What It's Like Not to Be Able to Pay Your Student Loans

Unlike most of the school-loan borrowers who make it into the news, the most severely delinquent borrowers tend to have low balances and low monthly payments.
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(Photo: bikeriderlondon/Shutterstock)

(Photo: bikeriderlondon/Shutterstock)

The share of Americans defaulting on their student loans or putting them off for years is increasing, as New America Foundation researcher Jason Delisle argued in the Wall Street Journal last year. What's it like not to be able to pay your student-loan debt? Lots of viral articles have tried answering the question, but those stories tend to pull examples from the extreme end of the spectrum. A new report, published this week by the New America Foundation, relies on focus groups of ordinary borrowers to seek out a more realistic, and useful, answer.

The Obama Administration has been especially active in suggesting programs that would relieve struggling borrowers of their school debt. This week, the president floated the idea of allowing a limited number of underwater borrowers to file for bankruptcy. But what if we could prevent problems from the start? The New America Foundation-commissioned report provides a fascinating glimpse into the experiences of delinquent borrowers, and hints at some ways policy changes could prevent delinquency.

Some of those who didn't graduate didn't realize they had to pay back their loans if they didn't get their degrees.

To run the focus groups, the foundation hired a private firm, FDR Group, which recruited 52 struggling student-loan borrowers from six cities across the United States. All of the focus-group participants owed less than $60,000. Yet all met certain criteria, such as having missed three or more payments in a row, or using income-based re-payment programs—which lower monthly payments, but make the overall debt larger.

Below, we've summarized two lessons and three solutions from the report. First, the lessons:

1. STUDENT LOANS SEEM EASY TO PUT OFF

Some interviewees pointed out that if their funds were limited, student loans would be the last bill they pay. Many felt not paying didn't have the same consequences of, say, not paying a house, car, or utility bill. "They can't take my education away from me," one participant told researchers. "I already graduated." (But it's not as if they get off scot-free. Some noted their delinquency hurt their credit so badly, they couldn't get car and house loans later.)

2. SOME STUDENTS WHO STRUGGLE WITH RE-PAYMENT NEVER GRADUATED COLLEGE

Some of those who didn't graduate didn't realize they had to pay back their loans if they didn't get their degrees, while others knew, but felt it was unfair. Situations like these created resentment about the loans, as did graduating, but not landing a job that required a degree. Resentment and hopelessness about the size of their loans then led some not to pay. (See point 1.)

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The report also identified a few fixes, based on their focus-group results:

1. MAKE IT CLEAR WHAT A MONTHLY PAYMENT ENTAILS WHEN STUDENTS SIGN UP FOR LOANS

Many participants were surprised by the size of the payments they were responsible for when they graduated. For some, this was the largest bill they had ever had to pay.

2. CREATE SUPPORT SYSTEMS 

To keep students in school and reduce the chances borrowers will resent—and not pay—their student loans, be sure students have the support they need. Tutoring and freshman seminars that prepare students for the college years ahead are especially helpful, one 2010 ACT survey found. Surely schools would want such programs, anyway, but it's interesting to know they may help with loan delinquency, too.

3. MAKE PRE-BORROWING MATERIALS THAT TEENAGERS PAY ATTENTION TO

Some of the younger participants said they thought their schools might have tried to tell them what their payments would be and the consequences of not paying, but it didn't stick. Others felt they didn't get any guidance at all.

One caveat to this study: FDR Group didn't try to get a representative sample of struggling borrowers, so it's hard to know how many of those who are delinquent on their loans share the viewpoints above. But surely some of them are more typical than the doctors and lawyers that make it into the news most often. After all, federal student-loan borrowers who tend to be the most severely behind on their payments tend to have low balances—less than $16,000, on average, according to New America's number-crunching.

While super-sized debts can be fascinating to read about, New America's report suggests the federal loan system could reach many more folks with smaller, simpler fixes, including making sure that naive borrowers understand what they're getting themselves into.

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