America's student loan debt has mushroomed over the last decade, rising from approximately $500 billion in 2007 to $1.44 trillion in the first quarter of 2017. The New York Fed's Quarterly Report on Household Debt and Credit shows that 11% of cumulative student loan debt is either ninety days delinquent or in default.
Given those facts, it's no surprise that the Department of Education estimates that over 8 million student loan borrowers are in default. What is a surprise is this finding from the Consumer Financial Protection Bureau (CFPB): 90% of the borrowers who are exiting a default on their student loans are not taking advantage of federal repayment programs that allow income-driven repayment (IDR).
When you default on a federal student loan, you have few good options. Ignoring the debt is not one of them. Student loan debts generally cannot be discharged by bankruptcy, and the government has many options to collect on debt that others do not – even seizing tax refunds, garnishing up to 15% of your disposable income until the debt is retired, and, if all else fails, suing you for the loan balance.
The Department of Education offers two ways to get your loan out of default: loan rehabilitation and loan consolidation.
To rehabilitate a loan, you must make nine consecutive payments using a payment amount equal to 15% of your discretionary income, or less if you can negotiate terms based on your documented income and expenses. Loan servicers may then help borrowers enroll in an income-based repayment plan that is appropriate for the longer term. Under a loan consolidation, you agree to repay under a federal Direct Consolidation Loan that already incorporates income-based repayment.
Rehabilitated loans and Direct Consolidation Loans also become eligible for student loan benefits that were available prior to default, such as deferment and forbearance.
Unfortunately, the CFPB found that less than 2% of borrowers enrolled in the affordable repayment plans immediately after becoming eligible, and only 10% had enrolled within a year after becoming eligible. CFPB found that almost half of previously defaulted borrowers face a second default within three years, and over three-quarters of those with a second default did not make a single payment to their loan servicer. Continuous missed payments and multiple defaults will wreak havoc with your credit. You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips.
There is clear evidence that the programs work when borrowers use them. Less than 10% of defaulted loans undergo a second default after entering an affordable repayment option.
Where is the breakdown? In some cases, students may just be shirking responsibilities, but the CFPB report cites "a series of administrative, policy, and procedural hurdles" as part of the reason for poor enrollment rates. That could apply to the Department of Education or the contract collection agencies that provide loan servicing.
Ironically, the Department of Education may be aggravating the situation. A previous action against contract collection agencies resulted in a recent Court of Federal Claims ruling that stopped the collection of defaulted student loans through certain agencies. Some students attempting to do the right thing and follow through with an income-driven repayment plan are stuck in limbo, with no place to send their payments and/or get advice on how to proceed.
It's one thing if your plans to remove your default through an affordable repayment plan are being disrupted through no fault of your own, but there's no excuse for not signing up at all. Too many student borrowers may be following the line of reasoning cited by Adam Carroll, Founder and Chief Education Officer of National Financial Educators: "Students think, 'If I can't make my payment I'll defer, or I'll get a forbearance.' They kick the can down the road for a year or two or five or ten, and by the time they start around to paying it back again it has capitalized on itself ... they may have borrowed $40,000 and it's ballooned to $70,000."
If you are in this unpleasant situation, don't put your head in the sand. Follow through with an affordable repayment plan. Your student loan debt won't go away by itself, and the longer you wait, the nastier the surprise may be.
Find out quickly at what rate you can refinance your student loan.
Read the previous article in our Student Loan Crisis series to discover why the government stopping the collection of defaulted student loan debt is bad for borrowers. In the fourth part of our series, learn how you risk losing your home by not paying your student loans.