Magazine article Diverse Issues in Higher Education

The Student Loan Buzzword for 2014: Repayment Rate

Magazine article Diverse Issues in Higher Education

The Student Loan Buzzword for 2014: Repayment Rate

Article excerpt

"You get what you measure," and with federal student loans, we only measure failure. The sole metric focused on by the federal government, policymakers and higher education institutions is the student loan default rate. Instead, the U.S. Department of Education should also track and publish the rate of federal loans in good standing and in delinquency.

The national student loan cohort default rate, defined as the percentage of borrowers who fail to make payment for 270 days within three years of separating from school, currently stands at close to 15 percent. This would imply that 85 percent of student loan borrowers are having no problem repaying their student loans. This is not the case.

While 85 percent of student loan borrowers may not currently be in default, a 2012 study by the Federal Reserve Bank of New York found that only 39 percent of federal student loan borrowers are currently in good standing and actively repaying their loans. The rest are either behind on payment by at least 90 days or temporarily postponing payment with deferment or forbearance.

Although the Federal Reserve data didn't break down repayment rates by race and ethnicity, we can deduce that the news is even worse for minority students: according to a 2007 Education Sector report, Black students had an overall default rate more than five times higher than White students, while Hispanics' overall default rate was twice that of White students.

Delinquencies, deferments and forbearances won't show up in a cohort default rate number, but these borrowers who are struggling to pay are not amortizing their loans, often suffer damaged credit records and their balances will continue to grow with capitalized interest, forcing them deeper and deeper into debt. Even among those within the 39 percent who are "currently" in good standing, many may have been delinquent in the past and had their credit dinged.

The challenge, then, is not just to stop default at the back end, but to stop delinquency at the front end before problems can take hold. We need to ensure that borrowers are taking advantage of all the available repayment options that help them manage their debt. To do that, we need good data and good communication. Here are some suggestions:

Establish Loan Repayment Rate as the primary metric of student loan success. We need to focus on increasing loans in good standing rather than just decreasing defaults. Instead of the annual CDR report, the U.S. Department of Education should release an annual breakdown of the federal student loan portfolio for all statuses--in school, grace, in repayment (not delinquent), deferment, forbearance, delinquent (past due 90 days), default and other (forgiven/ discharged). …

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