Pay what you can after graduation

Why We Don’t Repay Our Student Loans

College students can ace every math class without having a clue how they’re paying for them.

And then, when offered help in repayment, they think it’s a scam.

Two analysts tried to figure out why. Led by a former Republican staffer and federal student loan expert, a think tank called New America interviewed dozens of student loan borrowers of all ages, incomes, and degrees about topics like postponing payments, wage garnishment, and income-based repayment plans to find out how knowledgeable the borrowers were about the kinds of debt they were in.

Nearly 60 people from six major cities participated, and while they were “demographically diverse,” at some point all of them had struggled or stopped paying their student loans altogether.

The feedback the researchers received was alarming. Some students didn’t know that interest accumulates over the life of the loan, and some figured they could just stop paying for a while if other bills took priority.

Here are three key findings from the study, and one lesson that can be applied for future students…

1. Students really have no idea how much a college degree costs.

They don’t understand what they’re  signing up for when they’re 18, and they still don’t understand years later when they graduate. Many participants said they felt led on or pressured by student financial aid offices to take out a loan, without considering they might not get a job in that field when they graduate — or that they may not graduate at all.

One borrower quoted in the study said she didn’t realize that the interest began building up while she was still going to school. (This is only true for unsubsidized student loans, which is why you should always take the full subsidized amount available first.) Five years later, she was shocked at how much she owed.

Several others said they didn’t know they would still be charged for the degree if they dropped out or didn’t finish college. Despite mandatory “entrance counseling” for student loans, many students don’t understand the most fundamental things about them.

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2. Student loans take a backseat to other bills.

Would you rather pay for Netflix and phone service, or an increasingly high student loan bill? Many of the borrowers believe the increasing interest and constant phone calls are the worst things that happen for not paying off your student loan.

There’s nothing to take away the way there is with a car loan or a house. If you don’t pay those bills, they’re repossessed or go into foreclosure. And if it comes down to shutting off cable or paying off a loan, the borrowers were nearly unanimous in which one they’d choose.

“I just don’t want to give up some things,” said one participant from Atlanta.

3. Students resent their loans.

This one seems obvious, yet it is an often overlooked reason why students refuse to pay back their loans: They hate them. Many feel that paying for something they got years ago and don’t use isn’t fair.

“Right now I’m working retail, which I could do if I didn’t have a degree. So what is the point?” asked one participant from San Francisco.

A possible solution…

The researchers spent a long time explaining to participants what income-based repayment plans are and how they worked. It was originally supposed to be a focal point of the study, but it turned out most borrowers had never heard of it.

Basically, income-based repayment ties your debt to what you’re making, under the assumption it will take a while to get a good-paying job and be able to afford your loan. As your pay increases, so do your payments. And if you’re struggling, you get to stop making payments for a while without penalty. Stick with it for 20 years, and the government forgives the rest of the loan.

When the researchers tried to explain the program, though, borrowers just didn’t get it. “After the moderator explained how IBR worked, participants were asked for their reactions,” the report says. “They were very confused by the plan, asked a lot more questions, and then still were confused.” Some of the reactions…

  • “Some thought that a plan with loan forgiveness sounded too good to be true, and that there must be a catch.”
  • “Others thought the plan did not really provide benefits because interest could increase their loan balance…”
  • “…or that making payments for 20 years was too much time to make loan forgiveness a meaningful benefit…”
  • “…or that their incomes would rise later and they would resent having to pay an increasing student loan bill…”

The study concludes that explaining IBR was pretty much a waste of time: “Few meaningful quotes came out of this discussion because participants were primarily confused.” It also blames the government for making the rules so confusing, and for poor marketing of IBR:

Over the course of the six focus groups, New America worked closely with FDR Group to modify the moderator’s guide in order to communicate the plan as simply as possible. But because the benefits are opaque and hidden in a formula, explaining the plan proved extremely difficult.

That a program elicits suspicion and confusion from the group of people it is intended to help is extremely troubling. Policymakers should consider what changes to the formula and advertising materials must be made to encourage struggling borrowers to enroll in the plan.

IBR won’t solve all the problems brought up by participants in the study — especially if they can’t figure out how it works. But it can help students who are currently behind on their student loans by lowering their monthly payments, and forgiving the remainder of the loan after 20 or 25 years depending on when the loans were taken out. Certain professions can get forgiveness within 10 years.

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