Insights on Student Borrowers and the Grace Period

Submitted by Tanya Tanaro, American Student Assistance

This summer, your 2015 graduates are hopefully getting into the swing of post-college life: securing a job, finding a new place to live, and learning what it means to live on a budget. (Welcome to the real world, kids!)

As a financial aid officer, you’re probably hoping that your former students are also heeding your advice about using the student loan grace period – those handy six months between graduation and the start of repayment – to prepare for making regular monthly payments.

Unfortunately, for many recent grads, the emotions that go along with starting repayment can be overpowering, and can often cause a state of near-paralysis when it comes to dealing with the debt burden. Higher education administrators can be of more assistance when they understand the challenges from their students’ and alumni’s perspectives, as well as available solutions.

Recently, my organization had the opportunity to ask student loan borrowers about their mindsets as they approached the start of repayment.* Reactions ranged from proud and excited to repay, to anxious, surprised, overwhelmed and disappointed when they realized how much they’d have to pay each month.

“Initially, I was happy to start paying them back,” said one of our members. “I knew I had this debt and I was excited to get rid of it and felt lucky to have a job to be able to do so! But then I saw how much I had to pay each month and how much interest had accumulated and I was more unhappy. I wish I knew more in advance how much I would have to pay each month.”

Challenges
Our members cited these specific challenges around grace period and repayment:

• Lack of awareness – Some don’t realize when their grace period will be over and what to do when it is, making the grace period a critical time for education and preparation before repayment begins (and before delinquency or default become possibilities).
• Lack of understanding – Recent grads often don’t understand the impact of interest or the terms of their loans.
• Lack of familiarity – They are frequently unaware of who their loan servicer(s) is or are and the role that the servicer plays in the repayment process.
• Employment – Some are unemployed or underemployed and worry about facing payments they won’t be able to cover (especially when they don’t know how much they’ll have to pay).
• Inexperience – Some are becoming financially independent for the first time, and lack experience with factoring student loans into their budgets or living expenses.
• Lack of option awareness – They don’t know that they have options to deal with loans other than simply repaying them.

Our members reported a few different ways they cope with repayment. Some move back home with their parents, while others become more stringent with budgeting to make sure they can at least pay their minimum payment. Some said they explored loan forgiveness or refinancing to try and lower payments. Far too many, though, simply avoid the problem if they can’t afford to repay and don’t proactively engage with their servicers to find a workable solution in time for the first payment.

That can have dangerous consequences, not only for the individual borrower, but for the higher education institution. Research has shown that the majority of student loan defaulters do so without ever making even one payment. So, making the first payment and getting into a regular repayment rhythm is crucial to long-term success.

Aside from federal student aid sanctions when too many students default on their loans, schools also face heightened animosity from former students who have difficulty repaying their debt. In American Student Assistance’s Life Delayed survey of young professionals, 54 percent of respondents said that, knowing what they know now about the struggle to pay back loans, they were either unsure or definitively would not have made the same college decisions. Meanwhile, 32 percent of respondents saw the school they attended as secondarily responsible for the debt they incurred.

Solutions
Higher education institutions can play a pivotal role in setting borrowers up for success by emphasizing the first payment. Exit counseling is the first step in explaining the borrower’s responsibilities at the outset, but communications to alumni and stop-outs also need to be boosted during the grace period.

June – September:

• Since most students were too busy wrapping up school, finding a job, and focused on graduating during exit counseling, now is a good time to remind alumni that their grace period will be over soon. Continue to offer content on repayment options, especially deferment for those still without a job, so they can feel prepared and in control when repayment actually hits.
• Refer your students and alumni to reputable sources of information, such as any third party service providers your institution works with for financial education and loan counseling, the servicers themselves, or the U.S. Department of Education (ED). Tell them about ED’s Repayment Estimator or the Consumer Finance Protection Bureau’s tool for repaying student debt.

October – December:

• Ease the stress of repayment with budgeting and money saving materials – make it seem less overwhelming with actionable resources such as worksheets and calculators.
• Again, continue providing information that alumni can use to understand their options if they realize they can’t make their payments or to help maximize their repayment plan.

January – March:

• This is the time when recent grads fall into delinquency or default if they haven’t been making payments since their grace period ended. Therefore, content about how to fix the situation if they’ve fallen behind is especially important at this time.