Some consultants hired by colleges to reduce student loan default rates are giving advice to borrowers that increase their loan repayment costs or risk of default. That’s according to a Government Accountability Office (GAO) report out Thursday.
Many colleges hire consultants to counsel students struggling to repay their education loans. That’s because schools can lose access to federal financial aid if too many borrowers default during their first three years of repayment.
The GAO report found some consultants manipulate three-year default rates by pushing students into forbearance, which increases the long-term cost of loan repayment.
How student loan default consultants are failing borrowers
Colleges depend on students having access to federal financial aid to afford tuition. If too many borrowers default within the first three years of student loan repayment, the U.S. Department of Education can sanction the college and stop offering federal financial aid to its students.
To avoid triggering those sanctions, many colleges hire consultants to give advice to students in danger of default. The GAO took a close look at the advice given by nine default management consultants serving around 800 schools.
It found that four of the consultants provided inaccurate or incomplete information to borrowers; the other five routinely steered students toward forbearance when other approaches to repayment might have been more beneficial.
In many cases, consultants failed to explain repayment options to students that could prevent default, such as income-driven repayment plans. Some consultants also mailed forbearance applications to students who were past due on their debt, even though the students didn’t request the forms.
One consultant incorrectly told students a verbal request for forbearance could be processed within five minutes. Another wrongly told students that federal benefits such as food assistance could be lost due to default, and yet another offered gift cards to students who put loans into forbearance.
While forbearance can prevent default by putting payments on pause, it also increases total repayment costs; interest continues to accrue while certain loans are in forbearance.
Meanwhile, students who had their loans in long-term forbearance defaulted more often during their fourth year of repayment. While 1.7% of borrowers defaulted in the first three years of repayment during the time period the GAO reviewed, 9.4% defaulted in the fourth year.
Although it’s commonly used, forbearance isn’t a long-term solution for students. Sixty-eight percent of borrowers who entered repayment in 2013 placed loans into forbearance within three years, the GAO found. That group includes the 20% of borrowers who put loans into forbearance for at least 18 months.
As the chart below shows, pushing students into forbearance significantly reduces the risk of default during the first three years:
The GAO report suggests consultants are more concerned with reducing default rates for the school, rather than providing long-term solutions for students.
How are borrowers affected by poor advice?
When consultants provide incomplete advice or steer students toward forbearance, three things happen:
- Students face a bigger risk of default in the future.
- Students pay more in interest over the life of the loan.
- Default rates can’t be accurately measured.
The Department of Education imposes sanctions on schools with high default rates. With schools manipulating default rates, the government’s oversight is weakened. This means students could be blind to some low-performing educational institutions.
Further, borrowers might not be getting the guidance they need to avoid default. Forbearance could simply be delaying it. But a default can be devastating; it could destroy a borrower’s credit, lead to wage garnishment, and lead to a loss of federal benefits.
Borrowers who put loans into forbearance also unnecessarily pay more in interest over the life of their loans. The chart below shows additional costs of putting loans into forbearance.
What policy changes could be made to protect borrowers?
In the wake of the new report, some government officials are calling for policy changes to better protect students and hold schools accountable.
“The GAO’s report reveals an astonishing lack of accountability and transparency in the default management industry that results in borrowers owing thousands of dollars in additional debt and facing a greater risk of default,” Rep. Mark Takano, D-Calif., said in a press release. “The Department of Education must use the full extent of its authority to rein in abusive firms and protect student loan borrowers and taxpayers.”
The report recommended that the Department of Education change the way in which default rates are calculated to get more accurate measurements. Changes could include revising calculations to account for borrowers spending time in forbearance or adding additional accountability measures.
The GAO also urged Congress to require schools and debt management consultants to provide complete, accurate information about borrower options.
However, not all agree that the GAO report clearly indicates a need for change. James Manning, acting chief operating officer of the Department of Education, criticized the small number of consulting firms included in the GAO’s study, noting that just nine of 48 consulting firms were included, and only a small number of consultants and borrowers were interviewed.
Manning also objected to GAO’s criticisms that consulting firms only sent forbearance applications to borrowers without disclosing other options to students.
“While critical of a few consultants’ practice of sending forbearance applications to borrowers, GAO fails to acknowledge that the application itself provides an opportunity for borrowers to learn about other repayment options,” Manning said in a letter responding to the study.
How can students protect themselves?
Students need to be proactive in researching their options for student loan repayment; they cannot rely on just the advice of consultants or loan servicers.
Use trusted resources such as the Department of Education to learn about student loan repayment options. You could also check out our guide to avoiding student loan default. It’s your money at stake, so make sure you understand the long- and short-term implications of any repayment decision you make.
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