Nine out of ten of the highest-risk borrowers were not enrolled in federal affordable repayment plans, according to analysis from the Consumer Financial Protection Bureau.
The report also found that nearly half of the highest-risk borrowers redefault if not enrolled in an affordable repayment plan and that 95 percent of the highest-risk borrowers do not redefault within the first year when they consolidate into an affordable repayment plan.
The student loan market has ballooned in the last decade with about 44 million Americans now owing money more than $1.4 trillion in private and federal loans, 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 intended to provide a fresh start through two primary options, rehabilitation of defaulted debt or refinancing into a new federal Direct Consolidation loan. 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 collected information on how previously defaulted borrowers perform over time. Servicers collectively handling accounts for more than 20 million student loan borrowers provided information, including 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.
“Too many struggling borrowers fall through the cracks in a broken, outdated student loan system,” said CFPB Director Richard Cordray.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.”
The data shows 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,” the bureau said.