A new report by the Consumer Financial Protection Bureau (CFPB) shows that 9 in 10 of the highest-risk borrowers were not enrolled in federal affordable repayment plans that allow them to pay back their loan based on how much money they make. The Bureau also found that approximately 50% of these borrowers redefault because they are not enrolled in an affordable repayment plan, compared to less than 10% of those who are enrolled.
Approximately 44 million Americans owe money on their student loans for combined total for outstanding federal and private student loan debt that has reached over $1.4 trillion, with the vast majority from federal loans, according to the CFPB.
The Department of Education estimates that more than 8 million federal student loan borrowers have gone at least 12 months without making a required monthly payment and have fallen into default. Nearly 1.2 million borrowers defaulted in the past year. These borrowers face negative consequences such as wage garnishment, loss of federal benefits, and negative credit history.
The CFPB said that federal student loan borrowers have access to programs that are intended to provide a fresh start through two primary options. Under the first option, borrowers can work with a debt collector to “rehabilitate” their defaulted debt — a process where borrowers have to make nine on-time payments over 10 months to exit default. Generally, the federal government pays debt collectors to take these payments and then transfers borrowers back to a servicer or to the government for assignment to a servicer.
Servicers then can help these borrowers enroll in an affordable repayment plan. Under the second option, borrowers can refinance the defaulted debt by consolidating it into a new federal Direct Consolidation loan, which immediately moves them into an affordable repayment plan. Most debt collectors use rehabilitation to get borrowers out of default, which constitutes more than 70 percent of all federal loan collections, according to the CFPB.
Student loan companies are responsible for informing borrowers about affordable repayment options that can help them stay on track.
“Too many struggling borrowers fall through the cracks in a broken, outdated student loan system,” said CFPB Director Richard Cordray. “These people did everything that was asked of them to get back on their feet, only to end up deeper in debt. We will continue to work to make sure this industry provides borrowers with the kind of service they deserve.”
“For far too many student loan borrowers, the dream of a fresh start turns into a nightmare of default and deeper debt,” said CFPB Student Loan Ombudsman Seth Frotman. “When student loan companies know that nearly half of their highest-risk customers will quickly fail, it’s time to fix the broken system that makes this possible.”