Income-Driven Repayment Isn’t Enough to Prevent Default

Rather than getting them back on track, the most popular tool for getting out of default is instead derailing borrowers. For the more than 8 million people who are in default, the most common path back to active repayment is loan rehabilitation. This one-time only option resolves the default and returns borrowers to regular servicing after they make nine on-time monthly payments. The theory is that rehabilitation creates a habit of repaying debt monthly, preventing re-default in the future. However, troubling new data suggest that rehabilitation does not guarantee positive outcomes for defaulted borrowers.

On Tuesday, the Consumer Financial Protection Bureau (CFPB) released an update to its 2016 annual report from the Student Loan Ombudsman. Using data from five federal loan servicers that, together, manage the accounts of more than 20 million borrowers, the CFPB studied how borrowers who rehabilitated their defaulted loans fared when they re-entered a typical payment scheme. The outcomes were not good. Forty percent of those borrowers re-defaulted within three years and more than 75 percent did so without paying a single bill.

The CFPB report shows how easily borrowers can get derailed when their loans change status. The federal government doesn’t have a streamlined process for keeping borrowers in similar repayment plans, instead forcing borrowers to start at square one. And even if these problems got fixed, proposed reforms don’t address a lingering problem: Our solutions for helping borrowers stay out of default are ill-constructed for the low debt levels of the most at-risk students.

Rehabilitated borrowers are not using income-driven repayment plans

While the exact reason why rehabilitated borrowers default again is not clear, one thing the CFPB data show is that re-defaulters are not using income-driven repayment (IDR) plans that can lower, if not outright eliminate, monthly payments. According to the CFPB, about 80 percent of rehabilitated…

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