Can Student Loan Deferments Prevent Defaults?

Tim Goral's picture

A growing number of nonprofit colleges are hiring companies that specialize in “default management” to reach out to former students who are behind on federal loan payments. These firms often recommend postponing payments through either deferment or forbearance.

One of these companies, Boston-based American Student Assistance, says 47 nonprofit schools have signed up or began contract negotiations for its default-prevention services over the past six months, bringing its total roster to 140 colleges. Student-loan servicer Edfinancial Services reports a 120% increase in nonprofit colleges signing up since last year, to 51 schools. And lender Sallie Mae says it has had a jump in colleges asking for help.

Recent data suggests that more borrowers are opting to delay payments, with or without default-management programs. Fifty-one percent of student loans were in deferment, forbearance or belonged to students still in school as of March 2012, up from 44.3% a year prior, according to data released by credit bureau TransUnion earlier this year.

Borrowers have to prove an economic hardship, like unemployment, to qualify for a postcollege deferment or forbearance. In deferment, interest is paid by the federal government for certain loans; in forbearance, the interest on all loans accrues in the borrower’s account.

Until recently, default management was mostly used by for-profit colleges trying to lower their high default rates. As student-loan debt woes have spread, nonprofit colleges are signing on. The reason: If a college’s federal student-loan default rate surpasses 25% for three consecutive years, or 40% in a single year, it could lose eligibility for federal student aid for all students, according to the Department of Education.

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