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News Release

FOR IMMEDIATE RELEASE
November 08, 2001

New report suggests education loan forbearance reduces the risk of default

INDIANAPOLIS — As the number of education borrowers and their indebtedness increase, policy-makers and lenders continue to scrutinize the use of education loan forbearance to ease borrower repayment burdens and cut default costs. A new report from Lumina Foundation for Education explores the effect of forbearance on default and reveals that the use of forbearance may reduce the risk of default.

A forbearance temporarily reduces or suspends a student’s monthly education loan payment during a period of financial hardship. Forbearances typically are granted by the education loan servicer for up to a year at a time. During forbearance, students are still responsible for the accruing education loan interest.

“The use of forbearance appears to benefit taxpayers, the government and private participants in the education loan program,” said Derek V. Price, the report’s author and the director of higher education research at Lumina Foundation. “Forbearance also benefits student borrowers by helping them avoid default, but this benefit increases the cost of borrowing, sometimes substantially.”

The study — Student Loan Forbearance and Its Relationship to Default — is based on an analysis of 9,859 Stafford subsidized and unsubsidized loans held by 2,999 borrowers. The guaranteed loans in this sample, valued at almost $34 million, were in forbearance in December 1996 and were tracked through December 2000.

Skeptics of forbearance have questioned whether forbearance leads to default. The conclusion of this study suggests that the default rate for loans in forbearance is in a similar range to the overall loan default rate for the Federal Family Education Loan Program (FFELP). About 6 percent of the borrowers in this research sample repaid their loans in full during the study period. Only one in six borrowers who were in forbearance defaulted.

Forbearance reduced the default losses to taxpayers by at least 4 percent, because many of those borrowers who were granted forbearance and ultimately defaulted were able to make some loan payments before they eventually defaulted.

“If we extrapolate this 4 percent savings to the $2.2 billion dollars in defaults paid for FFELP Stafford loans in 2001, we can estimate that granting forbearance to all borrowers who qualify will save taxpayers at least $88 million annually,” said Price. “We know the actual savings are greater than this, because some borrowers in forbearance repay some or all of their loans. We cannot say with certainty that some borrowers would not have paid without the forbearance assistance, so our savings estimates are conservative.”

The study also highlights a few connections between forbearance and default:

• The longer a student is in forbearance, the less likely he/she is to default.
• Borrowers in forbearance who attend vocational, for-profit or two-year public institutions are more likely to default than other students.

Borrowers enrolled in vocational institutions are four times more likely to default than are graduate school borrowers. Borrowers in two-year public institutions are more than two and a half times more likely to default than are graduate school borrowers.

Students in forbearance may consolidate their loans to help pay education debt. Almost one in four borrowers in this sample of loans had consolidated his/her loans by the end of the study period. Price noted that more study is needed to determine to what extent consolidation leads to repayment versus default.

A complete copy of the report is available on the Lumina FoundationSM Web site among its Synopsis publications. Printed copies of the report are also available. To obtain a free copy, please send an e-mail request to pgriffin@luminafoundation.org.

Lumina Foundation for Education, an Indianapolis-based private, independent foundation, strives to help people achieve their potential by expanding access to an education beyond high school. Through research, grants for innovative programs and communication initiatives, Lumina Foundation addresses issues surrounding financial access, educational success through degree or certification attainment, and opportunities for underserved students. The Foundation bases its mission on the belief that postsecondary education remains one of the most beneficial investments that individuals can make in themselves and that society can make in its people.

For more information, contact Sara Murray-Plumer, director of communications at (317) 951-5493 or splumer@luminafoundation.org.