Borrowers in Default Tend to Be Unemployed and to Object to Repayment

August 01, 2012

By and large, borrowers who default on their student loans are unemployed, have attended for-profit colleges, and have failed to complete their degrees. And many don't think they should have to pay back the money they owe.

That's the portrait of people in default on federal student loans painted by "The Student Loan Default Trap," a report released this week by the National Consumer Law Center.

Based on a survey of 40 borrowers in default on federal student loans, the report says that 80 percent of them were unemployed and 85 percent were receiving some form of public assistance. Most of the respondents attributed their defaults to those economic challenges.

Why people default is an important but underexplored question that borrowers can answer, said Deanne Loonin, the report's author and a staff lawyer at the center. "It's shocking how little empirical study there is and how little feedback there is from borrowers themselves," she said. "You get the most honest and practical information about what works from talking to people actually in default. I don't see how you can make policy without it."

Nearly two-thirds of respondents to the center's survey had attended at least one for-profit college. Over all, less than half had completed their programs. Most of the borrowers were first-generation college students: Less than a third had a parent who had received a college degree.

A belief that they shouldn't have to pay off their debt was common, according to the report. Almost half of the borrowers surveyed thought so, many of them voicing complaints about the quality of education they had received. About 90 percent of those who objected to paying off their debt had attended a for-profit college.

People in default on student loans tend to think about what ought to happen, said Mark Kantrowitz, publisher of the consumer Web sites and "These borrowers place a lot of emphasis on what should be their responsibility as opposed to what is their responsibility," he said.

The report also highlights a general lack of awareness about default. Nearly a quarter of those surveyed did not know they were in default when they sought legal assistance. Almost two-thirds of respondents did not recall being contacted beforehand about the risk of default, although a few admitted that they had ignored some telephone calls and pieces of mail.

Such confusion about the process, coupled with a denial of personal responsibility, could explain why some borrowers enter default, Mr. Kantrowitz said. While the government allows borrowers whose debt burden is high relative to their earnings and family size to choose income-based repayment, he noted, many people are not aware of that option.

Automatic entry into income-based repayment is one of several reforms Ms. Loonin said she hoped would follow the report. Also, she said, the government should aim its collection efforts at borrowers with the resources to repay their loans—and borrowers should be given more than one chance to get out of default.

"We must rethink the draconian collection policies that leave vulnerable students with nowhere to turn," Ms. Loonin wrote in the report. "There are significant costs to taxpayers associated with pursuing the most vulnerable borrowers until they die."