A new report by the Consumer Financial Protection Bureau’s (CFPB) Student Loan Ombudsman highlights ongoing issues within the student loan rehabilitation process. The process is designed to help students get out of defaulted status on their federal student loans, but failed communication processes and aggressive, profit-driven debt collectors, among other issues, means that student borrowers are paying millions of dollars in needless interest charges and payments. For many borrowers, this means they either stay in a defaulted status when they should have entered rehabilitation, or else they briefly enter rehabilitation only to fall back into default because they aren’t being educated about their rights and options under various federal repayment plans.
What Does This Mean?
A staggering number of borrowers have gone a year or more without making their student loan payments. Defaulting on federal student loans has dire consequences, and not just on credit reports. Those in default can easily find that wages from their jobs are garnished and that entire tax returns are confiscated by the IRS and turned over to the Department of Education to be put toward the defaulted balance. The loan rehabilitation program is intended to help borrowers get back on track by making a set number of monthly loan payments on time, after which the defaulted loan status will be erased from the borrower’s credit report and the borrower will be allowed to get on one of several income-driven repayment programs.
Once the loan is rehabilitated, IBR payments could be as little as $0 a month, depending upon the borrower’s income. After twenty to twenty-five years on IBR, the remaining loan balance is forgiven (although it currently comes with a hefty tax bill on that discharged debt). The problem isn’t the terms of the rehabilitation process, but lies in its execution.
According to the Ombudsman’s report, which was released in October 2016, one in three borrowers will default again after going through the rehabilitation process because of processing delays and communication issues. Many borrowers who qualify for $0 monthly payments aren’t made aware that they qualify. Since they make higher payments than they can afford based upon their income, this leads them to eventually default a second time.
The data analyzed by the Ombudsman comes from the CFPB’s Consumer Complaint Database, which allows consumers of financial services to submit complaints by category, such as for student loans. The information from the database is available to the public through the CFPB’s website. A leading complaint type in the student loan category is from borrowers attempting to transition from a defaulted status to IBR programs.
Substantial delays in the process, and miscommunication from student loan servicers, seems to often lead to frustrated borrowers who either give up on the process and allow their loans to slide back into default or attempt to make the higher payments until they have no recourse but to fall back into default. The Ombudsman urges that the rehabilitation process needs reform and increased oversight to ensure that borrowers are educated about their options when it comes to student loan rehabilitation. This includes knowledge of IBR availability and increased education about the process of rehabilitating loans smoothly from one step to the next.
Among the many recommendations in the report is that legislators consider additional laws and regulations that require student loan servicers and debt collectors to “reach back” to borrowers during the rehabilitation process. This recommendation is intended to increase the amount and extent of early communication and help borrowers avoid sliding back into default, especially in the earliest stages of the process. Borrowers need accurate information if they are to successfully rehabilitate. This might also involve identifying those borrowers who, even among those in default, are at the highest risk of re-defaulting – such as those with prior defaults or those with especially low incomes.
The Ombudsman also recommends that legislators link borrower performance to the compensation that debt collectors receive. Currently, debt collectors are economically incentivized to encourage borrowers to repay, even if borrowers actually qualify for $0 payments. Linking the debt collector and servicer’s remuneration to whether or not the borrower successfully completes the rehabilitation process would encourage these entities to assist the borrower throughout the rehabilitation and see them successfully to the IBR stage.
It is fairly well-known that we’re going through a student loan repayment crises of historic proportions. Both the overall amount of student loan debt as well as the amount of loans in default have never been higher than it is today. While there is no easy solution to the many issues presented, the Ombudsman’s latest report contains several well-reasoned recommendations that would help millions of borrowers get their loans back on the road to successful repayment.
Author: Jeff Gitlen
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