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NYC Consumer Debt Defense Project

Avoiding Student Loan Default

Saturday, September 22, 2012

The federal student loan program offers flexible payment plans that are supposed to keep borrowers out of default even when they have lost their jobs and can afford almost nothing in monthly payments. But these programs will never serve their intended purpose until the government does a better job of getting out the word about them and makes them easier to use.

As The Times’s Andrew Martin reported this month, defaults on government-backed loans have exploded since the start of the recession. The number of people who have fallen at least 12 months behind in payments has risen by about a third over the last five years, which means that nearly one in every six borrowers with a loan balance is in default.

The amount of defaulted loans — about $76 billion — is said to be greater than the yearly tuition bill for all students at public two- and four-year colleges.

Many of those in default could benefit from a flexible payment plan or loan forgiveness. Instead, they end up with ruined credit histories and even higher loan balances through penalties, and become prey to debt collectors who can garnish their wages for the overdue amounts.

The dunning letters that borrowers receive are mostly intended to terrify them into paying as much as they can as quickly as possible; they often fail to explain that the borrowers can avoid default by signing up for more affordable payment plans. A recent report by the National Consumer Law Center included a survey of 40 people in default and found that nearly two-thirds of them did not recall being contacted before being declared in default. This means they never had a chance to avoid it by signing up for alternative plans.

One of these plans, called Income-Based Repayment, caps the required monthly payment at an affordable amount based on the borrower’s earnings and family size. Under this program, people who pay 15 percent of their discretionary incomes for up to 25 years have the rest of the loan forgiven. There is a similar kind of loan forgiveness program for borrowers who work full time in public service jobs for 10 years.

Critics have complained that the application for the Income-Based Repayment program is too complicated. Fortunately, the Department of Education plans to introduce a streamlined online application for the program this month. But the government should go a step further, automatically enrolling qualified borrowers — including people on public assistance or Social Security — while they are behind on payments, before they officially default.

The department is also completing regulations that will protect delinquents from being moved into payment plans that they cannot afford. But it will be difficult for collectors to administer the complex provisions laid out in federal law. The better option would be for the department to take the $1.4 billion it paid collection agencies and other groups last year and use it to establish a division that deals with delinquent debts and loan disputes.

The Internal Revenue Service took this approach with delinquent taxpayers a few years ago and found that it was a cost-effective way to get more people into compliance with the law.

The government should also broaden access to its loan rehabilitation program, which allows people in default to get back into compliance by making a specific number of payments and meeting certain conditions.

The federal student loan program is meant to give millions of Americans a chance at a college education, which can lift them up economically. That goal is undermined when crushing repayment burdens in hard times actually push many people to the very margins of society.

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