Unlocking the Secrets of Student Loan Repayment: Insights from a Federal Reserve Researcher

Dubravka Ritter, a Senior Advisor and Research Fellow at the Philadelphia Fed's Consumer Finance Institute, has dedicated her career to understanding the complex interplay between consumer credit markets, economic opportunity, and social equality. Her research delves into the nuances of how students and governments finance postsecondary education, shedding light on the far-reaching implications of student loan burdens and repayment plans.

Empowering Borrowers Through Informed Choices

Navigating the Student Loan Landscape

Ritter's research at the Consumer Finance Institute (CFI) explores the critical role of higher education in shaping the workforce and providing a pathway to the middle class. With over 20 million students enrolled in postsecondary programs across the United States, and the sector employing more than 3 million staff, the financing of higher education has far-reaching economic implications. Ritter's work examines the intricate web of funding sources, including government, philanthropic organizations, and students and their families, as well as the impact of financial aid and student loans on household financial health, the higher education sector, and the broader economy.

Navigating the Student Loan Forbearance Landscape

The COVID-19 pandemic and the subsequent widespread opportunity to pause student loan payments have brought the issue of student debt to the forefront of public discourse. Ritter's research at the CFI has provided valuable insights into borrowers' experiences during this unprecedented period. Through the institute's consumer surveys, Ritter and her team have been able to capture real-time data on borrowers' perspectives, including their expected capacity to resume payments, reasons for missed payments, and their awareness and intentions regarding newly introduced repayment plans.

Exploring the SAVE Income-Driven Repayment Plan

One of the key findings from Ritter's research was the varying levels of awareness and understanding among borrowers regarding the Saving on a Valuable Education (SAVE) income-driven repayment (IDR) plan. While at least one-third of borrowers were unaware of the plan, 32% expressed an intention to apply after the researchers explained its features and eligibility criteria. However, a significant portion (40%) said they would not apply, citing affordability concerns or hesitation to potentially extend their loan term. Ritter's work highlights the need for personalized outreach and education to help borrowers navigate the complexities of repayment options and make informed decisions.

Budgeting for Resumed Payments

Ritter's research also delved into borrowers' expectations for how they might adjust their household budgets once student loan payments resumed. Contrary to common assumptions, the study found that borrowers did not expect to simply cut savings or discretionary spending. Instead, they anticipated a more nuanced approach, including increasing their income, borrowing more, and saving less, while shifting their spending from discretionary to more essential items. This comprehensive understanding of borrowers' budgeting strategies provides valuable insights for policymakers and financial institutions as they work to support borrowers during the transition back to regular payments.

Addressing Inequities in Financial Aid

Ritter's research has also shed light on the potential disadvantages faced by certain groups in the financial aid process. Her findings suggest that the formula used to determine eligibility for federal financial aid, which excludes certain assets like home equity and retirement savings, may disproportionately benefit middle- to upper-income White families. Ritter estimates that this formula has resulted in almost 1 million students gaining access to roughly billion in scholarship money that would not have been available if their total household wealth was considered. These insights raise important questions about the alignment of financial aid policies with the objectives of making higher education accessible to all.

Exploring the Evolving Higher Education Landscape

Ritter's research agenda at the CFI extends beyond student loan repayment, delving into the broader trends and transformations within the higher education sector. The institute has hosted forums to discuss the risks and opportunities of increasingly prevalent certificates and other non-degree credentials, as well as novel funding models like income-contingent student loans. As the higher education landscape continues to evolve, Ritter and her team remain committed to expanding their understanding of the economic impacts of this critical sector, including the financial health of colleges and universities and the role of local higher education opportunities in community well-being.