NEW YORK (MainStreet) The Consumer Financial Protection Bureau (CFPB) Student Loan Ombudsman Rohit Chopra recently responded to those who asked the CFPB about the status of the $1 trillion that has already been borrowed to pay for college tuition.
An August 5 article by Chopra paints a bleak portrait. Chopra found that there are over 7 million borrowers in default on federal or private student loans. The CFPB also estimates that roughly a third of Federal Direct Loan Program borrowers have chosen alternative repayment plans to lower their payments.,/p>
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The CFPB analyzed data from the National Student Loan Data System. They examined both the Federal Direct Loan (FDL) and the Federal Family Educational Loan (FFEL) Programs. The data represent loan status as of June 2013. FFEL loans were made by private lenders. Commercial lenders would use their own capital to finance loans but received government incentive subsidies.
It is not encouraging. The repayment status for the federal student loan programs breaks down this way: for the FDL only 42% ($237.4 billion) are in repayment. The remainder is divided this way: 24% ($133.8 billion) are still in school, 7% ($40.4 billion) are in a grace period, 13% ($75.6 billion) are being deferred, 8% ($48.3 billion) are in forbearance, 5% are in default ($30.5 billion) and 1% ($3.2 billion) is listed as "other."
The FFEL program fares slightly better. 60% ($256.3 billion) are in repayment, but 14% ($58.8 billion) are in default. Some 3% ($12.2 billion) are still in school, 2% ($6.6 billion) are in a grace period, 11% ($46.5 billion) are in deferment and 11% ($49.1 billion) are either in forebearance or in an alternative arrangement.
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CFPB noted that it is hard to compare the Direct and FFEL programs to each since a much larger portion of Direct Loan borrowers are still in school and no new loans have been made through the bank-based FFEL program since 2010.
The CFPB emphasizes that a "noteworthy number of borrowers are in default." They caution those who are in default in the following way: "Defaulting on a federal student loan has serious consequences. Unlike other consumer credit, borrowers in default on a federal student loan might see their tax refund taken and their wages garnished without a court order."
They then mention a number of different ways to avoid default. The report mentions that borrowers can reduce their payments by choosing an Income Based Repayment (IBR) plan where their monthly payment can be tied to a portion of their income after submitting documentation. The newest of these plans is Pay As You Earn (PAYE), which is a payment equal to roughly 10 percent of one's income above the poverty line. After 20 years, any remaining balance is forgiven.
Chopra also advises that there are plans that extend payments over a longer time period and graduated repayment plans that require smaller initial payments. These can be combined. He cautions they all will incur more interest over the life of the loan. But they also do not require much documentation for enrollment.
He says that based on the average estimated balances for borrowers in each plan, many "borrowers in plans not based on income might be better off with an income-based plan. If borrowers were aware of and able to easily enroll in income-based plans through their servicer, many federal student loan defaults could have been avoided."
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"IBR and PAYE are for new borrowers - IBR is for the 2008-2012 cohort," said Clare Law, a Charleston, South Carolina-based Certified Educational Planner. "I recently spoke with a law school graduate. Her loans were $3,200 a month. She consolidated with SallieMae and extended the repayment period and now pays 'only' $2,000 a month for 30 years."
Law pointed out that IBR and PAYE are federal repayment plans for federal loans only and are based on the borrower's income.
"Non-federal loans issued by banks do not offer these provisions nor do they offer forgiveness if you work at a non-profit," she said. "Even though you make regular payments there's a balance at the end of the payment period. The object of these income-based repayment plans is to prevent loans from skyrocketing out of control and get into negative amortization."
"I worry that in dealing with the trillion+ outstanding student loan volume, we're engaging in triage after a disaster that could have been avoided through better financing policy," said Barmak Nassirian, an independent consultant, who was formerly an official with the American Association of Collegiate Registrars and Admissions Officers. "By the time students become borrowers, they have already made the most crucial decisions regarding where to go to school and how much they should borrow."
Nassirian is alarmed by the numbers in Chopra's report. He thinks Congress and the Administration should seek out policies to address the underlying causes of the student debt.
"Chopra is on to something when he points out that too many borrowers who should be taking advantage of them are struggling with repayment or are in default," Nassirian affirmed. "The most obvious reason for the low participation rates is that the incentives for servicers conflict with the best interest of borrowers and the taxpayers."
Nassirian calls on Congress to clean up the mess that the repayment system of student loans has become by simplifying the options and "ending the atrocious requirement that significant chunks of the loan servicing volume must be handed to underqualified state-affiliated entities as make-work."
--Written by Michael P. Tremoglie for MainStreet