GAO Report Details Shady Practices from Student Loan Consultants
Some colleges turn to consultants when they need help controlling their cohort default rate. The cohort default rate shows how many students have missed loan payments in the three years since their repayment period began.
It’s important for colleges to report low default rates. If the cohort rate among graduates from a certain college rises too high, that college could become ineligible for federal financial aid.
To combat this prospect, Consultants are hired by colleges to reach out to graduated but struggling borrowers and help them get on track with their payments. By offering to assist students who are behind on their loans, the consultants are ultimately helping colleges avoid becoming ineligible for funding.
New Criticisms From the GAO
A new report from the Government Accountability Office (GAO) may have shed some light on shady practices surrounding consultants, college financial aid eligibility, and student loan default rates. The report reviewed the methods of nine consultants serving students from 800 schools.
It revealed that five out of the nine consultants recommended to struggling borrowers that they enter forbearance as a solution to their default. Furthermore, the report found that these consultants “provided inaccurate or incomplete information” to borrowers “in certain instances.”
The GAO also found that eight out of nine consultants were not paid to contact past-due borrowers outside of the three-year cohort period. Additionally, four out of nine consultants were paid for each borrower kept out of default within the cohort period.
The above could be seen as an incentive to prioritize borrowers who would immediately impact a colleges financial aid eligibility, while also pushing the easiest immediate solution.
One can surmise that colleges may benefit from these practices by having a better chance at prolonging financial aid eligibility from year to year. It’s also easy to think that consultants may make more money by prioritizing certain students while pushing simpler, short-term loan solutions.
In the report, the GAO called for heightened oversight over the consulting practices. Keep in mind that the report does not accuse individual colleges or consultants, nor does it make specific legal accusations. It simply sheds light on observed practices within an industry.
Why is This a Problem?
While forbearance can postpone imminent default, it is not a definite fix-it solution to paying down student loans.
Forbearance is a period in which borrowers facing financial hardship can postpone their student loan payments. Borrowers can enter forbearances more than once. The point is to give the student loan borrower a reprieve so he or she can get back on track to resume payments later on.
While that may seem like a handy solution, it can sabotage a borrower’s finances if not managed correctly. When loans are in forbearance, the interest keeps accruing. Without payments being made, a borrower can lose ground during forbearance assuming they aren’t saving up money or preparing.
There are other plans the consultants could explore with the borrower such as income-driven repayment plans that lower monthly payments while continuing repayment.
With income-driven repayment plans, colleges still have to hope the borrowers continue to make the reduced payments to avoid defaulting and driving up that cohort default rate.
Author: Andrew Rombach
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