What’s striking about the findings is that Americans now more than ever have a variety of repayment options to avoid default. The Obama administration expanded programs that limit monthly payments to a percentage of earnings, but even though millions of people are enrolled in those income-driven plans, there’s still a disconnect.
“Despite a rising stock market and falling unemployment [rate], student loan borrowers are still struggling,” said Rohit Chopra, a senior fellow at CFA and a former student loan ombudsman at the Consumer Financial Protection Bureau. “The economy remains very difficult for so many young people just starting out.”
Chopra lays some of the blame on colleges doing a poor job of graduating students who take on debt, leaving them with limited prospects of earning enough to repay the loans. He also cited accreditation agencies and the Education Department, which do not hold those schools accountable. He said policymakers should consider a bipartisan proposal to force schools to share the risk of borrowing by having them reimburse the government for a percentage of defaults.
Nearly half of the outstanding debt in default comes from the old bank-based federal lending program, known as the Federal Family Education Loan (FFEL) Program. There has been a fairly steady increase in the total amount of past-due debt in the program, even as the number of borrowers has declined, suggesting that interest charges and other fees are being tacked on to balances.
On Monday, Sen. Elizabeth Warren (D-Mass.) and Rep. Suzanne Bonamici (D-Ore.) sent a letter asking the Education Department to stop imposing double-digit collection fees on people who default on FFEL loans. Those borrowers can be charged up to 16 percent of the principal and accrued interest owed on the loans, unless they enter the government’s loan rehabilitation program within 60 days of default. Yet companies overseeing the collection of that debt are imposing the fee regardless, lawmakers say.
“The Department and Congress must do more to help student loan borrowers manage their payments and avoid the long-term consequences of default. Penalizing borrowers who take prompt action to cure their defaulted loans is a step in the wrong direction,” the letter said.
According to the CFA study, the average amount owed per federal student loan borrower, at $30,650, has climbed 17 percent since the end of 2013. There is no single explanation for that growth, but policy analysts have said borrowing to attend expensive graduate programs, state disinvestment in public higher education and an overall rise in the cost of college are contributing factors.
Although the number of borrowers defaulting for the first time in the direct loan program slowed last year, tens of thousands of people are defaulting for at least a second time, a trend that has led policy analysts to question the effectiveness of student loan servicing companies. The government pays those contractors hundreds of millions of dollars to keep people current on their payments and avoid default.
“More than 1 million people defaulted last year, and most of that could have been prevented by loan servicers. Too many of them put their own bottom line before the best interest of borrowers,” Chopra said. “There are too many people given the runaround.”
As an example, Chopra pointed to the charges being leveled against Navient in a CFPB lawsuit, which accuses the student loan servicer of misallocating payments, steering people into costly plans, supplying the wrong information and ignoring borrowers’ pleas for help. Navient has called the allegations unfounded and said it has a strong track record of keeping people out of default.
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