A new report released by the Consumer Federation of America (CFA) shows eight million borrowers failed to make payments on $137 billion in federal student loans for at least nine months during 2016. This is an increase in nonpayment of 14 percent from last year. Almost half of defaulted student loans are from the Federal Family Education Loans (FFEL) program. According to the authors of the report and federal lawmakers, student loan servicers and the Department of Education may be to blame.
There are several income-based programs that can help keep borrowers with federal loans out of default. For example, the REPAYE program caps monthly payments to 10 percent of a borrower’s discretionary income. This means that if a borrower makes $0 (is unemployed or working as an unpaid intern), his or her monthly payments are also $0. So why are these programs not working?
Loan servicers have been accused of steering borrowers away from income-based programs or losing paperwork when borrowers sign up. In addition, loan servicers are accused of misallocating payments. We recently discussed the lawsuit against Navient that goes into more detail on the subject. However, borrowers are also making mistakes. The CFA claims half of borrowers who sign up for income-based plans fail to provide documentation in time to qualify for lower payments. They miss the deadlines for these programs.
The Department of Education may also share some of the blame. Senator Elizabeth Warren and U.S. Representative Suzanne Bonamici recently sent the Education Department a letter, asking them to walk back the steep fees borrowers receive after defaulting. When borrowers with FFEL loans default, they may be charged up to 16 percent of the principal balance in addition to accrued interest. Until the Education Department rolled back protections last Thursday, borrowers had been allowed to rehabilitate their loans within 60 days of defaulting to avoid these fees.
Do Borrowers Have Options on Defaulted Student Loans?
Student loan borrowers who have defaulted on loans may have options to lower payments or discharge their debts through bankruptcy. Although it is difficult to receive an undue hardship discharge, it is not impossible. Under the correct circumstances, student loans can be discharged. It cannot hurt to have a bankruptcy attorney review your situation.
The Kansas City bankruptcy attorneys at The Sader Law Firm can help struggling student loan borrowers look at options for managing debts.