School of Public Policy Capstones

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Starting in 2008, major changes to the federal student loan system have increased the generosity and flexibility of repayment options. In theory, these efforts should reduce the effect of the business cycle on default patterns. However, since 2007, student loan default rates have persisted in rising. In response, several student loan advocates have proposed replacing the standard program with the income-based repayment program as the automatic repayment option. This stakeholder analysis explores the potential of this proposal from the perspective of borrowers, academic institutions, and student loan servicers through a literature review of empirical research of student loan default behaviors, quantitative analysis of cohort default rates, and exploratory interviews. This research does not strongly support the broad statement that automatic enrollment in income-based repayment would eliminate the problem of student loan defaults. However, of all repayment options, the income -based is best suited to meet the needs of financially stressed borrowers, and the stakeholder analysis uncovers some practical opportunities to leverage current infrastructures and institutional needs to improve outcomes. This analysis recommends that the Department of Education consider piloting two default reduction efforts in order to promote income-based repayment programs: (1) partner with schools that have the largest number of associated defaulted loans to develop targeted counseling services prior to loan disbursement and (2) partner with servicers to test the effectiveness of making the income-based repayment program the automatic option upon entering into repayment. Though the income-based repayment program will not fully solve the problem of the rising burden of student loans, it provides a promising structure to reduce the financial burden of higher education debt.

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