Profiles in Delinquency: How Student Loans Become Unmanageable Debt

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2 Introduction < 2 > Living on the Edge of Default In the quest to achieve the American Dream, an education is one of the most important tools a person can acquire. Ironically, the cost of getting that education can create as many obstacles as it does opportunities. Student debt in this country has reached an all-time high. Growing steadily over the past decade, the nation s $1-Trillion student debt burden has financial implications that extend far beyond student borrowers. As an entire generation s discretionary spending virtually disappears, it causes an economic ripple effect impacting families, government and municipalities, and businesses alike. Currently, more than 40 million Americans hold student debt. The population with student loans is actually greater than the entire population of Canada, Poland, North Korea, Australia and more than 200 other countries. 1 Colleges and universities are feeling the effects as well. Reduced alumni giving, declining admissions, and a weakened reputation in the community are just a few of the casualties resulting from this towering debt. Perhaps worst of all, institutions could face federal penalties for rising Cohort Default Rates (CDR), and put future federal funding for financial aid in jeopardy. After 50 years of helping students successfully finance their higher education, the nonprofit organization American Student Assistance (ASA) has found that the best way to combat the crisis first requires combating the status quo belief that default is the problem. Too often the perfunctory approach to understanding rising debt is to focus only on default statistics, like CDR. However, ASA has found that student loan delinquency is actually a more significant problem than default and that course-correction can best be achieved by targeting the cause of the issue, not merely the symptom. The reality of student debt is that not all delinquent borrowers are the same. ASA s work with over a million student borrowers has revealed that people who are behind on their loan repayments often fall into one of six different categories. Each type of student borrower comes with a unique set of circumstances and challenges as well as unique opportunities to steer them back onto a path to successful repayment.

3 The Hand Raisers < 3 > Hand Raisers? Hand Raisers: This is the type of borrower who would be mentioned in sentences that begin, In a perfect world Hand Raisers are aware of their debt situation, but they are not entirely sure of their repayment details and obligations. I went into sticker shock when I saw what my monthly payments would be. When I began looking for help regarding payment options I found that there were a lot of ways to lower my monthly payments right off the bat. 2 Jessica, Boston, MA Upon completion of their degree, Hand Raisers are ready and willing to begin all the necessary preparations to ensure their future success. From resume writing and job seeking to taking control of their financial obligations, Hand Raisers maintain a feeling of self-control. Accessibility to information is the greatest obstacle Hand Raisers face. They know there are resources to make repayments easier to navigate; they just need to find them. Despite the best intentions, it can be difficult for any borrower to know where to start. Information Infusion. There is an abundance of opportunity to set Hand Raisers on the path to successful repayment. Fortunately, helpful financial information is readily available, and it is easy to access once a person knows where to look. Active engagement, often in the form of one-on-one counseling, provides Hand Raisers with the tools needed to develop a plan that best suits them. With Hand Raisers, awareness and desire are present, they just need to be guided in the right direction.

4 The Blindsided < 4 > Blindsided? Blindsided: The Blindsided don t lack motivation. They lack awareness. Like all graduates, they re thrust into a world of job hunting, moving, adjusting to the real world beyond college, and of course, debt repayment. They may not know or fully understand the repercussions that delinquency or default can have on their long-term goals and often they do not know where to begin, or how to manage their loan repayment. Eager to get an education, the Blindsided may be all too ready to fill out forms and sign their name on anything, thinking they re getting financial aid. To the Blindsided this means some or all of the money they receive is a form of assistance or a grant that will not require repayment. These borrowers are caught completely off guard by the obligation to repay their loans. I really had no idea of the true cost of college. I just signed what I needed to sign and had no idea how much in loans I was taking out. 3 Heather Harden-Stone, Environment Studies student, New York Understanding Options. Information, options and a little guidance can be all that s needed to redirect the Blindsided and move them from delinquency to stable repayment. Unemployment deferments and income-based repayment are two programs that may be unknown to the borrower, but can mean the difference between ruining their credit score and successful repayment. Because they are not prepared for the payments now due, and haven t properly budgeted for them, the Blindsided quickly fall into delinquency. Very often, these borrowers actually believe that the only option they have is to default on their loans, unaware of the life-long ramifications involved.

5 The Overwhelmed < 5 > Overwhelmed? Overwhelmed: Student debt is a perpetual game of catch-up then fall-behind for the Overwhelmed. They will slip from 30 to 60 to 90 days delinquent, then catch up, only to slip behind once again. Due to a variety of factors including unemployment and underemployment their student loan repayment has not been a priority. A recent study by Northeastern University found that 36.7% of 2013 college graduates were working jobs that didn t require a college degree.4 Heather Harden-Stone, Environment Studies student, New York Under favorable conditions, the Overwhelmed would choose to repay their debt and put it behind them. They understand the importance of repayment, and are fully aware that their student loan debt won t go away. But many borrowers like the Overwhelmed view a loan payment as if it were a cable bill or other utility something you can put off or skip without much consequence. Fueled by the frustration and disappointment that comes with trying to find a job in a recovering economy, or falling into the rut of underemployment, the Overwhelmed push their student loan payments lower and lower on their to be paid list. One Step at a Time For the Overwhelmed, affecting behavior change can be as simple as establishing short- and long-term goals. Frequently, they are unaware of income-based repayment options that can alleviate frustration surrounding under- or unemployment. Additionally, various deferments can give them the breathing room necessary to re-prioritize their finances and put a long-term repayment plan in action.

6 The Small Debtors < 6 > Small Debtors? Small Debtors: As a whole, the Small Debtors make up one of the larger groups of student borrowers. Their loans may represent only one or two semesters at college, with student loan balances totaling as little as $1,000. Small Debtors determined early on that they were not academically or socially prepared for college, and withdrew. But experience has shown that the earlier a student withdraws, the higher their risk of delinquency. Nearly 30% of college students who took out loans dropped out of school, up from fewer than a quarter of students a decade ago. 5 Without a degree the Small Debtors have reduced their earning potential. Unemployed, or working lower paying jobs, they often regard their college experience as a waste of time, and that they shouldn t have to pay this money back. The Small Debtors don t understand that if they enter default, the damage done to their credit will only compound the obstacles they face when buying a car or home, saving for retirement, or heading back to school at a later date. An Ounce of Prevention The Small Debtors would benefit from having greater knowledge and understanding of their loans from the very beginning. By fully appreciating the obligations they are taking on, and the impact student loans will have on their future finances, Small Debtors can make more informed decisions about their college career. At the same time, counseling the Small Debtors about repayment programs can open their eyes to a host of options they may not be aware of and show them how quickly and effectively they can rid themselves of their debt.

7 The Running Scared < 7 > Running Scared? Running Scared: Hopeless. That s the overwhelming emotion felt by many of the Running Scared. They consider their debt as an insurmountable obstacle. They don t believe that there is a solution to their problem, so they are unwilling to even broach the subject at all. Consequently, they re ignoring the warning signs of credit damage, collections or even potential default. I know I have a ton of loans, but there s not really much I can do about it, right? There s not really much point in talking about it. It is what it is, you know? 6 Jill, Nursing Student, University of Massachusetts The Running Scared don t genuinely believe that the problem will go away if ignored, but they do experience some degree of relief by putting it out of their mind as much as they are able. Solutions Not Scare Tactics. Establishing contact, and beginning a meaningful dialogue, is the most challenging obstacle faced in initiating course-correction with the Running Scared. Trust is difficult to achieve because most calls they receive are likely to be collectors offering a heavy hand, not a helping one. The Running Scared do not believe that anyone is on their side. A neutral voice offering plainspoken, honest advice along with understanding and compassion can bring down their guard, and go a long way towards reversing their dilemma.

8 The Cliff Dwellers < 8 > Cliff Dwellers? Cliff Dwellers: The Cliff Dwellers are, quite literally, a group of borrowers living on the edge of default. They ve gone beyond 30, 60, and 90-days delinquent and are rapidly approaching 270 days past due. They are on the brink of disaster. Cliff Dwellers may or may not know how close they are to default; most certainly they do not know how quickly their options vanish once they go over the default cliff. As of FY 2012, about $52 billion in student loans that had been current became delinquent in the first half of the year, the highest first-half total recorded since The Cliff Dwellers live with daily collections calls and notices. In the later stages of delinquency, they become harder and harder to reach because communication has become outright confrontational. Breaking through is the biggest challenge in reaching these borrowers. Never, Ever Give Up. Cliff Dwellers are almost out of time. But it s that almost that everyone will need to focus on. At this juncture, the biggest imperative is getting them to understand that it s not too late, and there are still some realistic and helpful options available to them. But they also need to realize that the window of opportunity is quickly closing, and there are virtually no options once they are over the cliff of default. This is admittedly one of the hardest groups to get through to but it is important to keep trying to reach them as long as options are still possible.

9 Summary < 9 > Shifting from the mindset of a collections officer, to a student loan counselor. Upon evaluating the entire student debt landscape, it becomes clear that delinquency and not just default is a problem that must be combated early and aggressively. During the beginning stages of delinquency, or preferably before delinquency even happens, conditions are most favorable to prevent borrowers from sliding out of control. Profiles of Delinquency Armed with an awareness of the six most common types of student borrowers, there is an opportunity to successfully tailor an approach to help them understand and manage their debt. While each type of borrower faces different emotional, psychological and practical obstacles, they all can benefit from an independent information resource, and a proactive rather than reactive action plan. Hand Raisers Blindsided Cliff Dwellers Overwhelmed Small Debtors Running Scared

10 SALT: A Responsible Borrower Program < 10 > After 50 years of working with over a million student borrowers, the nonprofit organization American Student Assistance (ASA) created SALT, a comprehensive approach to responsible borrowing designed to empower college students and alumni to confidently approach, manage, and pay back their student loans while gaining financial skills for life. WITH SALT, COLLEGE ADMINISTRATORS CAN OFFER: Well-timed, neutral financial education resources, advice, and self-paced courses designed from the student s point of view Live one-on-one counseling by trained advisors who can answer the students questions objectively and advocate on their behalf Easy-to-use tools that help students and alumni monitor and manage their loans and payments online As a leader in responsible borrowing, we ve taken our knowledge of what works and rolled it into one powerful program. SALT incorporates the best practices ASA developed to keep more than 93% of the loans it manages in good standing and puts them to work for your students. CONTACT SALT david.snow@asa.org

11 References < 11 > 1. McKarthy, Kyle. 10 Fun Facts About the Student Debt Crisis. The Huffington Post. Web. Jan Jessica. Student Loan Horror Stories. Boston.com. Web. Dec Harden-Stone, Heather. Student Loan Horror Stories. CNNMoney. Web. Oct Luhby, Tami. Recent College Grads Face 36% Mal-Employment Rate. CNNMoney. Web. June Nguyen, Mary. Degreeless in Debt: What Happens to Borrowers Who Drop Out. American Institutes for Research. Web. Feb Jill, A Nursing Student. University of Massachusetts. Personal Interview. Jan Kirkham, Chris and Shahien Nasiripour. Student Loan Defaults Surge To Highest Level In Nearly 2 Decades. The Huffington Post. Web. Sept American Student Assistance. All rights reserved. SALT, SALT logo, American Student Assistance and ASA are trademarks of American Student Assistance.