From the U.S. Government Accountability Office, www.gao.gov Transcript for: Federal Student Loans and Default Rates Description: Are schools and their consultants giving borrowers incomplete or inaccurate information about repaying their student loans? Related GAO Work: GAO-18-163: Federal Student Loans: Actions Needed to Improve Oversight of Schools' Default Rates Released: April 2018 [ Background Music ] [ Melissa Emrey-Arras: ] The federal government isn't able to hold these people accountable for repaying their loans because of a loophole in the current system. [ Matt Oldham: ] Welcome to GAO's Watchdog Report, your source for news and information from the U.S. Government Accountability Office. I'm Matt Oldham. The amount of outstanding federal student loan debt is currently just shy of $1.4 trillion and more than 10 percent of that is made up of loans in default, numbers likely to keep rising. I had phone call with Melissa Emrey-Arras, a director in our Education Workforce and Income Security team to talk about GAO's recent report on federal student loans. Melissa, thanks for taking my call. [ Melissa Emrey-Arras: ] Thank you, Matt. [ Matt Oldham: ] So your report looked at strategies schools use to lower their default rates, what did you find? [ Melissa Emrey-Arras: ] Interestingly, we found examples of schools hiring consultants that then pushed borrowers, who were struggling with their loans, to put their loans in forbearance. Forbearance is a technical student loan term but what it basically means is that borrowers would officially postpone paying back their loans, which sounds great on the face of it if you're a struggling borrower. However, the big catch is that interest continues to build during that postponement period and borrowers who do this can actually end up paying thousands of dollars more because of this. And when we did our analysis, we found that close to 70 percent of all borrowers, who were repaying their loans, had put their loans in this forbearance, in this postponement at some point and 20 percent of them had had their loans in forbearance for over a year and a half. [ Matt Oldham: ] So why might schools or their consultants encourage forbearance over other options? [ Melissa Emrey-Arras: ] It doesn't require a lot of documentation. It can be done quickly over the phone. In fact, one consultant told us that it could be processed in just five minutes. And schools have a real incentive for their borrowers not to default because if students who are paying back their loans at default within the first three years of repayment, the school can lose their access to financial aid if those default rates are really high. And unfortunately, this sort of structure of incentive can then result in borrowers being pushed into this forbearance despite the fact that other repayment options are available that may in fact be even better for them. And in fact, we found one consultant that was trying to push borrowers into forbearance by inaccurately telling them that they could lose other federal benefits, they could lose nutrition benefits and income benefits if they defaulted on their student loans and that's not true. [ Matt Oldham: ] So how has the use of forbearance affected the Department of Education's ability to hold schools accountable for defaults? [ Melissa Emrey-Arras: ] The real concern there is that these schools are basically trying to gain the system and push borrowers outside of that measurement window so that it benefits them but it doesn't necessarily benefit the borrowers who are still in fact struggling, nor does it benefit the federal government. It's really hard to hold schools accountable you know if they're basically putting these borrowers in this status. [ Background Music ] [ Matt Oldham: ] So schools can lose the ability to offer federal student aid to their students if enough of their former students default within the first three years of repaying their loans and this could cause schools or the consultants they hire to push student borrowers toward solutions that aren't ideal for them. So I asked Melissa about her team's recommendations. [ Melissa Emrey-Arras: ] We think that Congress should consider changing the metric that holds schools accountable to make sure that there really isn't this loophole built in. And furthermore, we think that Congress should require that when schools and consultants choose to reach out to borrowers, after they leave school to talk to them about repayment, that they give them complete and accurate information. [ Matt Oldham: ] And what would you say is the bottom line of your report? [ Melissa Emrey-Arras: ] I think the bottom line is that currently some borrowers are being misled or pressured into this forbearance which, as we've talked about, can benefit schools but it can hurt borrowers and it can cost them thousands of dollars. And in the process, the federal government isn't able to hold these schools accountable for repaying their loans because of a loophole in the current system, so we think that needs to change. [ Matt Oldham: ] Melissa Emrey-Arras is a director on our Education Workforce and Income Security team and she's the signer of a GAO report on federal student loan default rates. Thank you for your time, Melissa. [ Melissa Emrey-Arras: ] Thank you, Matt. [ Background Music ] [ Matt Oldham: ] Thanks for listening to the Watchdog Report. To hear more podcasts, subscribe to us on Apple podcasts. [ Background Music ] [ Matt Oldham: ] For more from the congressional watchdog, the U.S. Government Accountability Office, visit us at gao.gov.