By Balaji Rajan, CEO of IonTuition
Since 1990, I have collected and serviced student loans. Helping borrowers with student loan repayment was enjoyable while Federal Student Aid (FSA) established a “reasonable and affordable” payments program. There were landmark changes on collecting debts in the U.S. including administrative wage garnishment, Treasury offset, litigation, and even bankruptcy reform. Programs like Income Contingent Repayments, Consolidation Loans, and Loan Rehabilitation, and 30 others were all introduced in just the last 15 years.
Student Loan Borrowers Need Time to Build Wealth
Over the years, I found that student loans improved in repayment rates as they aged, contrary to other consumer debt. For this reason alone, lawmakers and the Education Department should increase the grace period from six months to three years. This improves borrowers’ ability to pay. Borrowers are more likely to receive pay increases, gain financial stability, build wealth, and frankly, understand planning finances and credit.
The Education Department has gone the other way. It increased the CDR measurement period from two years to three years seemingly to penalize for-profit colleges. The unintended consequence was that it impacted all colleges. This increased the pressure on new graduates to begin repayment and they struggled mightily.
A Longer Grace Period Averts Student Loan Defaults
Between 4Q2017 and 4Q2018, the total defaulted loan portfolio increased from $84 billion to $164 billion!1 During that same period, collection agencies for FSA still entered over $12 billion into repayment through Consolidation and Loan Rehabilitation programs. More than half of these debts were older than five years and they were defaulted!
Putting the data aside, it’s common sense. We should implement rules where interest will not accrue during this extended grace period; students must keep their contact information updated with the Department or ED should get updated contact information from Treasury, the DMV, or the National Directory of New Hires at Social Security. If a student does not begin repayment after three years, the loan should be placed in default within 90 days of notification and some due process to accommodate life issues.
This longer approach of easing borrowers into repayment gives them time to build a career and will increase repayment rates, reduce forbearance, reduce defaults, and promote borrower financial wellness. Plus, taxpayers won’t need to bear the burden of cancellation and forgiveness. Perhaps, even politically motivated calls for cancellation could die off.