Student Loan Dodgers

If you leave college with student loans, you’re not alone. Approximately two-thirds of all college financial aid packages include student loans in one form or another. The sharp increases in the cost of college education mean that many students need to take student loans or borrow more than they planned in order to finish college.

The double-digit increases in the year-to-year costs of college tuition means that as students borrow more to cover their educational expenses, the risk of student loan defaults increase. The default rate among FFELP lenders is relatively low – less than six percent. The rate of default among borrowers in the FDLP is higher, at points exceeding 20 percent.

Typically, lenders receive money from collections on defaulted student loans. Lenders want to help students avoid default, but they needed a mechanism to shift their revenues from defaulted loans to default avoidance in order to make that happen. Several years ago, Congress allowed the US Department of Education to experiment with Voluntary Flexible Agreements (VFA), which allow the D.O.E. and a few test lenders to modify their existing loan agreements and provide revenue for lenders that implement successful default avoidance strategies.

One of the strategies being employed by the lenders is a change in the communication between the lender and borrower during the six-month deferment period. Typically, lenders don’t communicate with borrowers in this period, waiting instead until the student loan has become delinquent to contact the borrower. By working with borrowers in the deferment period before any payments are due, the VFA lenders have been able to reduce delinquency and default rates on their student loans by nearly 50 percent, and the lenders have been able to shift some of their revenue from collections to default avoidance.

Most federally backed lenders don’t have VFAs. The best strategy to avoid defaulting on your student loans is to understand your loan terms and talk with your lender if you think you will not be able to begin loan payments as agreed. Your lender may have some flexibility in extending your deferment or may be able to help formulate a plan to avoid default on your student loan obligations.