Nearly Half of the Highest-Risk Borrowers Not Enrolled in an Affordable Repayment Plan Redefault
WASHINGTON, D.C. – Today, the Consumer Financial Protection Bureau released an analysis of a student loan industry data sample showing that 9 in 10 of the highest-risk borrowers were not enrolled in federal affordable repayment plans. The analysis looks at hundreds of thousands of the highest-risk borrowers who are exiting default and may be eligible for federal programs that allow them to pay based on how much money they make. Student loan companies are responsible for informing borrowers about affordable repayment options that can help them stay on track. The Bureau also found that nearly half of the highest-risk borrowers not enrolled in an affordable repayment plan redefault, compared to less than 10 percent of those who are enrolled.
“Too many struggling borrowers fall through the cracks in a broken, outdated student loan system,” said CFPB Director Richard Cordray. “These people did everything that was asked of them to get back on their feet, only to end up deeper in debt. We will continue to work to make sure this industry provides borrowers with the kind of service they deserve.”
“For far too many student loan borrowers, the dream of a fresh start turns into a nightmare of default and deeper debt,” said CFPB Student Loan Ombudsman Seth Frotman. “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.”
The student loan market has grown rapidly in the last decade with about 44 million Americans now owing money. The combined total for outstanding federal and private student loan debt now exceeds $1.4 trillion, with the vast majority from federal loans. The Department of Education estimates that more than 8 million federal student loan borrowers have gone at least 12 months without making a required monthly payment and have fallen into default. Nearly 1.2 million borrowers defaulted in the past year. These borrowers face negative consequences such as wage garnishment, loss of federal benefits, and negative credit history.
Federal student loan borrowers have access to programs that are intended to provide a fresh start through two primary options. Under the first option, borrowers can work with a debt collector to “rehabilitate” their defaulted debt — a process where borrowers have to make nine on-time payments over 10 months to exit default. Generally, the federal government pays debt collectors to take these payments and then transfers borrowers back to a servicer or to the government for assignment to a servicer. Servicers then can help these borrowers enroll in an affordable repayment plan. 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. Most debt collectors use rehabilitation to get borrowers out of default, which constitutes more than 70 percent of all federal loan collections.
Last year, the Bureau sent student loan servicers a voluntary information request seeking new information on how previously defaulted borrowers perform over time. Servicers collectively handling accounts for more than 20 million student loan borrowers provided information in response to the Bureau’s request. This included data about borrower performance for more than 600,000 of the highest-risk student loan borrowers. The highest-risk borrowers are those who previously defaulted on a federal student loan, exited default, and were then transferred to a student loan servicer. Today’s report provides the public with a preliminary update on this information, including data related to the performance of certain previously defaulted student loan borrowers. Key results for borrowers in the Bureau’s sample include:
- 9 out of 10 of the highest-risk borrowers were not enrolled in an affordable repayment plan after rehabilitation: The majority of highest-risk borrowers are put into the rehabilitation program, which means that they must pay a debt collector for nine out of ten months in order to get out of default. Once out of default, these borrowers must work with a student loan servicer to secure an affordable repayment plan. The range of widely available income-driven repayment plans that allow borrowers to pay based on income should ensure that payments remain affordable over time. However, new data shows that fewer than 2 percent of borrowers accessed this protection immediately after paying a debt collector to get out of default. Nearly a year later, 9 in 10 of these borrowers still had not secured an affordable repayment plan from their student loan servicer.
- Nearly half of the highest-risk borrowers redefault if not enrolled in an affordable repayment plan: Growing evidence shows income-driven repayments are a key step to avoid default for many of the highest-risk student loan borrowers. Data provided in the report shows that nearly half of all borrowers who were not enrolled in an income-driven plan ended up back in default within three years. In contrast, less than 1 in 10 borrowers in income-driven repayment plans ended up back in default over this period.
- 95 percent of the highest-risk borrowers do not redefault within the first year when they consolidate into an affordable repayment plan: A minority of the highest-riskborrowers consolidate their defaulted loans to get out of default, a process that will automatically establish payment plans based on their income. Nearly 95 percent of borrowers who recently consolidated their defaulted loans remained on track 12 months later. After two years, these borrowers defaulted at a rate one-third lower than the rate for those who rehabilitated their loans but did not consolidate.
This data offers new evidence that borrowers, taxpayers, and student loan companies would benefit from a clearer, more streamlined process to help previously defaulted borrowers succeed over the long term, and to ensure borrowers avoid default in the first place. Last year, the Bureau warned that hundreds of thousands of struggling student loan borrowers may end up back in default over the next two years, racking up at least $125 million in unnecessary interest charges along the way.
The Bureau has called for an overhaul of these programs to place greater emphasis on the long-term success of economically vulnerable student loan borrowers. This information will help the Bureau assess how current practices intended to assist the highest-risk borrowers may differ among companies. The Bureau previously highlighted how inconsistent practices across servicers can cause significant problems for borrowers, calling for industrywide servicing standards in this market.
The CFPB provides a Repay Student Debt tool, which helps borrowers get unbiased tips on how to navigate student loan repayment, along with other sample letters they can send to their student loan servicers. More information is available at: consumerfinance.gov/students.