"Paying back tens of thousands of dollars in student loan can be difficult, and more than 1 million Americans defaulted on their federal student loans just last year. But why are nearly all of these same borrowers failing to take advantage of programs to help them avoid defaulting again?
According to a new analysis [PDF] from the Consumer Financial Protection Bureau, 9-in-10 borrowers who are exiting default on their student loans are not enrolling in federal repayment programs that base the amount they pay each month on their earnings." …
The income driven plans are based on income, family size, and state of residence … and the borrower has to provide this information (annually!) in order to be in this program. Also - and this is important, IMO - we shouldn’t be encouraging people to pay just 10% of available income IF they can pay more. Why should someone who “could” pay $100 a month be encouraged to pay $0 (based on the prior year income)? That just increased interest and lengthens the repayment period for the loan.
What is needed is a lot more education, in much simpler terms. I counsel graduate students about repayment, and I am constantly learning new things about how interest capitalizes on specific types of loans, how the IDR plans work, how being in paid-ahead status on PSLF payments negates future payments being counted toward the 120 total payments, etc.
And don’t even get me started on students trying to get into an IDR plan in the first place … I have worked very closely with students through this process, and it does not always go smoothly.
We need better consumer education, better communication, better servicers.