As more and more colleges are hiring consultants to help students manage their student loans, those consultants are too often steering individuals toward bade decisions in the name of keeping default rates down, according to a study conducted by the General Accountability Office that was released late last month.
By instructing individuals to sign up for forbearance programs, rather than finding better ways to manage the debts over the longer term, the consultants are helping the schools more than the students, the GAO study found.
Colleges and universities could lose access to student loans and grants if their default rates get too high, which is why they are hiring consultants to help keep their students’ default rates as low as possible.
Forbearance programs may be beneficial in the short term, but over the long term, the added interest on the unpaid principal can significantly increase the amount owed. For example, if an individual with $30,000 in student loan debts spends three years in forbearance, he or she would owe an additional $6,742 in interest, or an additional 25% of the total amount owed.
In some cases, the consultants hired by the schools were only sending forbearance applications to individuals instead of providing a range of options.
Based on an analysis of Education Department data, GAO researchers found 68 percent of borrowers who began repaying their loans in 2013 had loans in forbearance for some time within the first three years after leaving school. About 20 percent had loans in postponement for 18 months or more. People in long-term forbearance frequently default in the fourth year of repaying their loans, when schools are no longer held accountable for defaults, “suggesting it may have delayed — not prevented — default,” the report said.
The Education Department criticized the study, saying it only analyzed nine of the 48 consulting firms that are used by colleges and universities.
