Thursday, May 18, 2017
One of the critical steps taken in recent years to help student borrowers manage rising levels of indebtedness was the creation of flexible repayment plans, which tie monthly payments to borrower income. However, most students do not use these plans and many may not even know they have the option.
Yesterday the Consumer Financial Protection Bureau provided some evidence of the cost of ignorance, for borrowers who are most at risk.
The Bureau released a brief report finding that more than 90 percent of borrowers who already defaulted on student loans were not enrolled in one of these flexible repayment plans. Further, the Bureau found, these borrowers who did not enroll in one of the income-linked plans were five times as likely to default a second time.
These findings, based on responses from student loan services that, together, manage accounts for approximately half of all student loan borrowers, suggests that students are not getting the word.
Overall, rates of delinquency – that is, falling behind on payments, a prelude to default – are lower for students on income-linked plans. Slightly less than one-third of federal direct student loans in repayment are in an income-linked repayment plan, according to the Education Department’s Office of Federal Student Aid.
The findings should raise three questions. First, how well are student loan servicers advising borrowers about their repayment options? Second, why are there so many plans, creating such complexity for student borrows to navigate? And third, why aren’t income-linked plans, rather than the ten-year, fixed payment plan, the default for all borrowers?
Good questions all. Unfortunately, the answers are not in the Bureau’s report. But the implication is clear: In the absence of regulatory action, students need to be better informed about their options.
The federal Education Department’s description of the different income-linked plans is here. This post will not try to weigh the relative advantages and disadvantages of each. Others, including The New York Times, Time and US News, have already taken that on, and The Institute for College Access and Success has put together a handy comparison chat.
Spread the word.