Association for Public Policy Analysis & Management

The oft-cited, large, and increasing amount of outstanding student loan debt in the United States, now exceeding $1.4 trillion, has been a source of policy attention and public consternation. Of particular concern is evidence that many debtors are not repaying their student loans, as such behavior has potentially negative consequences on student welfare, post-college decisions, and the economy writ large. In this paper, we use a large sample of anonymized credit bureau files from the Federal Reserve Bank of New York Consumer Credit Panel / Equifax dataset over 14-years to examine an issue which has not previously received attention in the research literature: whether the manner in which student loan servicers report delayed repayment and delinquency has unexpected consequences.

The potential issue can be simply presented by comparing the delinquency reporting of student loan servicers to the typical practice in other types of consumer credit. For most segments of consumer credit, servicers will report a derogatory account to credit agencies if payments are at least 30 days late. However, in student loan practices such as default calculations used for regulatory analysis of federal student loan cohort default rates, a debtor is not considered in default until 270-360 days of delinquency. Anecdotally, student loan servicers may not report delinquency until up to 90 or 120 days of missed payments, per guidance from governmental agencies.

There is a social welfare argument for delaying reporting of delinquent repayment among student loan debtors, especially because many student loan programs aim to address credit constraints and encourage students to invest in their future productivity. However, this delayed delinquency reporting has the potential to impose costs on other lenders since student loan debtors may not have a full accounting of repayment delinquencies on their credit profile when applying for other products like credit cards, auto loans, or mortgages. The delayed reporting can also harm the credit prospects for the broader student loan debtor population as well, since noisy signals of creditworthiness can raise risk, and thus prices.

Preliminary findings indicate that a significant proportion of student loans experience delays in the reporting of serious delinquency. Somewhat surprisingly, our analysis does not indicate that consumers who experience reporting delays make distinct credit decisions. Therefore, even though the incentive exists for debtors, we interpret our results as evidence that there was not a substantive negative externality imposed on other lenders in the market from the documented delinquency reporting delay identified in our analysis.

This study has important implications for research and practice in the context of student loan repayment and in ongoing discussions on the regulation and oversight of student loan servicers. While government agencies have made substantial changes to the organization of student loan servicing and credit bureau reporting for federal student loans in recent years, there have been prominent complaints about insufficient guidelines for servicer reporting and inconsistent reporting practices over time and across servicers.