Three steps to fix the student lending system

You may have heard the figure: 43 million Americans — 1 of every 5 adults — have federal student loans. 

Although these loans are an important tool for borrowers who want to earn a college degree, the current student loan repayment system is complex and outdated — and can undermine borrowers’ efforts to repay their loans. As of September 2020, close to 20 percent of borrowers were in default on their loans and more than 1 million people defaulted each year, even before the pandemic. 

To help borrowers during the pandemic, payments, interest and collection efforts for most federal student loans have been put on pause through September of this year. This pause has given many borrowers a much needed respite from debt obligations while creating an important window for lawmakers to address problems in the student loan repayment system. The short-term urgent need is to facilitate successful repayment, because once the pause ends, tens of millions of borrowers will reenter the system at the same time, possibly overwhelming it.

But this is also an opportune time to establish longer-term, systemic reforms. 

Among the reforms now under consideration, canceling some or all student debt has received the most attention. But regardless of whether debt forgiveness or other major changes are enacted, it’s critical to examine how existing policies — which will continue to affect student loan repayment even if debt is canceled — create disparate outcomes, especially for borrowers of color and those who don’t complete a degree.

What to do? Research, analysis and survey work from The Pew Charitable Trusts, where I work, point to solutions that would make a real difference in the ability of borrowers to make affordable payments, navigate the repayment process, and emerge with a positive outcome. 

To start, the U.S. Department of Education and Congress can and should take the following three steps:

One, identify at-risk borrowers before they’re in financial distress — by looking for and heeding the warning signs of borrowers who need help before they fall into severe delinquency. Pew’s research has shown that borrowers who have missed payments within the first three months of repayment, those who have put their payments on pause repeatedly, and others who have previously defaulted on other student loans are prime examples of borrowers who are more likely to have long-term repayment challenges. If any of these behaviors emerge, it’s a signal to engage early with the borrower.

Two, after the current pause in payments ends, provide a grace period for struggling borrowers. Automatically allowing additional time, for short-term periods, for those who miss payments immediately after the protections expire would give student loan servicers more time to reach these borrowers and it would give the borrowers more time to manage automatic debit arrangements.

Three, ensure easy access to affordable payments. Loan servicers should be permitted to easily enroll and recertify borrowers into income-driven repayment plans, in which payment levels vary depending on the borrower’s income. These plans are more affordable for those who qualify, and lead to lower levels of delinquency and default, which is especially important for borrowers whose income was reduced during the pandemic. This kind of easy reenrollment could be done by phone, through a website, or through electronic communication.

 Implementing these measures will move us toward providing consumers with a student loan repayment system that does what it was originally designed to do: serve everyone who wants to get a postsecondary education while enabling them to more easily repay their loans.

Travis Plunkett is the senior director of the family economic stability portfolio at The Pew Charitable Trusts.