Millions of federal student loan borrowers are struggling with default — four million, to be exact. Unfortunately, even after these borrowers rehabilitate their loans, they are likely to end up in default a second time, according to the Consumer Financial Protection Bureau (CFPB).
A new report from the CFPB points out that nine in 10 of the highest-risk borrowers were not enrolled in an affordable repayment plan after rehabilitation. As a result, more than 40 percent of these borrowers ended up in default again within three years.
Are student loan borrowers getting the information they need?
Moving to an income-driven repayment plan after rehabilitating their student loans could offer borrowers lower monthly payments, making their debt more affordable and reducing the chances that they will default again.
The recent report raises questions about the information student loan servicers provide to borrowers, who might not be getting the guidance they need to get on an affordable payment plan.
“When student loan companies know that nearly half their highest-risk customers will quickly fail, it’s time to fix the broken system that makes this possible,” said CFPB Student Loan Ombudsman Seth Frotman in a press release.
Jay Fleischman, a lawyer specializing in student loan repayment issues, pointed out that servicers sometimes make it difficult for borrowers to apply for income-driven repayment when they exit default.
“The problem is that not all servicers allow you to apply for income-driven repayment through the Department of Education website,” Fleischman said.
“Some servicers accept online applications, while others require you to download an application and send it in,” he added. “One of my clients had a hard time finding the application she needed on her servicer’s site after realizing the servicer didn’t allow online income-driven repayment through the Department of Education.”
Another issue, said Fleischman, is that many borrowers don’t realize that when they are in default, they don’t have a repayment plan.
“I talk to many borrowers who think that the payments they make to debt collectors while in default are actually a new payment plan,” he said. “They think they have a new plan, when they don’t. They end up in trouble, an, as the CFPB report indicates, many of them default again.”
Affordable payments can prevent a second default
Affordable monthly payments might be the key to preventing a second default for student loan borrowers who are struggling. The CFPB reported that 95 percent of borrowers who consolidate and set up income-driven repayment are still on track 12 months later.
After two years, borrowers who consolidated defaulted loans and enrolled in affordable payment plans defaulted at a rate one-third lower than those who didn’t.
Fleischman emphasized the importance of showing borrowers that they can consolidate their defaulted federal loans and access lower monthly payments. He also pointed out that servicers could do a better job of providing information to borrowers who are working to get out of trouble.
What should you do if you can’t afford your student loan payments?
The CFPB report indicates that many student loan borrowers, especially those in default, aren’t on an affordable repayment plan. If you can’t afford your student loan payments, one of your best options is to apply for income-driven repayment.
Income-driven repayment is available for borrowers with federal student loans. It caps your monthly payments at a percentage of your income and extends your repayment period so you are better able to afford your debt.
Fleischman said it’s possible to consolidate defaulted federal loans and enroll in an income-driven repayment plan. “This is one of the best ways to get back on track. But you might have to look harder for the information,” he pointed out.
However, it’s important to understand that these payment plans can result in higher interest costs over time. Fleischman recommended using income-driven repayment to get back on your feet, then paying off student loans faster as your financial situation improves.
You have tons of options if you need help managing your student loans. The CFPB also provides information about student loan repayment and affordable repayment options on its website. If you decide income-driven repayment is right for you, apply through the Department of Education.
“In the end, your best bet is to get on income-driven repayment as quickly as possible,” said Fleischman. “Check with the Department of Education website or call your servicer and ask what you need to do to qualify.”
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