Student debt has never been higher—especially in the US. Rising tuition fees and the wider economic pressures of COVID-19 have a great impact on every student’s financial condition. High tuition costs and rising student debt is not only a US problem because higher education can be just as expensive for many students around the world. Consider the following statistics:
- Over half of American students have to go into debt to pay for college, and the average student loan debt in 2020 totalled $37,500
- Nationwide US student loan debt increased by 8.3% in 2020
- As of 2020, the outstanding student loan debt in the United Kingdom reached over 135.62 billion British pounds
- In Germany – due to COVID-19, the number of available student jobs has decreased, meaning an increase of 641.6 million euros in student loan applications
The problem is only getting worse. After the COVID-19-induced economic downturn, recent graduates are struggling to find jobs, meaning they’re struggling to pay off their debts. Collections teams must evolve their approach if they want to prevent student debts from becoming non-performing loans (NPLs).
This blog will examine how collections departments can communicate effectively with past-due customers that have student loans.
A brief history of student debt in the US
You might be surprised to learn that student debt is far from a new issue. The first student loans were issued back in 1840, 181 years ago, to students studying at Harvard. In 1965, the Higher Education Act was passed into legislation—this provided students that required financial aid with “Educational Opportunity Grants”. The Act also introduced the Guaranteed Student Loan Program (also known as the Federal Family Education Loan Program or FFELP), meaning banks and private institutions could provide government-subsidised loans to students.
The FFELP was a considerable success. However, in 2008, the Great Recession struck. This forced many banks and other lenders to back out of the FFELP because they simply didn’t have the financial capability to provide student loans.
2021 has been another historic year for student debt, though for all the wrong reasons. Recent graduates are in more debt than ever before. They’re struggling to find jobs—let alone high-paying ones that will allow them to pay back their debts. Economists predict that inflation will rise over the next couple of years, making swift repayments even more difficult than before.
Collections departments must respond by making it easier for college graduates to pay back what they owe. They must provide flexible instalment plans and self-service functionality, catering to past-due customers’ needs and gently guiding them through the collections process.
How to collect student loans, the right way
New pressures (increased debt, a tougher job market, and rising inflation) require modern solutions. And not only do recent college graduates face unforeseen challenges, but they also behave differently from their predecessors.
The key takeaway here is that you need to adopt a new approach. Most importantly, you need to embrace a new way to communicate with past-due customers. Collections is a dialogue between you and your customers. If you cannot communicate clearly and effectively, past-due customers won’t be engaged in the collections process.
Sending harsh, direct letters through the mail simply won’t cut it anymore. In fact, this might even lead consumers to bury their heads in the sand and make them feel helpless about their financial situation.
So what’s the right approach?
1. Leverage omnichannel communication strategies
We’re living in the communication age. There are tons of ways to get in touch with past-due customers—so use this to your advantage. Digital communication channels are particularly effective. Recent McKinsey research shows that digital-first collections strategies lead to a 20 – 25% reduction in non-performing loans compared to traditional strategies and 5X the levels of customer engagement.
Of course, there’s no hard-and-fast rule for deciding which single digital channel is the best. Some people might respond better to emails whereas others prefer SMS messages. Test out a range of different options until you find out which channels work best for which segment, and for each individual past-due customer within every segment.
2. Tailored messaging
It’s not enough to send out messages on the right channels. The wrong message on the right channel counts for little. So if you want to optimise your collections approach, you need to tailor your messaging for every past-due customer.
This is a great strategy—but it’s difficult to do at scale. Unless you use artificial intelligence (AI). The AI-powered multi-armed bandit (MAB) algorithm allows you to send out the best message at the right time. You start with a range of messaging templates and as the results come in, the algorithm automatically prioritises the template that has received the highest engagement and sends it out at the best delivery time.
By using MAB, agents will be able to spend more time and energy on high-priority accounts that need human-to-human interaction.
3. Embrace self-service
Modern consumers like to solve problems themselves. They don’t want to wait in a call queue to speak to the next available agent. They want to resolve issues on their own in a timely manner.
Nowadays, past-due customers are far more likely to pay back what they owe if you let them take control of the process. Get in touch with them on the right channel, with the appropriately tailored message, and encourage them to visit your self-service repayment landing page. You could also include a QR code on the landing page to make this process even easier.
Better still, let them create a customisable instalment plan and give them power over the entire repayment process. This will avoid reactance, a phenomenon where past-due customers refuse to pay so that they can feel like they’re in control of the debt repayment process.
Adapt your debt collection approach for a modern world
Today’s college graduates are struggling to pay off their student debt. Economic uncertainty and rising inflation are making this issue more problematic by the day. However, by embracing modern dunning methods, you can ensure that the majority of student debts don’t become NPLs.
Use omnichannel communication strategies to meet consumers on their preferred channel, at the right time. Tailor your messaging so that you speak to every single individual—instead of sending out generic, one-size-fits-all messages. Provide self-service channels to give past-due customers agency over the process and make them feel in control.
Fortunately, you can find all these capabilities and more in the receeve All-In-One Collections and Recovery Platform. To learn more about our offering, get in touch today.