How to Help the Highest-Need Student Loan Borrowers


A new Urban Institute report sheds light on who's most likely to default on student loans, and possible ways to help them.

Higher ed not debt protest

A new Urban Institute report sheds light on who's most likely to default on student loans, and possible ways to help them.

Among the "secrets" for one individual's recently publicized recipe to paying back $180,000 in student debt were things like never missing a payment, paying more than the monthly minimum and living with her parents. But for every success story, there are people struggling to pay back student loans. Both the average amounts and the share of students graduating with debt have been increasing in recent years. And hundreds of thousands of borrowers default for the time each quarter, according to a new report from the Urban Institute.

While other studies have looked at which factors, like attending a for-profit school or leaving school before completing, might predict student loan defaults, this latest study examines the broader credit profiles, including other sources of debt, of borrowers repaying student loan debt over a four-year study period. Using a nationally representative sample of individuals starting their repayments in 2012, Kristin Blagg, a research associate at the institute and the author of the report, found that 22 percent had a default in the four-year period. And it was borrowers with less than $5,000 in debt who were the most likely to default.

Individuals who had certain types of debt the year before starting to repay their student loans were more likely to default than those with other types of debt. Specifically, people who owed money on their utilities, medical bills, retail cards or bank collections were more likely to default while individuals with credit card debt, auto debt or mortgage debt were less likely to default within four years of starting repayment.

The study also found ties between neighborhood characteristics and default rates. Borrowers who defaulted within that four-year window lived in neighborhoods that, on average, had less income and housing wealth, according to the study, as well as areas with higher shares of black and Hispanic residents and lower shares of white residents when compared to borrowers who did not default.

These findings echo others from studies of student loan debt, including one from Demos and Brandeis University's Institute on Assets and Social Policy that found that black people were more likely to have student debt, regardless of income. "The majority—54 percent--of young (25-40 years of age), black households hold student debt," said Thomas Shapiro, head of the institute in an interview published by the university. "For these households who are just starting their financial lives, this creates a major obstacle to long-term economic security."

Even some of the solutions had the potential to exacerbate racial wealth gaps, according to Shapiro. "Universal debt relief or tuition reduction policies that do not address financial need could benefit students with A greater capacity to pay loans such as those from wealthier households as well as professional degree holders," he said in the interview. Instead, he recommended more targeted programs that better assess need.

A similar recommendation comes out of the Urban Institute report, using the factors that help predict default before repayment even begins. For example, it may make sense for strapped borrowers to repay some debts, like utilities, first, rather than student loan debts. Better understanding those obligations can help tailor policy responses. Credit scores could be used to help identify potentially high-risk borrowers who may need more counseling, according to the report. "[P]olicymakers could offer additional dollars for services who ensure that high-risk borrowers are consistently enrolled in an income-driven repayment plan or for servicers who keep 'high-risk' borrowers out of default," the report recommends. Among other recommendations, Blagg also suggests changing the way deferred, delinquent or defaulted loans increase the total loan balance, saying, "implementing too harsh a financial penalty could discourage borrowers from paying down their loans."

Most importantly, perhaps, access to student loans shouldn't be restricted, writes Blagg. Instead, policymakers should do more "to help borrowers manage their debt...and to ensure that borrowers have access to a solid and fair safety net when life gets in the way of repayment."



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