Paying back tens of thousands of dollars in student loan can be difficult, and more than 1 million Americans defaulted on their federal student loans just last year. But why are nearly all of these same borrowers failing to take advantage of programs to help them avoid defaulting again?
According to a new analysis [PDF] from the Consumer Financial Protection Bureau, 9-in-10 borrowers who are exiting default on their student loans are not enrolling in federal repayment programs that base the amount they pay each month on their earnings.
The Department of Education estimates that more than eight million federal student loan borrowers have entered default — described as failing to make payment on their debts for at least 12 months.
According to the report, student loan servicers — who are responsible for informing borrowers about affordable repayment options — are not holding up their end of the bargain when it comes to assisting debtors in avoiding a second default of their loans.
While many borrowers who enter default will be able to bring their accounts back into the black, according to the CFPB analysis not all of them will stay that way despite available programs intended to provide a fresh start.
One option allows borrowers to work with a debt collector to “rehabilitate” their defaulted debt by making a certain number of on-time payments. Once the account is current, loan servicers can assist borrowers in enrolling in an affordable repayment plan. This option is used for roughly 70% of all federal loan collections.
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.
The CFPB’s analysis found that fewer than 2% of borrowers were enrolled in repayment plans immediately after bringing their accounts current. One year later, the nine out of 10 borrowers still hadn’t accessed a repayment plan.
Because of this, the CFPB found that nearly half of previously defaulted borrowers will re-enter default within three years of rehabilitating their accounts.
Of these borrowers, the report found 75% did not successfully pay a single bill to their student loans servers.
Conversely, of those who do enter a repayment program after default, the CFPB found that less than one in 10 end up back in default.
As for the second repayment option — the consolidation of loans — the CFPB analysis found that 95% of high-risk borrowers in this program did not re-default on their loans within 12 months of enrollment.
After two years, the analysis found that these borrowers defaulted at a rate one-third lower than the rate for those who rehabilitated their loans but did not consolidate.
According to the CFPB, the new data is evidence that borrowers, taxpayers, and student loan companies can benefit from a clearer, more streamlined process to help previously defaulted borrowers successfully repay their debts over time.
“For far too many student loan borrowers, the dream of a fresh start turns into a nightmare of default and deeper debt,” CFPB Student Loan Ombudsman Seth Frotman said in a statement. “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.”
For consumer advocates, the report confirms that borrowers are struggling to get a fresh start and stay on top of their loans.
“The Bureau’s research is crucial to understanding how and when servicing failures can cause long-term damage to a borrower,” Suzanne Martindale, policy counsel for our colleagues at Consumers Union, said. “These problems could be avoided, and save borrowers a ton of money and distress, if servicers had to act in their best interests and help them access affordable repayment plans.”