On Monday, the Consumer Financial Protection Bureau (CFPB) released a new report that highlights ongoing issues with the student loan system. The CFPB’s research revealed that one in three rehabilitated borrowers will go back into default within two years. The main reason: Today’s system makes it difficult for borrowers to stay on track with payments.
If you have student loans in repayment, understanding the risks for default and your repayment options is important to keep your loans in good standing.
Students who default
According to the Department of Education, more than eight million students have gone at least 12 months without making a payment on their loans. Of those eight million in default, over one million defaulted just in the past year.
Defaulting on student loans has serious consequences. In some cases, lenders can garnish your wages. The IRS can also withhold your refund. Plus, you lose important federal benefits and take a big hit to your credit.
Under federal law, borrowers have the chance to rehabilitate their loans if they do go into default. Essentially, you make a series of payments, based on a percentage of your income, in order to get back into good standing.
Then once this process is complete, you’re eligible to enroll in an income-driven repayment plan (IDR). Under an IDR, payments are capped at a percentage of your discretionary income. Depending on income and family size, payments can be as low as $0, making it more manageable to stay current on the loan. And after 20-25 years of making payments on an IDR, the remaining balance is forgiven.
Issues with rehabilitation
While the rehabilitation process was designed to help borrowers, there are systemic issues that make it difficult for graduates to get back on track. Because of processing delays and other problems, millions of people will end up back in default.
According to the CFPB report, over 200,000 borrowers will default in the next two years despite qualifying for a zero-dollar payment under income-driven repayment plans. These borrowers will also rack up $125 million in needless interest charges because they miss out on the subsidies that are part of IDR plans.
Borrowers report experiencing delays or dead ends when applying for IDRs, even when they are eligible. Without any response or acceptance into an IDR plan, they end up defaulting on their loans because they cannot afford payments under the Standard Repayment Plan.
The debt collection process exacerbates the problem. Collectors sometimes report wrong payment numbers or do not apply payments to the rehabilitation process, leaving borrowers in worse shape than they began.
And collectors are so focused on collecting money that they do not inform borrowers of long-term solutions, such as IDR. According to the CFPB report, debt collectors make $40 for every $1 they collect, so their focus is on getting borrowers to make payments, not to help them fix the situation. Borrowers are often completely unaware of the programs available that can help them.
Call for reform
The Student Loan Ombudsman, a role that offers recommendations to Congress, the Secretary of the Treasury, and the Secretary of Education, called for significant reform to the current systems.
First, the process for borrowers to get into rehabilitation and into an IDR needs to be streamlined and simplified. There should be proactive communications made to borrowers in the rehabilitation program or who are in danger of default. Borrowers should be informed about their options, including deferment and IDR plans.
Customer communications with lenders needs to be improved as well. It should be a collaborative process to set up the borrower for long-term success. As it is, the system fails the people who need it most.
What to do if you’re at risk of default
If you are at risk of defaulting on your loans or just cannot keep up with the payments, be proactive. Reach out to your lender and explain you cannot afford your monthly payment. Depending on your situation, you may have some options:
- Income-driven repayment plan: IDR plans cap your payments and spread them out over 20-25 years. In some cases, your payment can be as little as $0 – but you do need to re-enroll in the program every year. There are several different IDR plans, so research which ones you’re eligible for and what will work best for you.
- Deferment: If you are facing economic hardship, such as losing your job, you may be able to qualify for a deferment. Under a deferment, your loan payments are put on hold while you get back on your feet. Keep in mind that unsubsidized loans still build up interest, but you get a break on the payments without going into default.
- Forbearance: Student loan forbearance and deferment work similarly, allowing you to temporarily pause payments. However, all student loans continue to accrue interest in forbearance.
Note that these options are only available if you have federal student loans. When it comes to private loans, it’s up to the individual lender to provide assistance (or not) if you’re facing financial hardship.
In any case, the most important thing is to talk with your lender as soon as you think you will miss a payment. If you do not make contact with them and you miss payments, you will be marked as delinquent and eventually default. That can have a serious impact on your credit history and income. Talk to your lender to see what options are available to you.
If you are interested in learning more about income-driven repayment plans, find out how to apply.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
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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 5.87% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 5.87% 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.
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2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
Savings example: average savings calculated based on single loans refinanced from 9/2013 to 12/2017 where borrowers’ previous rates were disclosed. Assumes same loan terms for previous and refinanced loans, and payments made to maturity with no prepayments. Actual savings for individual loans vary based on loan balance, interest rates, and other factors.
Application detail: 5 minutes indicates typical time it takes to complete application with applicant information readily available. It does not include time taken to provide underwriting decision or funding of the loan.
Instant rates mean a delivery of personalized rates for those individuals who provide sufficient information to return a rate. For instant rates a soft credit pull will be conducted, which will not affect your credit score. To proceed with an application, a hard credit pull will be required, which may affect your credit score.
Total savings calculated by aggregating individual average savings across total borrower population from 9/2013 to 12/2017. Individual average savings calculation based on single loans refinanced from 9/2013 to 12/2017 where borrowers’ previous rates were provided. Assumes same loan terms for previous and refinanced loans, and payments made to maturity with no prepayments. Actual savings for individual loans vary based on loan balance, interest rates, and other factors.
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.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.47% – 6.99%3||Undergrad & Graduate||Visit SoFi|
|2.47% – 5.87%1||Undergrad & Graduate||Visit Earnest|
|2.47% – 8.03%4||Undergrad & Graduate||Visit Lendkey|
|2.95% – 6.37%2||Undergrad & Graduate||Visit Laurel Road|
|2.48% – 6.25%5||Undergrad & Graduate||Visit CommonBond|
|2.72% – 8.32%6||Undergrad & Graduate||Visit Citizens|