Demystifying Default

Laura Kadamus Rhea Rakshit

October 13, 2014

Unpacking Student Loan Behavior and Default in

the United States

40 million

$1.2 trillionstudent loan borrowers share a debt burden of

14% of them are expected to default.That’s 5.6 million borrowers, approximately

the total population of Denmark.

Why is default a problem?

It’s a problem for the borrower

stress and anxiety

credit score ruined

taxes withheld

wages garnished

It’s a problem for the economy

rising inequality

public interest job market

SME market

housing market

Why!Federal Loans?

Why are so many students

defaulting?

Here’s what we heard.

“Changing plans is so confusing - I never even bothered.”

“There is no communication. They don’t make the process easy. I learned everything on

my own.”

“I didn’t have a plan. I have no clue how loans are structured.”

“I don’t tell people my business. Student loan

payments should have been the first thing on my mind, I

take full responsibility.”

“I was so stupid to have borrowed so much money, exactly the kind of stupid teenager they prey on.”

Rob, Delinquent!Associates

Evan, Forbearance!Bachelors + Masters

Ari, Repayment!Bachelors!

Lela, Default!Drop Out

Francesca, Repayment!Bachelors

“Financial stress is rarely not somewhere in the picture. Most students don’t come in until a major incident.”Christine, Student Health,!SVA

“Low income students don’t have a good example on how to navigate the loan process.

Lynn, Debt Advisor!SVA

Joanne, Partner Engagement, ASA

Jonathan, Campus Engagement & Education Consultant. ASA

Michael, Operations Analyst, LearnVest Inc

“Small goals allow you not to [get overwhelmed] think

about the big picture.”

“They are not thinking about it until it’s down to the wire.”

Patty, Career Development, SVA

“[Students] need to track how much they’re borrowing while they’re in school so there are no surprises.”

“Borrowers need to know there are options out there. It’s in the best interest of all stakeholders for borrowers to be in a [suitable] repayment plan.”

Here’s what we learned.

Awareness + Accountability

Low Financial Literacy

Awareness

Lack of Clarity + Financial Jargon

Awareness

Behavioral Biases

Accountability

Accurate Profile of a Defaulter

Accountability

How might we encourage a sustainable financial practice

among recent college graduates, so that they do not default on their student loans?

HypothesisTheory of Change

Why recent college graduates?

AssumptionsPeople want to deal with their finances but they

don’t know how

Breaking down the decision making process makes decisions less intimidating

Obligation Ownership

Next StepsPrototyping and Testing:

Competitive Analysis

Financial Literacy Formats Collaborative Learning Methods More User Research

People and Organizations Reframing Interactions with Money, ex. Reciprociti People and Organizations Making Painful “Tasks” Easier, ex. Commonbond

Thanks!