The new coronavirus and the accompanying economic downturn have wreaked havoc on households, businesses and higher education institutions across the country. In response to the pandemic, payments, interest, and fees for most federal student loan borrowers were suspended until at least September 30… But once that hiatus is over, many borrowers will have to deal with personal financial problems and a convoluted federal student loan repayment system.
A look at how student loan borrowers acted during the Great Recession, which officially lasted from December 2007 to June 2009, could help policymakers understand the potential impact of the novel coronavirus on repayment results. In the context of this recession, the rise in student loan delinquencies has mainly occurred after their technical completion and as the economy recovered. For example, the proportion of student loan payments that are at least 90 days overdue declined slightly from about 8% in 2007 to 7.3% in 2009. before jumping to 10.3% in 2013.… This trend was in contrast to other forms of consumer debt, for which delinquency rates declined as the economy recovered. Part of the increase in crime may be due to a dramatic increase in student enrollment and subsequent borrowing from adult students who attended commercial and biennial schools since the start of the last recession.
It is also helpful for policymakers to understand which paths borrowers took before they faced financial distress. Pugh worked with researchers at the Triangle Research Institute to examine data from the 2004/2009 cohort study of primary higher education students. – a US Department of Education dataset that tracks first-time full-time students from their college entrance in 2004 to 2015 – and highlight differences in results for borrowers for those who started repaying in 2004 – 07 years before the Great Recession, and those who started repayment during and immediately after it (2008-11).
This analysis shows that borrowers who start repaying during a recession may have trouble paying off their loans faster than those who start out during stable economic periods. As policymakers prepare to resume paying off student loans, they need to make sure the system is ready to help all borrowers get back on track.
Borrowers who started repaying during and immediately after the Great Recession defaulted on their loans or suspended payments faster than borrowers who came in in previous years.
The average borrower, who repaid from 2008 to 2011 and defaulted on its federal student loans, did so after about 31 months of repayment. This is six months earlier than those who paid off their debts between 2004 and 2007 and then defaulted. Both groups include borrowers who have completed their studies and those who have not completed their programs. Borrowers in the 2008-2011 cohort who applied for a deferral due to economic hardship also did so faster after repayment began than those who started repayment between 2004 and 2007 (see Figure 1.)
Borrowers who start repaying during the Great Recession are more likely to stop repayments or pause payments faster
The time until the first default or deferral of payment in case of difficulty for those who made repayment in the period from 2004 to 2007 or from 2008 to 2011.
|Average time after receipt of repayment until:||2004–07||2008-11|
|Default||37.5 months||31.3 months|
|Delay due to economic hardship||38.8 months||12.0 months|
Source: Analysis of data from a longitudinal study of primary higher education students of the US Department of Education. Time to deferral or deferrals other than those related to economic hardship are not shown in the data.
Comparatively shorter time frames highlight how a recession could affect borrowers’ experience with a repayment system. Faster default times for the 2008-11 cohort. Assumes that loan servicing companies may need assistance from more borrowers after repayment is resumed. He also emphasizes the importance of maintaining staffing levels and are ready to help borrowers.
Borrowers whose payments were suspended due to natural disasters also struggle to start repayments again.
The pandemic pause for most federal borrowers is similar to the government’s response to recent natural disasters. For example, the Department of Education offered borrowers affected by Hurricane Harvey in 2017 an emergency grace period. increased as borrowers moved to maturity… This increase was likely due in part to job losses that occur after natural disasters… Another reason may be related to borrowers change addresses and lose contact with their service companies…
In addition, as students move part-time or drop out due to natural disasters, some may receive payments before completing their degree and struggle with make payments… With similar shifts over the past year, policymakers should monitor college graduation and transition to part-time status as they prepare to resume payments. Data from autumn 2020 as well as spring 2021 semesters suggesting declining undergraduate enrollment could signal future increases in delinquencies and defaults if students who received loans are not re-enrolled and graduated.
Income-oriented repayment plans can help borrowers avoid default, but many still have trouble accessing them.
Today’s borrowers have access to improved income-oriented repayment (IDR) plans that didn’t exist during the Great Recession. However, many borrowers who could benefit from IDR plans cannot access them. On the bench review this spring, two-thirds of borrowers (67%) with suspended payments said they would be somewhat or very difficult to pay within the next month. The same survey found that about one-third of borrowers repaid their loans under the IDR plans, but Pew focus group research shows that many find that they are credited – and remain – in these plans challenge… Aside from affordability concerns, some borrowers have stated that they find the IDR plans unaffordable for their financial situation.
Before resuming repayment, the Department of Education must ensure that the student loan system ready to help those borrowers who may face difficulties… For example, the department and service providers should ensure intensive and targeted work with borrowers who were experiencing difficulties prior to the hiatus, and service organizations should be allowed to temporarily include borrowers in IDRs without the need for extensive paperwork.
In addition, Congress and the Department of Education should consider automatically extending the pause for borrowers who miss payments as soon as it expires. This move will give borrowers more time to manage their finances and more time for service personnel to contact them. Finally, long-term policy changes to improve the IDR, including implementation of the Law on the Development of Bachelor’s Talents by Opening Resources for Education (FUTURE)are also needed.
Travis Plunkett is Senior Director of Family Economic Stability at The Pew Charitable Trusts. Regan Fitzgerald is a manager, and Brian Denten and John Remedios are senior staff members of the Pew Charitable Trusts Student Borrower Success Project.