With the cost of obtaining a degree from a college or university skyrocketing, on average 6% each year, it is not surprising that student loan debt also continues to rise. Currently, more than 44 million borrowers throughout the United States are burdened with student loan debt, totaling more than $1.3 trillion. Although taking on debt is a necessary part of finishing a college degree for the vast majority of students, carrying tens of thousands of dollars of education loans into adulthood creates a financial challenge that impedes individuals from moving forward with other objectives.
In an effort to ease the difficulty some borrowers face in the process of repaying a significant student loan debt, the federal government rolled out a handful of new programs over the last decade. Income-driven repayment plans are intended to cap the minimum payment due on federal student loans based on a borrower’s earnings. The programs want to encourage on-time repayment while simultaneously allowing borrowers to work toward other financial goals, including saving for retirement, setting aside an emergency fund, or buying a home. Unfortunately, not all student loan servicers are playing nice with borrowers when it comes to various repayment plans.
Consumer Financial Protection Bureau Findings
In a recent report released by the Consumer Financial Protection Bureau (CFPB), it was found that several student loan servicers catering to federal student loan borrowers are routinely denying access to repayment plans driven by income levels. The report revealed that despite having a justifiable reason to utilize an income-based repayment plan, student loan servicers were creating barriers to entry into the programs for thousands of borrowers.
Within the report, a number of issues were uncovered, including extended processing time for income-based repayment program applications and declining applications from borrowers who were otherwise eligible. According to the CFPB, more than 3,500 complaints have been submitted relating to student loan servicers, with the most common issues dealing directly with income-driven repayment plans. The majority of borrowers cite issues with servicers after applications for repayment plans are submitted, and feeling as though they have little recourse to address the problems.
The Cost of Denying Access
The inability of borrowers to access income-driven repayment programs for their federal student loans is more than a logistical annoyance. The government put in place these programs to assist borrowers who may find it difficult to repay their student debt on time each month due to lower income levels or unemployment. Without access to income-driven programs that cap total repayment at an affordable amount, borrowers face the threat of defaulting on student loans, unnecessarily.
Not paying students loans on time leads to a rapid downward spiral for borrowers. Late or missed payments plague an individual’s credit report, oftentimes for years into the future, making it a true struggle to obtain affordable financing for any of life’s other substantial expenses. In addition, the CFPB reports that denying borrowers access to income-driven repayment programs leads to an increase in late payment fees on the servicer’s end, non-sufficient funds fees on the financial institution’s end, and accrual of interest that is nearly impossible to get out from under for some borrowers. Higher default rates coupled with the increased total cost of student debt results in negative outcomes for thousands of borrowers trying to repay their student loans.
Available Repayment Programs
Some borrowers are able to afford standard repayment terms on their student loan debt, which equates to a 10-year repayment period at a fixed interest rate. However, for borrowers who have yet to find a high-paying career or those who have an exorbitant amount of student debt, income-driven repayment programs are intended to be a financial lifesaver. Here are the income-driven options available to student loan borrowers with federal student loans:
- Revised Pay as You Earn Repayment Plan (REPAYE) – monthly repayment across all federal student loans is capped at 10% of a borrower’s discretionary income. (Read more: PAYE guide)
- Pay as You Earn Repayment Plan (PAYE) – monthly repayment for federal student loans is capped at 10% of a borrower’s discretionary income, but that amount is never more than the monthly payment amount of a 10-year standard repayment plan amount. (Read more: REPAYE guide)
- Income-contingent Repayment Plan (ICR) – borrowers have the ability to pay the lesser of 20% of discretionary income or the amount of a fixed repayment plan extended for 12 years, adjusted for individual income.
- Income-based Repayment Plan (IBR) – for new borrowers who have taken out a student loan on or after July 1, 2014, monthly repayment for federal student loans is capped at 10% of discretionary income, not to exceed the 10-year standard repayment plan amount. Borrowers who took out student loans before July 1, 2014, have payments capped at no more than 15% of their discretionary income. (Read more: IBR guide)
With each of the income-driven repayment plans, borrowers have the ability to apply for forgiveness of any remaining balance at the end of the repayment term. Depending on the plan selected, the repayment term is either 20 or 25 years.
Borrowers who are denied access to these helpful income-driven repayment programs may be fighting a losing battle with their student loan servicer. An increased potential for default and the added costs of student debt leave borrowers without viable options for repayment. The CFPB recommends implemented a simplified process for apply and implementing income-drive repayment plans across all student loan servicers with the help of a fix it form. The agency encourages student loan services to create “more responsive, consistent servicing” to enable student borrowers to repay their student loan debts without causing financial hardship and without facing default.
Author: Jeff Gitlen
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