–Over the next two years, one-in-three rehabilitated student loan borrowers could be driven back into default due to gaps between student loan programs, according to a new report from the CFPB’s Student Loan Ombudsman.
The report examines debt collection and servicing problems plaguing the federal programs designed to help millions of defaulted student loan borrowers get on track and into affordable repayment plans. The Bureau said it estimates that the breakdowns along the path out of default will cost borrowers hundreds of millions of dollars, including more than $125 million in unnecessary interest charges over the next two years.
The CFPB said it is calling for an overhaul of these programs in order to help improve the recovery process for distressed consumers.
“The consumer protections promised under federal law should make it nearly impossible for the most vulnerable consumers to be trapped in default,” said CFPB Director Richard Cordray in a statement. “Today’s report shows that far too many of these borrowers continue to fall through the cracks of a flawed student loan system."
The CFPB noted the student loan market has grown rapidly in the last decade with about 44 million Americans now owing money. The agency said it estimates that the combined total for outstanding federal and private student loan debt has reached roughly $1.4 trillion, with the vast majority from federal loans. The Department of Education estimates that more than eight-million student loan borrowers have gone at least 12 months without making a required monthly payment and have fallen into default. Nearly 1.2 million of these borrowers defaulted in the past year, the CFPB said.
“These borrowers face negative consequences such as wage garnishment, loss of federal benefits, and negative credit history,” the CFPB said. “Today’s report examines red tape, breakdowns, and communications gaps across the two federal programs designed to help struggling borrowers get out of default and into affordable repayment plans.
Federal law gives most borrowers in default the right to “rehabilitate” their loan – a process for borrowers to get out of default and get back on track by making a series of payments, which can be set based on income, to a debt collector. The majority of borrowers who rehabilitate and get out of default are eligible to enroll in an income-driven repayment program through their loan servicer, the CFPB said.
According to the CFPB, key issues facing borrowers include:
- One-in-three rehabilitated borrowers will re-default within two years due to servicing and program failures: The Bureau estimates over 200,000 struggling borrowers will needlessly redefault over the next two years despite qualifying for a zero-dollar payment under income-driven plans. Among other costs, these borrowers will rack up over $125 million in unnecessary interest charges because of lost interest subsidies they would have access to under an income-driven plan.
- Debt collection practices delay or derail borrowers seeking to get out of default: Borrowers report debt collectors setting incorrect monthly payment amounts and having problems verifying income levels.
- Misaligned debt collection incentives do not support long-term success: The report observes that collectors’ economic incentives do not encourage long-term success.
- Communication gaps cause consumer confusion and payment shock: Borrowers report problems resulting from collectors’ and servicers’ failure to communicate when transferring a borrower out of default. Borrowers report receiving conflicting information about their expected monthly payments, as well as where to send payments, what amount to pay, and how those payments will be applied to their loan balance.
The report also offers recommendations for improving the recovery process. For a copy of the report, go here.