Fearing they could lose access to federal student loans and grants, colleges and universities hire consultants to keep student loan defaults in check. But these advisers too often encourage borrowers to temporarily postpone payments, rather than enroll in plans that would manage their debt long-term — a strategy that skews the default data and threatens the financial health of borrowers, according to a study released Thursday by the U.S. Government Accountability Office.
The study examined a sample of nine default-management consultants, which serve more than 1,300 colleges. The consultants contact recent graduates or students leaving school to ensure they remain current on their education loans. Most of the consultants, who were not named, participated in three-way conference calls with borrowers and the companies servicing their loans, while one visited people at home who had fallen behind on their loans and provided debt counseling.
Researchers at the GAO found instances of consultants steering borrowers toward temporary postponement — a practice known as forbearance — over more beneficial options. In some cases, consultants sent borrowers who were past due on their loans unsolicited emails and letters that included only a forbearance application and instructed them to return it to the company instead of their loan servicer. Though this temporary postponement of payments can be useful in the short term, it increases the cost of the loan over time as interest continues to accrue.
If someone with $30,000 in loans spends the first three years of repayment in forbearance, he would wind up paying an additional $6,742 in interest. That same borrower could be spared that expense if he enrolled in a plan that pegs monthly payments to a percentage of his income. But the GAO discovered consultants providing inaccurate or incomplete information to borrowers about their options.
“The GAO’s report reveals an astonishing lack of accountability and transparency in the default management industry that results in borrowers owing thousands of dollars in additional debt and facing greater risk of default,” said Rep. Mark Takano (D-Calif.), who alongside Rep. Rosa L. DeLauro (D-Conn.) requested the study.
The Education Department’s acting chief operating officer, James Manning, took issue with much of the GAO report. In a letter responding to the study, he criticized the watchdog for reviewing only nine of the 48 consulting firms that work with colleges and interviewing just a handful of consultants and borrowers. He cautioned that the study should be viewed in light of that limited scope.
“While critical of a few consultants’ practice of sending forbearance applications to borrowers, GAO fails to acknowledge that the application itself provides an opportunity for borrowers to learn about other repayment options,” Manning said.
Based on an analysis of Education Department data, GAO researchers found 68 percent of borrowers who began repaying their loans in 2013 had loans in forbearance for some time within the first three years after leaving school. About 20 percent had loans in postponement for 18 months or more. People in long-term forbearance frequently default in the fourth year of repaying their loans, when schools are no longer held accountable for defaults, “suggesting it may have delayed — not prevented — default,” the report said.
Defaulting on a student loan can severely damage a person’s credit rating, making it much harder to buy a house or car. It could also result in the loss of tax refunds or in wage garnishment, because the government has extensive power to collect on federal loans. As of September 2017, $149 billion of nearly $1.4 trillion in outstanding federal student loan debt was in default.
Colleges have a financial interest in preventing students from defaulting within the first three years after leaving school. The U.S. Department of Education can impose sanctions on schools with default rates above 30 percent for three consecutive years, or 40 percent for a single year. And those sanctions can result in a college becoming ineligible to receive federal student aid — lifeblood for many schools.
As a result, the national student loan default rate, released once a year by the department, is one of the most closely watched metrics in higher education. Critics have long cautioned that schools can game default rates through forbearance because borrowers who postpone payments are considered in repayment for the purpose of calculating the metric. Even the Education Department said the default rate was susceptible to “gaming behavior” by schools in a 2015 report.
“[The Department of] Education has a strategic goal to mitigate risk in the student aid portfolio; however, it has not sought legislation to strengthen schools’ accountability for defaults,” the GAO report said.
The government watchdog recommends the Education Department revise the way it calculates the default rate or use a different measure to hold schools accountable for not saddling students with debt they cannot afford to repay.
Higher education experts have said tracking the percentage of borrowers making progress on paying down their debt would be a better measure. The House Republican higher education bill that won committee approval in December includes a provision adopting such an approach. Manning, of the Education Department, pointed to that as the best route to address the GAO’s recommendation.
The GAO would also like the Education Department to establish requirements governing the interactions that schools and their consultants have with borrowers once they leave school. Without such standards, the watchdog said the department cannot hold schools or consultants accountable for disseminating bad information.
“Despite our reservations about GAO’s analysis and findings, we do agree that we should provide information about our expectations to institutions with respect to how they or their third-party servicers — with whom they are jointly and severally liable — counsel borrowers about their repayment options,” Manning said.