Why do some borrowers fail to repay student debt?

New America: 'flexibility and leniency' of the system makes it a low priority

Federal student loan borrowers view their obligations to repay the debt as "fundamentally different" than their other monetary responsibilities, according to a new paper from New America Foundation.

The very design of the program may be encouraging this attitude, argue paper authors Alexander Holt and Jason Delisle, who based their findings on six focus groups led by the FDR Group between June and October 2014 that examined "borrower behavior and attitudes."

Who defaults on student loans?

"The flexibility and leniency the system provides encourages borrowers to make student loans a low priority, fueling rising loan balances, delinquency, default, and resentment," they write.

The focus groups resulted in several findings, including:

  • The sizes of monthly payments come as a surprise to borrowers. When students first take out loans, they do not know what their total college expenses will be and therefore cannot predict the size of their ultimate monthly payments.
  • Other financial responsibilities take priority. Borrowers frequently make payments with stricter financial consequences—such as late fees, high interest rates, and repossession—first.
  • Many borrowers resent their schools. Some of the focus group participants say they feel their schools misled them and they do not want to repay them.
  • Income-based repayment plans are not understood. Many borrowers had not heard about the new programs and, even after hearing their explanation, said they were "confused, perplexed, and often suspicious of the option."

Fixing these issues will prove complicated, say Holt and Delisle, because they require tradeoffs. For example, better educating those who are considering taking out loans about risks may discourage low-income students from pursing higher education at all.

For defaulters, dropping out—not debt—drives payment difficulties

The solution, they say, is to "reexamine what makes federal student loans different, and what processes and incentives can be put in place to correct for those differences" (Supiano, The Chronicle of Higher Education, 3/11; Holt/Delisle, "Why Student Loans are Different," New America, 3/11; Inside Higher Ed, 3/11).

The takeaway: A new paper examined why some borrowers fail to repay their student loans and find that they view the debt as "fundamentally different."

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