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As Many Students Default As Enroll In Programs Meant To Help Them Avoid That Fate

By Alan Pyke on September 12, 2013 at 8:54 am

"As Many Students Default As Enroll In Programs Meant To Help Them Avoid That Fate"

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CREDIT: Wall Street Journal

From mid-2012 to mid-2013, as many student debtholders defaulted on what they owe as enrolled in three programs that tie educational debt repayment to the borrower’s earnings. According to Department of Education data covering June 2012 to June 2013, 620,000 recipients of direct federal loans enrolled in the income-based repayment plans and 600,000 borrowers in the program slipped into default, the Huffington Post reported.

The repayment plans, which dramatically reduce the likelihood of a crippling default on student debt, are underperforming enrollment expectations despite being prominently featured in President Obama’s public speeches on education policy. The most generous of the plans, called Pay-As-You-Earn, has just 40,000 enrollees. While one in eight student debtholders is in default, just three percent are enrolled in the income-based plans offered by the Department of Education.

Education policy experts and loan servicing companies dispute the source of this under-enrollment. A government spokesman told the Huffington Post that judging loan servicers based on overall numbers of enrollees in various types of alternative repayment plans is unfair because “no one repayment plan is appropriate for every borrower.” But that variability in what is appropriate for individual borrowers is why such alternative plans exist, and the primary company that services federal education loans does very little to connect individuals struggling to repay their debts with the alternative plans that might be more appropriate.

Sallie Mae, which is the largest loan servicer for the Department of Education, has no contractual obligation to advertise income-based repayment to struggling borrowers. The company says it posts information about income-based repayment in various places on its website and fields 50,000 calls per month about the programs. But the company stands accused of “unfair or deceptive” practices by the Federal Deposit Insurance Corporation, and millions of borrowers who are eligible for loan forgiveness or alternative repayment plans are instead ending up in default.

Total outstanding student debt now tops $1.2 trillion. That unprecedented debt overhang will cost borrowers $4 trillion in lost wealth over their lifetimes. The costs to the country as a whole in lost economic activity are measured in the hundreds of billions of dollars.

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