Why do so many student loan borrowers end up in default on their student loans when their circumstances would have allowed them to qualify for a deferment? Why do so few refinance their loans when doing so would save them a significant amount of money?
In the U.S., there is an epidemic of people behind on their student loans. As of early 2016, of the 22 million federal student loan borrowers, 3.6 million were in default and another 3 million were delinquent on their student loans.
But the problem is more than just graduates that don't have the money to repay their loans. Most students don't understand their student loans. Many current of students rely on their parents for financial aid information and only a small amount of students actually know their repayment terms.
This suggests that at least some of the mistakes borrowers are making are due to ignorance instead of poverty.
Lack of Information
One of the big drivers behind the mistakes that graduates are making is the fact that they were never properly educated about their student loans and often don't know where to get the information that they need (see an up-to-date survey on this). While entrance counseling is mandatory when taking out federal student loans, it is not always successful in helping students understand their loans. Even if a student was able to understand their loans because of that counseling, by the time a student starts repaying those loans several years later they have often forgotten that crucial information.
But the education given is often incomplete. Very few borrowers are even told about the benefits of refinancing their loans – something that could save them significant amounts of money.
Many don’t even realize they have options when it comes to their standard repayment. If they aren’t aware that things like income-based repayment options exist then they could struggle to repay their loans with the standard 10-year plan. Similarly, if they aren’t aware that student loan deferment exists – they might believe that defaulting on their loans is their only option when they lose their job or encounter financial difficulties.
Bad communication occurs when students take out their loans, but it also occurs later when students try to repay their loans. The websites of student loan servicers are sometimes difficult to navigate or understand. If borrowers have questions, it can be difficult to get someone over the phone in order to answer those questions. Some borrowers report that customer service representatives at these student loan servicers sometimes answer their questions wrong. This leads borrowers to make bad decisions based on bad information.
Ask a student loan borrower what happens when you don’t repay your loans and you can bet that very few of them will be able to answer. But not knowing that you could be sued or have your paycheck garnished leads to very bad consequences for students. Some believe instead that it's just like failing to pay a credit card - that interest will just continue to accrue and they’ll be able to restart payments later on. Other students believe that you can discharge your student loans in bankruptcy - something that is nearly impossible to do especially for private student debt. These false beliefs lead students to make bad decisions and that leads to equally bad consequences.
So what's the solution?
The only way to help students make better student loan decisions is to ensure that they're educated around student loan issues and policies. This education would ideally start in high school and be mandatory for all students. Students should also be required to pass a comprehensive test when taking out student loans to certify that they understand the consequences of their actions and the terms of the loans.
Too much of the time parents are the ones who are dealing with student loan issues but it's the students that are going to have to repay them, so it's critical that they understand their responsibilities, and obligations as well. It's also important that student loan servicer companies have more engaging and easy to understand educational materials on their websites that will allow students who are trying to repay their loans to quickly understand the steps that they should take before they repay their loans in order to make their repayment easier.
This information should include personal finance tips to help students make a budget, information on student loan refinancing, and information about the benefits and drawbacks of either paying off your student loan debt early or utilizing a longer repayment plan. By educating borrowers on the tradeoffs between these two choices – they can make a decision that will be right for them.
By equipping student borrowers with the right information to make good choices in regards to their student loan repayments, we can ensure that students and borrowers are able to pay back their loans, avoid default, and live happier and healthier financial lives.