The Federal Student Loan Default to Income-Driven Repayment Transition

By Rachel Fenton

In October, the Consumer Financial Protection Bureau (CFPB) published its Annual Report of the CFPB Student Loan OmbudsmanThis report analyzed complaints submitted by consumers from September 2015 through August 2016, including 5,500 complaints related to private student loans and 2,300 complaints about debt collection of private and federal student loans.  Since the CFPB recently began accepting federal student loan servicing complaints, this report also analyzed 3,900 federal student loan servicing complaints received between March and August 2016.  The report features a detailed analysis of complaints regarding the transition from default to repayment status.

Key points and recommendations from the report are highlighted below.

  • In analyzing a sample of the 3,900 federal loan servicing complaints, the CFPB found that most complaints (20% of total) were related to income-driven repayment (IDR). For example, consumers complained about the process of enrolling in IDR plans, recertification of their income, problems processing qualified payments for the purpose of loan forgiveness or switching between IDR plans.
  • With more than eight million federal student loans in default, the report provides information about two options borrowers have to “cure” a default:
    • A borrower can rehabilitate their debt by making nine on-time payments to their debt collector. The debt collector uses the borrower’s financial circumstances to determine the amount of these payments, with some borrowers having a payment as low as $5 per month.  After a loan is rehabilitated, a borrower may enroll in an IDR plan, often with a $0 monthly payment.
    • As an alternative to rehabilitation, a borrower can refinance their defaulted debt with a new Direct Consolidation Loan and concurrently enroll in an IDR plan.
  • In the past year, the CFPB estimates that 650,000 borrowers rehabilitated a federal student loan by making $5 payments. Unfortunately, the CFPB projects that about one-third (220,000) of these rehabilitated borrowers will default again within two years.
    • The CFPB received complaints indicating that collection processes and servicing problems delayed the default-to-IDR transition for borrowers, creating barriers to borrowers’ ability to avoid future defaults. For example, if there is a delay by the servicer in processing an IDR application, a borrower may unexpectedly have to pay a high standard repayment (rather than $0 under IDR).
  • The report recommends that policymakers strengthen the transition from default to IDR, streamline the IDR application and enrollment process, modify debt collection and servicer compensation to encourage long-term borrower success and implement the U.S. Department of Education’s July 2016 recommendation to monitor high-risk borrowers.