1 in 3 rehabilitated student loans may wind up back in default

Consumer bureau finds too many students falling through the cracks of loan work-out programs

The Consumer Financial Protection Bureau (CFPB) has some dire warnings for consumers trying to clean up their student loans. It says one in three borrowers who have rehabilitated their status could be driven back into default because of gaps between student loan programs.

“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. “Today’s report shows that far too many of these borrowers continue to fall through the cracks of a flawed student loan system."

The report, prepared by the CFPB's student loan ombudsman, 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 estimates that the breakdowns along the path out of default will cost borrowers hundreds of millions of dollars, including over $125 million in unnecessary interest charges over the next two years. The bureau is calling for an overhaul of these programs in order to help improve the recovery process for distressed consumers.

“Too many student loan borrowers are being left behind due to breakdowns in the federal programs designed to provide them a fresh start, including an affordable monthly payment and a path to long-term success,” said CFPB Student Loan Ombudsman Seth Frotman. “This report offers further evidence that industry practices and needless red tape can turn a student loan into an unbearable burden. Policymakers should work to reform the programs that are failing those borrowers that need help most.”

Student debt has grown markedly over the last decade, with about 44 million Americans now owing roughly $1.4 trillion, most of it from federal loans. It's estimated that more than 8 million borrowers haven't made a payment in at least 12 months and have fallen into default.

Besides costing taxpayers money, defaulting causes problems for the borrower, including wage garnishment, loss of federal benefits, and negative credit history.

"Rehabilitation" process

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. 

But consumers have complained to the CFPB about every step of the process for getting out of default and into an affordable repayment plan. They borrowers report a range of debt collection and servicing breakdowns across these programs.

What to do

While the CFPB is pressing for improvements to the rehabilitation program, it offers advice that can be used now by borrowers trying to retire their loans. The Repay Student Debt tool 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 can be found at: consumerfinance.gov/students

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