4 ideas for a better student loan program: A common sense recipe for reform
A college education remains the single most important factor in opening doors to opportunity. Today, a record number of Americans — 30 percent of the population — have earned a bachelor’s degree, and with good reason. A recent study by Georgetown University found 73 percent of jobs created after the Great Recession went to workers with a bachelor’s degree or higher. To earn this credential, roughly 6 out of 10 bachelor’s degree recipients financed some portion of their education with student loans. For most, it’s a valuable investment. A 2016 report from the White House’s Council of Economic Advisers determined that a college degree leads to lifetime earnings roughly 15 times the amount an individual borrowed for college.
The key to achieving this positive return on investment for most borrowers is completing the college degree.
Yet 40 percent of first-time, full-time students pursuing a bachelor’s degree do not achieve one within six years, according to the Department of Education. Despite good intentions, some find themselves degreeless but in debt and, for these student borrowers, there is little or no return on investment. In fact, many who borrow and don’t complete their degrees economically fall behind their peers who never went to college at all, according to research from Navient and Ipsos.
In addition, for many borrowers, the complexity of repayment options is difficult to navigate. Even student loan experts are baffled by the unnecessary hurdles and steps created by the federal repayment system.
Fortunately, there are already solutions underway, and more that we all can get behind to improve the system for all parties, especially for borrowers.
1. More information sooner
A better approach to student loans begins before a student even submits his or her first college assignment. The Department of Education, high schools, colleges, and others should collaborate to better educate borrowers before the start of their college experience.
Students need tools and interactions that provide meaningful, actionable information about the total cost of a degree and potential economic benefits by field of study, as well as the importance of college completion.
Data from the White House’s Council of Economic Advisers shows borrowers who do not complete their degrees default at nearly three times the rate of college graduates.
Beyond emphasizing the importance of completion, we have recommended ways to help borrowers make more informed decisions about financing their college education: a degree-based financial aid package, clearer loan disclosures, and improved loan counseling. The government already gathers a great deal of information from students and their parents through the financial aid application process — information that could be used to customize loan counseling.
These solutions clearly make sense.
After all, no one would build a house after receiving a price for the foundation only; a college education should be no different.
The federal government should take action to implement policies that ensure students have access to the right kind of information at the right time — before they decide where to attend college and especially before they take out loans.
2. Simplify repayment
This brings us to the labyrinthine process of selecting a student loan repayment plan. The complexity of the current repayment system does not serve anyone well: not the government, servicers, taxpayers, and especially not borrowers. The federal system has become too unwieldy — in fact, there are currently 56 different repayment options.
The number of plans should be and can be simplified.
The introduction of income-driven repayment (IDR) plans in recent years has increased options for borrowers to pay their student loans back based on a percentage of their discretionary income. Despite the popularity of these programs, the enrollment process is too complex, resulting in borrower confusion. This complexity is made worse as servicers are limited in their ability to facilitate enrollment in IDR.
Today, servicers cannot directly enroll borrowers in IDR programs. In order to enroll, borrowers must leave their servicer’s website to go to a separate government website or complete a 12-page application. If there are any errors in the application — even a missing signature — it is rejected and the process begins again.
The process is so onerous that in an analysis of Navient-serviced borrowers, just 28 percent of the past due, pre-qualified borrowers we spoke with completed all of the necessary steps to enroll in an IDR plan, even when we sent multiple reminders. In other words, 7 out of 10 borrowers eligible for IDR programs did not enroll, even after knowing how much lower their monthly payment would be under the new plan.
Additionally, the lack of a multi-year IDR enrollment option presents borrowers with a major headache, as they currently have to reenroll annually. There have been strides in this direction, but more must be done.
To better serve borrowers in the current complex system, Navient was the first servicer to develop a specialized team to support borrowers enrolling in income-driven repayment, the first to offer loan repayment plan counseling appointments and has received awards for its enhanced consumer-tested electronic communications. We’re also developing a prototype for how technology and design could better help borrowers evaluate trade-offs such as lower monthly payments vs. faster payoff.
3. Help borrowers pay off early
Although IDR is an important tool for borrowers unable to afford higher payments, it does not solve all student loan challenges. While these programs can offer important relief to those in transition or financial hardship, borrowers should understand how IDR impacts loan repayment in the long term.
IDR lowers a borrower’s monthly payment, but it can also stretch out the term of the loan — from 10 years to 20 or 25 years. Not only will borrowers in these plans add another decade to their payments, they will usually pay more interest. For many, despite making the required income-derived monthly payments, the loan balance continues to grow, since the payment is less than the interest accruing — an understandable cause of discouragement to many.
And while these plans offer the possibility of future loan forgiveness, for workers outside of public service, federal law assesses taxes on any amount ultimately forgiven — a particularly irrational outcome for struggling borrowers.
For individuals in a financial position to pay more than their standard repayment each month, they pay their loans off faster, and ultimately pay less.
This kind of information can be better communicated to borrowers with common sense reforms.
For other consumer finance products, borrowers are dissuaded from stretching out repayment terms. For example, today, credit card users receive statements showing the total cost they will incur if they pay only the minimum amount due. As policymakers promote alternative repayment options, similar disclosures geared for student borrowers enrolled in federal income-driven repayment plans could help consumers understand how interest impacts the total student loan balance, and empower them to make more informed decisions about which repayment plan works best for them in the long-term.
4. Encourage borrowers to engage with their loan servicers
Finally, borrowers should be encouraged to engage with their servicers. And servicers should be encouraged to innovate new ways to interact with borrowers.
For some borrowers, student loan debt can be especially daunting. The good news is that borrowers can turn to their student loan servicers for help to navigate the complex repayment options. The key is contact.
Our data shows that when we connect with struggling federal borrowers, nine times out of 10, we can help them enroll in repayment plans that enable them to avoid default.
Our commitment to engage with our borrowers is the main reason our customers are 37 percent less likely to default than their peers. Our success is replicable, and, with federal policies aimed at encouraging contact, combined with program simplification, we’re confident all servicers can help even more borrowers avoid the long-term consequences of default.
Furthermore, at Navient, we continuously experiment with new approaches, messages and technology to continually improve customer experience and results.
Encouraging contact, educating borrowers on the benefits of paying off early, simplifying the repayment process, and giving borrowers better front-end information are common sense solutions that can have a significant impact on the millions of Americans working to repay their student loans. Student loans should not be a political issue. Let’s work together to make the process easier and more manageable for more Americans.
Jack Remondi is president and CEO of Navient. Based in Wilmington, Del., the company supports 12 million customers on the path to student loan success.