About the Author: Sarah Sattelmeyer is the Project Director for Education, Opportunities and Mobility in the Higher Education Initiative at New America.
More than eight million Americans were in default on their student loans in June. They represent about a fifth of the 43 million Americans with federal student debt. The year before the pandemic, more than a million borrowers defaulted. These headline-grabbing numbers represent a problem that is both widespread and reflects deep structural inequalities, discrimination and racism not only in our higher education system, but also in the foundation of how families access education. capital and create wealth.
For example, black borrowers are more than twice as likely, and Hispanic or Latino borrowers are more than 1.5 times more likely to default on their loans than their white peers. Low-income students, those with caregiving responsibilities, students who leave school without a degree, and those who are the first in their families to attend university, among others, have high failure rates . The pandemic has hit these groups particularly hard.
Advocates and policymakers have proposed several solutions. Early in the higher education system, a free community college, funding to promote student completion and retention, and an expansion of the needs-based Pell Grant – as envisioned during the Build Back negotiations Better Act – would reduce the need for borrowing and help more students get a return on their investments in higher education. Behind, recent moves to make the civil service loan forgiveness program, defending borrowers against repayment, and total and permanent disability releases more accessible, and calls for cancellation some or all of the student debt has and would ease the burden on many struggling to repay. .
But other important vehicles for higher education reforms are moving beyond the headlines (and often behind the scenes). The US Department of Education is required to conduct a process called ânegotiated rule makingâ to implement certain laws passed by Congress. The process engages external stakeholders affected by the programs under review. While this sounds wonky and is unlike most other federal agencies, it is critically important and shapes the way federal programs are designed and managed.
The ministry is currently carrying out such rule making to reform major elements of the student loan repayment system. Although it was not initially included in the list of topics to cover, advocates have insisted that student loan default be added to the agenda. Addressing the default system issues, among the broader reforms, will ensure that we use a more holistic approach and create a more borrower-centric system.
First, we need to help borrowers avoid fault ensuring that repayment terms are affordable, accessible and of reasonable duration. Once they have started repaying their loans, borrowers can choose from a plethora of repayment plans. Income-driven plans are important options that tie borrowers’ monthly payments to their income and family size. They are more affordable for many and reduce missed and default rates. Despite the availability of such plans, not all who could benefit from them can and do not have access to them. Too many borrowers continue to struggle with overpayments, growing balances, long repayment periods, and difficulties accessing and keeping plans.
Second, we must ensure that those at fault can get out more easily and quickly by creating additional channels. Once borrowers default, it’s easy to navigate. The system is complex and confusing: borrowers’ accounts can be transferred multiple times after their default entry, and the means to exit are limited. Each exit path has different terms, conditions, and associated costs. Some can only be used once. In addition, default rates are high.
Finally, we must ensure that the consequences of the default less punitive. Being in default has serious consequences that endure regardless of the age of borrowers’ debts. Borrowers can have their wages garnished, their tax refunds and federal benefits garnished or withheld, pay high collection fees, lose access to benefits, and have their credit damaged. And the combination of these means that borrowers can pay more and at a faster default rate than they would in any repayment plan, while still earning interest.
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