Who Mismanages Student Loans, and Why?

The article investigates the phenomenon of student loan mismanagement, where many financially distressed borrowers who qualify for federal assistance programs—such as Income-Driven Repayment (IDR) plans and loan deferment, which offer interest moratoriums and principal forgiveness—continue to accrue interest through repeated long-term loan forbearance. This mismanagement is linked to higher delinquency rates and varies significantly by student gender and race, being more prevalent among male and non-white students. The study finds that while financial literacy partially explains these differences, the variation is largely driven by differential treatment from loan servicers, whose incentives may encourage steering borrowers into forbearance rather than more beneficial repayment plans. Evidence also suggests that demographic matching between borrowers and servicer representatives influences loan management outcomes, with in-group favoritism benefiting female and white borrowers. The findings highlight the potential for policy reforms in servicer compensation to improve borrower outcomes and reduce delinquency.