How we’re zeroing in on student loan defaults

Good news on student loans recently came out. For the third year in a row, the nation’s federal Cohort Default Rate declined. Since a peak of 14.3 percent for borrowers who began repaying their loans in the aftermath of the Great Recession, the latest default rate declined to 11.3 percent.

Released by the U.S. Department of Education annually, the Cohort Default Rate measures the percentage of federal student loan borrowers who default on their loans within three years of leaving school. A federal student loan is reported in default once no payments have been made for 360 days.

{mosads}While recent trends are good news for borrowers and taxpayers, innovation, smart policy, and program simplification can drive default rates even lower.  Getting to a zero percent default rate is a lofty goal for any loan product — particularly for loans that are not credit underwritten or secured with collateral.  Yet, it’s an aspiration policymakers, schools, servicers, and borrowers can work together to pursue.

At Navient, we use data and consumer insights to deliver targeted outreach to improve effectiveness and borrower outcomes.  During the most recent three-year window, Navient-serviced customers were 31 percent less likely to default on a federal loan than borrowers whose loans were serviced elsewhere.

That difference is not simply a data point, it’s about real people. In 2015, 300,000 fewer borrowers would have defaulted if other major servicers performed at this level. A key factor to the success of Navient-serviced borrowers is contact.  Nine times out of 10, when we connect with a past-due federal borrower, we enroll him or her in a plan that avoids default.  Unfortunately, for those who experience default, 90 percent have never engaged with us.

More than 40 million Americans have student loans, and the needs and circumstances of these borrowers are diverse. A one-size approach does not fit all. For instance, two-thirds of borrowers who default owe less than $10,000, indicating that many of them did not complete a degree.

To meaningfully reduce defaults, we should encourage innovation and experimentation at all stages of the loan life cycle. Policies can encourage pilots to test new approaches for upfront, pre-borrowing counseling, as well as school-based assistance and servicer-based strategies to support the unique needs of non-completers.

Policymakers deserve credit for smart policies, such as the recent change in the FAFSA process, which allows earlier filing and use of prior year data to give families more time to plan. However, much more can be done to eliminate barriers to planning and repayment.

For example, we need to make it easier for borrowers to enroll in an income-driven repayment plan. Navient counselors work with struggling borrowers every day to educate them about IDR plans, but current policies mean they cannot enroll immediately. Instead, borrowers have to get off the phone and go to a separate Department of Education website to complete a complex 12-page form, and then await a response.  

Our data show this multi-step process is prone to error and a barrier to completion. An internal analysis found 72 percent of past-due borrowers we had pre-qualified for IDR plans did not submit their application. That’s even after knowing how much lower their monthly payment would be and after multiple reminders.

To help, we have made recommendations to allow borrowers with zero income to enroll in IDR plans over the phone, as well as allow multi-year enrollment tied to Internal Revenue Service (IRS) filings so borrowers don’t have to repeat this process every year. Policy changes could also eliminate barriers to using preferred communication channels, such as text messages, to reach borrowers with information about IDR plans.

Consumers facing the ever-increasing cost of college need to be empowered to make better decisions about whether and where to attend school up front before they enroll — and certainly before they borrow.

On the backend, consumers would also benefit from a simplified set of options that enable them to repay their loans in a way that meets their financial circumstances and goals.  For too many years, well-intentioned and good ideas have been layered on to other well-intentioned and good ideas. The next Congress and Administration should take the opportunity to streamline today’s complex repayment system.

With the improving economy, we’re seeing positive trends. But let’s not stop there. Working together, we can achieve these practical reforms that will create better borrower protections, steward taxpayer resources and, ultimately, get us closer to zero defaults.

Based in Wilmington, Del., Jack Remondi is president and CEO of Navient, which services student loans for 12 million customers. Learn more at Navient.com.

The views expressed by contributors are their own and not the views of The Hill.