Three months can make all the difference for vulnerable student loan borrowers

By suspending student loan repayments and interest until May 2022, President Biden is giving 90 extra days of breathing room to millions of vulnerable student loan borrowers navigating Omicron and inflation — even as they are putting their investment in higher education to work. After nearly two full years of COVID-relief-driven student loan repayment moratorium, these short three months are vital for borrowers managing this extra bill on their household P&Ls.

President Biden, Department of Education Secretary Miguel Cardona, loan servicers, and all of us have another difficult problem on our hands: student loan borrowers who will inevitably fall into delinquency (missing one payment) or default (missing nine consecutive payments) by early 2023. In fact, every year, 1 million borrowers default on their student loans — enduring a series of cascading negative effects that effectively write them out of the economy: low credit scores, high-interest credit cards, and auto loans, and rejection by banks for mortgages and business loans. Most galling, being barred from making new investments in education through loans — essential for reskilling.

This is not a new problem. When the federal government enacted the repayment moratorium in March of 2020, millions were already in delinquency and default — a number that now stands at 8 million borrowers.

Despite trillions in COVID relief, this same group will still be fighting out of default when payments begin again in May.

Macro-economic indicators and political reality moved the White House toward another extension. Not as much on the radar is how critical three months can be in the life of a student loan borrower trying to build wealth while saving for retirement.

Over the past two years, we have examined existing research and created some of our own to understand the reality of these student loan holders. In partnership with Equifax, we dissected the student loan journey of almost 900,000 borrowers between 2010 and 2019 — to understand key drivers of student loan delinquency and default.

We found that, once out of school, as little as three months can be the deciding factor in negating this investment in education. For example, loan servicers are required to begin reporting delinquency to credit bureaus after three consecutive missed payments — or 90 days. These bad marks take years to fall off. It is around 90 days when loan servicers step up collection activities with calls, letters, and remediation offers like deferment, forbearance, or income-driven payment plans. Once in default, borrowers are required to make three consecutive full monthly payments on their loan before it can be consolidated — one step toward rehabilitation.

Most assume borrowers in trouble take on more debt than they can handle — say, a person with a modest salary stumbling while carrying $100,000 in loans. Reality is different. High debt holdres know how to make the system work for them. Data show these borrowers are like us: decent salaries, pathways to new job opportunities when needed, access to information, and extra resources like savings or family to bridge bad times.

Our study shows defaults mostly happen among those who have not completed their degrees — often those least able to withstand economic shocks, with loans of less than $10,000 and an average monthly payment of $75. Our data showed that the default rate for loans less than $2,000 was 182 percent higher than for loans exceeding $10,000.

Those most susceptible to default are people of color, women, and non-completers struggling with variable economic conditions, pay disparities, or unforeseen events like a medical emergency or major repair. Black people default at a 220 percent higher rate than the average loan holder. Women default at a 14.3 percent higher rate than men. And those who don’t finish have a 338 percent higher default rate than those who graduate from four-year colleges. 

Difficult, but — we think — reversible statistics.

Our research shows five keys to moving borrowers out of danger of default and toward creating wealth:

1) Graduating;

2) Connecting your major to a career that is fulfilling and pays a living wage;

3) Selecting a manageable repayment plan;

4) Building a higher credit score;

5) Making plans and strategic investments — like buying a home — to propel into the middle class.

From the 2008 Financial Crisis to now, these five steps are tough to reach for millions of Americans.

President Biden’s three-month extension coincides with the lifetime-defining choice high schoolers are making now: deciding where to attend college this fall. Around 90 days from now — May 1 — is College Signing Day in America. Students choose their college, as their families fill out financial aid forms, revealing how much borrowing is needed to access higher education. For 45 million current student loan borrowers this big education investment can pay dividends toward the American middle-class. Or thousands of dollars in student loans emerge as the albatross that kills a person’s chances of ever creating long-term wealth.

The Department of Education, loan servicers, colleges, and college access organizations are supporting current borrowers’ return to successful repayment. Now, we all must endeavor to understand and help student borrowers navigate toward a solid financial future.

Kahlil Byrd (KB) is co-founder and CEO of Shur, a public-benefit corporation focused on preventing student loan defaults.

Lea M. Crusey is co-founder, president, and COO of Shur, and has worked in education policy at the local, state, and federal levels. Both KB and Lea took out student loans for their post-secondary education.