The Government’s Plan to Reduce Student-Loan Defaults Helps Borrowers Who Need It Least

As more student loans head into default the federal government laid out a plan to stem the tied, and prevent a financial disaster reminiscent of the late 2000’s.

The problem is… It’s not working.

“The Obama administration has sought to stem a surge in Americans defaulting on their student loans by slashing borrowers’ monthly payments through so-called income-based repayment plans.

Enrollment in the plans—which set borrowers’ bills as a small percentage of their incomes—has soared over the past three years. But new research shows there’s a flaw in the administration’s strategy: The program isn’t reaching many borrowers who need it the most.

A study published Tuesday by the Urban Institute, a left-leaning think tank, shows that the programs have only modestly reduced defaults. The reason: Borrowers who have enrolled in the plans are the least likely to default in the first place.

These borrowers tend to have higher student-loan balances and credit scores than those who remain in standard repayment plans, the study shows. That suggests they attended well-regarded colleges—which charge higher tuition than less-regarded ones—and graduate, medical and law schools. Such borrowers are much more likely to be employed and earning high salaries than those with lower credit scores and balances.

The implication is income-based repayment is largely helping white-collar workers while failing to reach a big chunk of the college dropouts and graduates of for-profit schools and community colleges, who studies show are most likely to default.”

As with many government programs it appears that something was designed with good intention but fails to reach the people who need the program the most. And as a result many low income college dropouts, and blue collar workers will suffer financial consequences. A better solution is educating them on their options as they enroll in college.

Source: Washington Post

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Sara Morris
Sara is the director of outreach at Affordable Online Colleges
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