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.”
Interested in refinancing student loans?Here are the top 6 lenders of 2019!
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 7.89% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 6.97% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at firstname.lastname@example.org, or call 888-601-2801 for more information on ourstudent loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the fixed rate will decrease by 0.25%, and will increase back up to the regular fixed interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown.
All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.28% effective October 10, 2018.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.47% – 6.97%1||Undergrad & Graduate|
|2.56% – 7.30%3||Undergrad & Graduate|
|2.68% – 8.96%4||Undergrad & Graduate|
|3.23% – 6.65%2||Undergrad & Graduate|
|2.61% – 7.35%5||Undergrad & Graduate|
|3.00% – 9.74%6||Undergrad & Graduate|