Colleges Skirting Regulations by Encouraging Delays on Student Loan Payments

It is no secret that the United States is heavily bogged down with student debt. A recent Federal Reserve study on debt showed that there more than 44 million Americans with student debt. The tally for all that debt is now almost $1.5 trillion in total student debt.

Now a new report from the U.S. Government Accountability Office is suggesting that universities and colleges are encouraging former students to postpone repaying those loans. The report notes that current federal law has it where schools could become unable to participate in federal student aid programs if a significant percentage of their borrowers default on their student loans within the first 3 years of repayment.

According to the Government Accountability Office, some schools have hired consultants who have encouraged borrowers with past-due payments to put their loans in forbearance. This effectively allows borrowers to temporarily postpone payments, which could skate some of the rules that might prevent their college and university from being outside of the expectations.

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If the practice seems a bit shady, it probably should. The move would protect the institution from funding restrictions for student loans, but the move would also increase the borrowing costs for the students over time.

The report showed that 5 of the 9 selected default management consultants, serving 800 of roughly 1,300 schools, had instances of the practices. The end result is much higher interest payments over time. The report said:

Based on a review of consultants’ communications, GAO found four of these consultants provided inaccurate or incomplete information to borrowers about their repayment options in some instances. A typical borrower with $30,000 in loans who spends the first 3 years of repayment in forbearance would pay an additional $6,742 in interest, a 17 percent increase. GAO’s analysis of Department of Education data found that 68 percent of borrowers who began repaying their loans in 2013 had loans in forbearance for some portion of the first 3 years, including 20 percent that had loans in forbearance for 18 months or more. Borrowers in long-term forbearance defaulted more often in the fourth year of repayment, when schools are not accountable for defaults, suggesting it may have delayed—not prevented—default.

Additionally, the GAO report suggested that statutory changes to strengthen schools’ accountability for defaults could help further protect borrowers and taxpayers. The GAO report additionally said:

As of September 2017, $149 billion of nearly $1.4 trillion in outstanding federal student loan debt was in default. GAO was asked to examine schools’ strategies to prevent students from defaulting and Education’s oversight of these efforts.

Some economic watchers have pointed to the ongoing leverage effect that student loans are having on limiting the economic participation prospects for adults who exit undergraduate and more advanced degrees with large student debt burdens. It’s hard to buy a house, take vacations, buy cars and make other decisions if you have a steady $250, $500 or $1,000 in monthly outflows per month just trying to work off your student debt.

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