Report Shows How Colleges Lower Student Default Rates Through Loan Forbearance

Jun 11, 2018

Outstanding student debt in the U.S surpassed $1.5 trillion this year, and the percentage of students defaulting on their federal loans has been trending upward.

That might not be reflected in the default rates of many colleges around the country though because many of their students are in forbearance. That means the loans are still active, even though the students are temporarily not paying.

A recent report from the Government Accountability Office alleges that some colleges are trying to mislead the federal government by pushing students into forbearance. The report does not name any colleges, but it documents the practice at both for-profit and private non-profit colleges. 

Congresswoman Rosa DeLauro of Connecticut requested the report. She says many colleges have been misleading the federal government in order to maintain federal funding. “They do not want to raise any red flags at the Department of Education about their default rates. You have the consultants who move people into what they call forbearance.”

Ranking member Rep. Rosa DeLauro D-Conn., questions Education Secretary Betsy DeVos at a House Committee on Appropriations subcommittee hearing on Capitol Hill in Washington in March.
Credit Pablo Martinez Monsivais / AP

Forbearance allows someone with student loan debt to stop making their payments temporarily, but the loan continues to accrue interest. The GAO report says that they can end up owing 17 percent more interest in forbearance than in a standard plan.

Credit Courtesy of GAO

The GAO found that colleges hired consultants who lied to borrowers about what their options were. DeLauro says some of those consultants went so far as to intimidate borrowers into entering forbearance.

“Look, we had consultants who were threatening that the government would take people’s food stamps away, their supplemental security income, if they default on their loans—that’s false, there’s no basis in fact. It’s a scare tactic.” Some consultants even offered borrowers $25 gift cards in exchange for choosing forbearance.

Cody Hounanian, the program director at Student Debt Crisis, a non-profit organization that helps indebted borrowers, said, “We interact with student loan borrowers directly all the time. They’re coming to us looking for help, and what they’re really asking for is called an income-driven repayment plan. You know, a long-term solution that helps lower your payments based on your income. And we’ve spoken to hundreds of folks who are in forbearance and deferment who had no idea that they even had another option.”

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The GAO report says that coercing people with student loans into forbearance is not illegal, but the report recommends that the Education Department hold schools with unusually high forbearance rates accountable. They say doing so would have saved the federal government $2.7 billion in grants that went to those schools between 2016 and 2017. In response, the department says the problem should be addressed by Congress. DeLauro says she’s working on legislation to do that.