High Rate of Re-default for Rehabilitated Borrowers

on November 7, 2016

Borrowers who default on their federal student loans may rehabilitate the loans by making a series of consecutive on-time qualifying payments or by consolidating their loans and choosing an income-driven repayment plan. Rehabilitation represents a one-time opportunity to restore the loans to a current status. Unfortunately, a high percentage of rehabilitated borrowers default again on their loans, according to a report from the Consumer Financial Protection Bureau (CFPB).

According to CFPB estimates, more than 650,000 defaulted student loan borrowers rehabilitated their defaulted federal student loans by making 9 out of 10 consecutive, on-time, voluntary monthly payments. The CFPB believes that more than 220,000 of them, about a third, will re-default during the next two years. Overall, the CFPB reports that 45 percent of borrowers who rehabilitate defaulted federal student loans will eventually default again. Student loan servicers report that about a third of rehabilitated borrowers become delinquent within two months of rehabilitation.

The CFPB blames problems enrolling in an income-driven repayment plan or renewing their enrollment for the bulk of the re-defaults. When borrowers are unable to enroll in an income-driven repayment plan, it sets them up for “payment shock” that can lead to re-default.

The CFPB receives more complaints about income-driven repayment than any other problem area.

A key problem is that the borrower must annually provide authorization for the IRS to transfer income information to the loan servicer, instead of providing a one-time authorization that covers the entire repayment period. This is compounded by communication, customer service and servicing problems affecting income-driven repayment, and borrower confusion. The process of transitioning from a default status to a current status with an income-driven repayment plan is too complicated with too many steps. 

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