropped out o school.

Overall, 42 percent o undergraduate borrowers who started

repament in 2005 had graduated with a degree or credential

(see Appendix tABle 2).

Borrowers who let postsecondar education without gradu-

ating were more likel to eperience dicult in repaing their

loans59 percent o undergraduate borrowers who let withou

a credential became delinuent or deaulted (see tABle 3).

Fort-eight percent o those who graduated with a credentia

were repaing in a timel manner, while 38 percent became

delinuent or deaulteda considerabl lower number than

among non-graduates, but still signicant (see tABle 3).

Among graduate students, 68 percent o those who completed

their program were making timel repaments on their loanswithout using deerment or orbearance, and onl 12 percent

were delinuent or in deault (see tABle 3).

The proportion o graduate student borrowers who let withou

a credential and were delinuent or deaulted was 29 percen

(see tABle 3).

Percentage Distribution of 2005 Borrowers by Loan Status and Graduation Status

tABle 3

undergrAduAtes leFt Without degree/CredentiAl grAduAted All BorroWers

Timel repament 26 48 35

Deerment/orbearance without delinuenc 15 14 15

Delinuenc without deault 33 22 28

Deault 26 16 21

Total 100 100 100

grAduAte students

Timel repament 47 68 58

Deerment/orbearance without delinuenc 25 20 22

Delinuenc without deault 24 10 16

Deault 5 2 3

Total 100 100 100

NOTE: DOES NOT INCLUDE BORROWERS WITH CONSOLIDATION LOANS.




23/44

Bw ay ba a y a a.Previous studies have indi-

cated that the incidence o deault varies considerabl depending

on the tpe o institution a borrower attended (Gladieu and Perna

2005). This analsis provides support or that conclusion and

shows how it also applies or students who ma not have

deaulted, but had problems making timel paments.

A third or ewer o borrowers at our-ear public or private

nonprot institutions became delinuent or deaulted on their

loans, while close to hal (45 percent and 53 percent, respec-

tivel) were making timel paments, and an additional 20

percent had taken steps to secure a deerment or orbearance

to postpone paments without ever becoming delinuent (see

tABle 4).23 It is possible that these borrowers had better

economic prospects or had more knowledge o their options

than those who attended other kinds o institutions.

In contrast, onl one-uarter to one-third o borrowers at or-

prots and public two-ear institutions were making timel

paments on their loans, and more than hal o all borrowers in

these sectors were delinuent or had deaulted (see tABle 4).

These tpes o institutions are similar in that the tend to serve

disadvantaged and non-traditional populationsgroups tha

are oten dicult to reach with inormation about repamen

plans and nancial literac, in general. However, the are ver

dierent in the percentage o students who borrow. The

percentage o borrowers at two-ear public institutions is rela

tivel low, given airl low tuition and other epenses, and the

greater propensit o students to enroll part time while working

(Cunningham and Santiago 2008), whereas or-prot institutions

have a dierent business model that is reuentl refected in

higher costs o attendance and greater reliance on borrowing.

Bw ay c

a aa. The majorit o borrowerswho entered repament in 2005 last borrowed ater onl a ew

ears o enrollment37 percent ater one ear o college or less

and an additional 18 percent ater two ears. This could mean

that the borrowers let school at that grade level ater completing

a short-term program or dropped out beore inishing a longerprogram.24 O those who last borrowed ater enrolling or one ear o

less, two-thirds either became delinuent (30 percent) or deaulted

(34 percent), compared with 27 percent o borrowers who last

borrowed in their ourth ear (see Appendix tABle 4). Graduate

student borrowers were the least likel to have been delinuent (16

percent) or deaulted (3 percent) over this period.

Percentage Distribution of 2005 Borrowers Loan Status by Last Institution Attended

tABle 4

puBliC Four-YeAr privAte nonproFit

Four-YeAr

puBliC tWo-YeAr For-proFit

tWo-YeAr

For-proFit

Four-YeAr

Timel repament 45 53 24 32 35

Deerment/orbearance, but not delinuent 21 20 16 5 12

Delinuent, but not deaulted 24 20 36 27 29

Deault 10 8 24 36 24

Total 100 100 100 100 100

NOTE: DOES NOT INCLUDE BORROWERS WITH CONSOLIDATION LOANS. ALSO SEE APPENDIx TABLE 3.


23 The data capture onl the last institution attended; borrowers could have been enrolled at a

dierent kind o institution beore the began repaing their loans. For eample, borrowers who

transerred rom a two-ear to a our-ear institution would be captured as our-ear students.

24 In a small number o cases, borrowers ma have borrowed with another guarantor or enrolled

without borrowing. This would not be captured in the data.



24/44

o bw a a c b

ay a.Si out o 10 o the oungest borrowers (thoseunder 21) either became delinuent or deaulted. This proportion

graduall decreases as borrowers get older, with about 33 percent

o borrowers who were 45 or older when entering repament

subseuentl becoming delinuent or deaulting (see Appendix

tABle 5).Research suggests that older, more eperienced borrowers

have more nancial literac skills, greater awareness o repament

options, and more marketable job skills and the resources to cover

short-term repament diculties (Gross et al. 2009).

s bw cc ay b aca w b-

ay a. It is possible that choices aboutthe number o loans or the amount borrowed are related to eperi-

ences during the repament period, whether positivel or nega-

tivel. In general, borrowers who started repament in 2005 and

deaulted had ewer loans and lower loan amounts than those who

did not deaultewer than three loans on average, compared with

slightl more than three or those currentl making timel paments

and more than our or those who used orbearance (see Appendix

tABles 6 And 7). Borrowers who deaulted had median total loanamounts o $6,600 compared with more than $8,000 or those

repaing without event and $9,000$11,000 or those using orbear-

ance. The pattern is similar to that ound in other studies (Steiner

and Teszler 2003; Woo 2002). Although it ma seem counterintui-

tive, the lower numbers are likel related to the number o ears

borrowers were enrolled beore entering repament, whether or

not the completed their educational program, and the tpe o insti-

tution the attended. The numbers also suggest that the degree o

debt burden is a relative, not an absolute, phenomenon.

Bw w a w a a

ay a, b a cOverall, borrowers who were delinuent, but did not deault and

those who deaulted, were similar in man respects. Both groups

were less likel to have last enrolled at a our-ear public or private

nonproit institution. However, borrowers who were delinuen

without deaulting were less likel to have last enrolled at a or-pro

institution than those who deaulted. Within that group, borrowers

who were delinuent and used both deerment and orbearance

were more likel than deaulters to have last attended a public two

ear institution and much less likel to have last attended a or-pro

institution. Indeed, the use o deerments or orbearance to avoid

delinuenc or deault was ver limited at or-prot institutions

Borrowers who were delinuent without using an repamen

options were almost as likel as deaulters to have last attended a

or-prot institution, but more likel to have graduated.

Another signicant dierence is in the long-term impact on

borrowers o becoming delinuent or deaulting. Delinuenc

(especiall multiple delinuencies) oten aects borrowers credi

score, limiting their abilit to borrow in the uture. But deaultcarries ar worse conseuences that can persist or decades

thus, it is important to ensure that borrowers who become delin

uent receive the inormation and counseling support the need

to resolve their delinuenc beore the deault.



25/44

Ca bw a acay ky bc, wc a ca c a

acc a a w cy a.To decrease rates o delinuenc, programs need to target

borrowers who are most at risk. The data in this stud demonstrate

that among borrowers who started repament in 2005, those who

let school without a credential, last borrowed ater attending one

ear o college or less, or attended a public two-ear or or-prot

institution were ar more likel than their counterparts to become

delinuent or deault during the rst ve ears o the repament

period (see tABle 5). In most instances, the proportion o borrowerswho became delinuent without deaulting was signicantl higher

than the proportion who deaulted; eceptions were borrowers who

last attended or-prot two-ear institutions and those whose highest

grade level was one ear or less o college.

These three actorsinstitution tpe last attended, highest grade

level attained, and graduation statusare associated positivel or

negativel with delinuenc and deault. It is dicult to disentangle

them or uanti the impacts, because the are interrelated.

For eample, borrowers who had last attended public two-ear

or or-prot institutions were more likel to have taken out thei

last loan ater onl one ear or less o enrollment58 percent

or public two-ear institutions, or eample, and 74 percent o

or-prot two-ear institutions (see Appendix tABle 8). This makes

sense, as students at those institutions are oten enrolled in

shorter programs, such as certicates o a ear or less. The

proportion o borrowers entering repament ater enrolling o

one ear or less is much lower (20 percent or less) at public and

private nonprot our-ear institutions, which also would be

epected. Further, substantial proportions o borrowers at theseinstitutions last borrowed when the were graduate students

(20 percent and 37 percent, respectivel).

In addition, both institution tpe and highest grade level are

correlated with graduation. Collectivel, about 42 percent o

undergraduate borrowers who entered repament in 2005 had

graduated. For those who last borrowed ater onl one ear, the

gure drops to 36 percent. Borrowers who last attended our-

ear public or private nonprot institutions were more likel to

Percentage of Borrowers Who Started Repayment in 2005 Who Were Delinquent or Defaulted bySelected Enrollment Characteristics

tABle 5

lAst institution Attended

% oF BorroWers Who BeCAme

delinquent Without deFAult % oF BorroWers Who deFAulted

% oF BorroWers Who Were

delinquent or deFAulted

Public our-ear 24 10 34

Private nonprot our-ear 20 8 28

Public two-ear 36 24 60

For-prot two-ear 27 36 63

For-prot our-ear 29 24 53

highest grAde level

First-ear undergraduate 30 34 64

Second-ear undergraduate 33 18 51

Third-ear undergraduate 27 11 38

Fourth-ear undergraduate 21 6 27

Fith-ear undergraduate 22 6 28

Graduate student 16 3 19

grAduAtion stAtus

Graduated 22 16 38

Let without credential 33 26 59





26/44

graduate (42 percent and 49 percent, respectivel, compared

with 36 percent or our-ear or-prots and 23 percent or public

two-ear institutions). For-prot two-ear institutions had higher

completion rates (69 percent on average), perhaps owing to

short-term certicate programs (see Appendix tABle 9).

These gures refect substantial numbers o borrowers who

entered repament ater leaving college without a credential. As

might be epected (Steiner and Teszler 2003; Volkwein and

Cabrera 1998; Woo 2002), man, i not most, o these borrowersbecame delinuent or deaulted. This was true or all institutional

tpes, although the etent varied (see tABle 6). For eample, the

proportion o borrowers who let without a credential and became

delinuent or deaulted ranged rom 38 percent at private

nonprot our-ear institutions to 76 percent at or-prot two-ear

institutions. For our-ear public and private nonprot institutions,

the percentage o non-credentialed borrowers who were delin-

uent, but did not deault was twice that o those who deaulted.

The opposite is true or two-ear or-prot institutions, where hal

o borrowers without a credential deaulted (two out o ever three

who became delinuent). Other research (Volkwein and Szeles

1995; Woo 2002) suggests that the background characteristics o

borrowers who attend schools with higher deault ratessuch as

income, parent education, and nancial independencetend to

dier rom those o borrowers attending lower deault-rate schools

which ma account or some o the dierences. However, this

cannot be determined rom the stud data.

The rates o delinuenc and deault were generall much loweor borrowers who had graduated than or those who had not

suggesting that graduation ma be a crucial actor.25 Although this

analsis cannot show causalit, the ndings support previous

research that suggests that graduation (or, in this case, not gradu-

ating) is strongl correlated with loan deault (Gross et al. 2009).

25 The eception was two-ear or-prots, where rates o delinuenc were similar or borrowers

who graduated and those who did not.

Loan Status of 2005 Borrowers by Last Institution Attended and Graduation Status

tABle 6

oF those Who leFt

Without A Cred entiAl

% oF BorroWers Who BeCAme

delinquent Without deFAult

% oF BorroWers

Who de FAulted

% oF BorroWers Who Were

delinquent or deFAulted






All 32 23 55

oF those Who grAduAted,






All 20 13 33





27/44

To acquire some insight to augment the quantitative analysis, a number o people who work directly with borrowers were interviewed to

get a sense o how delinquency and deault aect borrowers and how borrowers in trouble can get assistance in repaying their loans.

Several general themes emerged across the interviews; they are summarized below. Interviews included student loan ombudsmen

and people rom community-based organizations who work with thousands o borrowers in trouble, as well as experts in deault risk

management. Although these insights cannot be generalized to the total population o student loan borrowers, they help understand the

borrower experiences refected in the data and suggest uture avenues o research that can build on this study.

Box 3: pc F

In general, interviewees said that borrowers

were rarel amiliar with all the repament options available to

them beore the became delinuent or deaulted;

do not ull understand loan terms, interest accrual, and so

on, and reuired signicant assistance in selecting a loan

repament plan;

compounded their repament problems b ailing to ll out

paperwork in time to avoid deault; and

report that wage garnishment, Social Securit osets, and no

being able to use their earned income ta credit are conse-

uences o deault that concern them.

Man o the interviewees work with borrowers who are alread

in trouble; the help borrowers understand what is needed to

get back into good standing on their loans. But the all high

lighted the act that borrowers are oten not aware o options

that could have helped them avoid becoming delinuent in the

rst place.

The likelihood o delinuenc and deault or borrowers who grad-

uated also varied signicantl b tpe o institution, again with two-

ear or-prots having the highest rates. About 76 percent o all

borrowers who last attended or-prot two-ear institutions, but did

not graduate, became delinuent at some point, and over hal o

them deaulted on their student loans within ve ears o entering

repament. Even among borrowers who successull completed

their programs at these institutions, 57 percent became delinuentat some point, and 30 percent had alread deaulted. Considering

the eects o the recent global recession, the results are likel to be

even worse or students who tried to enter the job market rom

2008 onward. Borrowers who graduated and last attended our-

ear public or private nonprot institutions had much lower rates o

delinuenc and deault. However, even or these institutions

almost a th o graduating borrowers became delinuent at some

point, although onl 5 percent or ewer deaulted.26

In addition to the characteristics highlighted here, other actors

that could not be eamined with the stud data are likel impor-

tant and could shed more light on some o these repamen

patternsactors such as starting salaries, emploment statusand previous nancial knowledge. Man o these actors are

likel correlated with borrower behavior; deeper analsis migh

be able to identi the actors that most aect repament behavior

Understanding all the actors that aect borrower behavior is

essential to inorm polic discussions about improving college

completion, access, and aordabilit in an era o restricted

resources (see Box 3).26 These patterns among institution tpe, graduation status, and rates o delinuenc/deault holdor each age categor and highest grade level attained.



28/44

What Does It All Mean?

Summarizing the Findings

This stud enables us to better understand borrowers repa-

ment eperiences. O the nearl 1.8 million borrowers covered

b the stud who entered repament in 2005, we can see that

more than a third were repaing their student loans success-

ull without dela or delinuenc or the rst ve ears. The

remaining borrowers had either used one or more o the

options in the ederal loan program to postpone their paments

temporaril or had become delinuent at some point during

the stud period. This report provides a snapshot o the char-acteristics and loan behavior o borrowers who entered repa-

ment in 2005. To better understand the dierences among

these groups and the implications or uture polic, it is helpul

to group borrower behavior into the ollowing three themes:

1.Epected path through repament.

2. Appropriate and timel use o repament tools and options.

3. Magnitude and impact o delinuenc and deault.

ec pa t ray

Man borrowers were able to repa their loans on a timel

basis during the rst ve ears o entering repament

Borrowers who were making monthl paments on time during

the stud period account or 37 percent (almost 667,000) o

those who entered repament in 2005. Among the 1.1 million

who did not consolidate their loans, roughl hal last attended

our-ear public (45 percent) or private nonprot (53 percent)

institutions. The made up about 48 percent o undergraduateand 68 percent o graduate student borrowers who had

successull completed their degree programs. Some o these

borrowers ma have had dicult making timel paments

but used options not captured in the stud data, such as

income-based or graduated repament, to make thei

paments on time. Still, one in three borrowers in the 2005

repament cohort seemed willing and able to use the edera

student loan repament ramework in the intended wa.

The goal o this stud is to shine a light on the ull range o borrower repament patterns, particularl

those o students who became delinuent on their student loans, but did not deault. Historicall, public

debate about student loans and debt burdens has ocused primaril on deaulters and deault rates.

In realit, the majorit o student loan borrowers never deault. But while that is positive news, we shouldnot ignore the act that man students enter repament and encounter a range o nancial challenges.



29/44

Aa a ty u ray o

Other borrowers used the repament options provided b the

ederal government to postpone their paments, thereb avoiding

delinuenc. Some o these borrowers (11 percent) used deer-

ment onl, usuall, although not alwas, because the re-enrolled

in college. Twelve percent used orbearance (oten in combina-

tion with deerment) to postpone monthl paments and avoid

delinuenc. Collectivel, this group totals more than 400,000 o

borrowers who entered repament in 2005.

Similarl to the group that took the epected path through

repament, these borrowers were more likel than all borrowers

to have last attended a our-ear institution, but there are some

dierences; or eample, borrowers who used both orbear-

ance and deerment tended to be ounger, more likel to

attend public two-ear institutions, and less likel to attend or-

prot institutions than those who used onl orbearance.

Although these borrowers needed a little etra assistance, it is

dicult to know the specic circumstances that prompted their

action because the repament options can be used or a variet

o reasons. Nevertheless, the were aware o the options and

used them or the intended purpose. However, these data raise

the uestion o wh the percentage o borrowers using these

options to avoid delinuenc was not higheran even larger

percentage o borrowers could have applied or a deerment or

orbearance but became delinuent beore doing so. Moreover

initial scans o the data reveal that some borrowers used multiple

orbearances when a deerment or some other, less costl loan

repament option might have been more advantageous.

ma a iac dcy

Despite the availabilit o repament options, over a uarter o

the borrowers who entered repament in 2005 (26 percent, or

approimatel 454,000 borrowers, representing $8.5 billion in

loans) were delinuent at some point, but had not deaulted

Much o the public debate over the past ew ears has ocused

on those who deault, without looking at the substantial popu

lation o borrowers who were delinuent, but did not deault. I

is important to recognize that or ever borrower who deaults

at least two others have been delinuent on their student loans

but successull avoided deault.

Most o the borrowers who became delinuent during the stud

period (21 percent out o 26 percent) used some combination o

deerment and orbearance to avoid the ar worse outcome o

deault. It is likel that these borrowers knew more about repa-

ment options or showed greater initiative in contacting lenders

guarant agencies, or consumer advocac organizations to

help them deal with their loan repament problems and avoid

deault. The remainder o the delinuent borrowers (onl 5

percent o all borrowers) managed to avoid deault without using



30/44

deerment or orbearance, presumabl b making paments

that brought their accounts current. Further research is needed

to better understand wh some borrowers were successul in

using available repament options to avoid delinuenc or

deault and others were not.

Then there are the deaulters. Fiteen percent o these borrowers

(258,000 borrowers, with $3.2 billion in loans) had alread

deaulted within ve ears o entering repament. Man o these

borrowers were either unaware o the range o repament

options available to them or ailed to act beore becoming delin-

uent and subseuentl deaulting. In total, 41 percent o the

borrowers (712,000 borrowers, $11.6 billion) aced the negative

conseuences o delinuenc or deault.

These data illustrate that man more borrowers are having di-

cult repaing their loans in a timel manner than is generall

recognized when the ocus is on deault rates alone. In this

stud, three-uarters o a million borrowers who entered repa-

ment in one ear alone had dicult. The stud period does not

capture what happened ater ve ears, so the actual rate odelinuenc and deault over time ma be understated. In addi-

tion, these gures do not include other FFELP or Direct Loan

borrowers who entered repament over this period, but were not

included in the stud data. These patterns are both cause or

concern and an opportunit or improvement.

This report has sought to highlight these issues, promote greate

understanding o the range o borrowers eperiences in repa-

ment, and thereb promote a vigorous polic discussion about

what steps or approaches might be appropriate to improve the

circumstances aced b all borrowers (For exAmple, see Box 4)

These challenges and opportunities have a heightened impor

tance as the impact o the economic recession continues to

aect the entire postsecondar education sstem.



31/44

Research has shown that proactive debt management strategies can have a positive eect on borrower behavior. The strategies that

appear to be most eective include engaging borrowers early, beore payment problems occur; looking at a borrowers whole nancia

situation, including not only student loans, but other consumer debt; and delivering advice through a third party (American Studen

Assistance 2010; Steiner and Teszler 2003). Oten, not enough inormation fows to borrowers between the start o the six-month grace

period and their rst reported delinquency 60 to 90 days ater their rst payment due date. Yet borrowers ability to choose options to

deal with repayment problems depends on receiving good inormation early in the process.

Box 4: eca db maa

Student loan servicers, guarant agencies, nancial aid oces,

and other organizations are oten involved in counseling and

providing inormation to borrowers to help them avoid repament

problems. Counseling might involve helping students manage

budgets to prevent repament problems or helping borrowers get

their loans back in good standing ater delinuenc or deault.

Borrowers oten have trouble understanding their loan repament

optionsincluding loan consolidation, deerment, orbearance,

and so on. The availabilit o timel education debt management

services can be a tremendous help.

Historicall, loan servicers have generall oered borrower assis-

tance onl ater delinuent loans appear to be headed toward

deault, and the tpicall involve a series o attempts to contact the

delinuent borrower. The ederal loan program reuires that manda-

tor entrance and eit counseling inormation be provided to

students while the are enrolled, to ensure that the are generall

aware o their loan pament obligations and repament options

However, this inormation is not alwas well understood or timel

Other organizations are involved in providing inormation to

students, including communit-based organizations and guarant

agencies, which provide online counseling tools, publications, and

sometimes onsite assistance, but the nature and etent o this inor

mation and assistance var widel. It is not clear what eect the

recent dissolution o the FFEL program and the transition to Direc

Loans or all new student loans will have on the provision o these

services. Loan servicers might have an etra incentive to reach outo borrowers earl to help them avoid delinuenc and deault

Guarant agencies will continue to provide the services reuired

b the FFEL program, even as the consider how the will t into

the new structure. Colleges and universities also are evaluating

their options or assistance. Given current economic pressures and

the potential or higher deault rates, debt management and nan

cial literac tools are more important than ever (Lederman 2010).



32/44

Opportunities for

Further Discussion

These research ndings are onl a rst attempt to eamine the etent o repament problems beond

deaultmore work is needed to ull understand the etent and nature o borrowers eperiences.

However, this report has implications or a broader discussion o student loans and how the are

structured. For eample, on the polic level, the ocus needs to shit rom simpl lowering deault rates

to considering a wider spectrum o eperiences with student loan repament, including how to increase

the number o borrowers who successull repa their student loans and whether current programsadeuatel address borrowers needs. The stud raises the ollowing uestions:

With short-term solutions such as deerment and orbearance

available to help borrowers avoid delinuenc, wh do two

out o ve borrowers become delinuent during the rst ve

ears ater entering repament?

Wh is the proportion o borrowers who are activel repaing

their student loans without dela so low? How can we ensure that

this number is higher or uture cohorts o student loan borrowers?

The current ocus on deault rate measures does not ull

capture the etent o borrowers diculties in repaing student

loans. Is there a better wa to track students who are eperi-

encing diculties with loan repament, given a highl mobile

population and the challenges o reaching cell phone users?

Can we provide inormation about repament options in a

more targeted and timel wa?

The ollowing are important areas to eplore in the uture:

Bw caacc. The stud data had limited inor

mation on borrowers demographic and enrollment character-

istics. Other variables that might aect delinuenc or deaul

such as income or more detailed enrollment histor

should be included in uture analses. In addition, surves o

borrowers attitudes toward repament could provide critica

inormation to inorm policies and institutional practices.

Faca acy. Most people agree about the importanceo providing students with general nancial literac inorma-

tion, as well as specic inormation on loan repament options

However, man borrowers are unaware o their options o

choose not to use them. This situation suggests other topics

or discussion, including how and when inormation is deliv-

ered, what agencies should be providing it, and whether i

should be promoted broadl or targeted to borrowers who are

most likel to become delinuent.



33/44

ia . Some institutions are seeing positive

results with deault prevention eorts, including nancial

literac. For eample, IHEPs work with minorit-serving insti-

tutions has illustrated some promising eamples o institu-

tional practice (Institute or Higher Education Polic 2009 and

2010), and man guarant agencies have supported nan-

cial literac initiatives on college campuses. However, not

enough is known about such eorts in general or about the

interventions that work best.

pa a. The data or the stud included ederal student

loans, but private loans are also a part o the euation. Private

loans do not include man o the protections o ederal loans;

however, it is in the lenders interest to use debt management

practices to mitigate the risks o deault. Because these loans

were not included in the stud, it could be understating the

ull etent o delinuenc and deault.

o a ay . The data or this stud

covered onl deerment and orbearance; it was not able to

include participation in newer repament programs, such asincome-based repament, graduated repament, and public

service loan orgiveness (see glossArY). For students who are

currentl entering repament, restructuring their loans into an

alternative repament plan might be a better long-term solu-

tion than reling on multiple deerments and orbearances.

sc. This stud provided a snapshot o the tools

and events borrowers eperienced. An important ollow-up

would be to see the order o events (e.g., the patterns o

events occurring beore and ater delinuenc or deault), as

well as the options used over a longer period o time.

The initial ndings o this stud provide important rst steps to

understanding the broader scope o borrowers eperiences

with student loans. But there is much more to do, and lowering

rates o delinuenc and deault will reuire a serious commit

ment rom man stakeholders who care about college access

Documents

Delinquency the Untold Story