3,000 People Per Day Needlessly Default on Federal Loans

Michael Lux Blog, News, Student Loans 0 Comments

Defaulting on your federal student loans is a nightmare.  In addition to your credit being destroyed, which makes it nearly impossible to get a mortgage and even makes find a home to rent difficult, the fees an interest add up.  Loan balances can quickly double when you factor in late fees, default fees, and compounding interest.  Making matters worse is that bankruptcy offers little protection for student loan borrowers.  Unlike credit card, mortgage or auto loan debt, a student loan cannot be wiped away in a standard bankruptcy proceeding.

Despite the devastating consequences of federal student loan default, on average, about 3,000 people per day will default on their federal loans, according to Department of Education records.

The really sad part is that defaulting on your student loans can easily be avoided.

How Does Default Happen?

When a borrower has not made a required payment on their federal student loans for over 270 days, it is considered to be in default.

One of the major issues with federal repayment is that the “standard repayment plan” is also the most expensive repayment plan.  On the standard plan, payments are calculated so that the borrower will have paid off the loan in its entirety within 10 years.  This is a problem because borrowers will get bills in the mail from their loan servicer saying they owe X dollars, when the borrower cannot afford that amount.  These borrowers also get collection calls saying that they owe a large sum of money.

The reality is that borrowers have the option of an extended repayment plan where the payments are spread out over 25 years as well as income based repayment plans that could lower the monthly payments to $0 per month.  Unfortunately, many borrowers are not aware of these opportunities.

Avoiding Default

Even if a borrower is unemployed and has no source of income, they can avoid default.  They simply have to sign up for an income driven repayment plan.

Signing up is easy, it takes very little time, and it can keep loans out of default.  Best of all, while the borrower is making $0 per month payments, each month still counts towards student loan forgiveness.

Continued enrollment merely requires a yearly recertification of income.

Fixing the Problem

Individuals borrowers can fix a federal loan default by calling their loan servicers and getting signed up for an income driven repayment plan.  These plans lower student loan payments to a portion of their discretionary income making it affordable in just about any circumstance.

The federal government and loan servicers could address the issue of 3,000 people per day defaulting by providing better information about income driven repayment plans and possibly modifying the standard repayment plan.  Too many people receive a bill they think they have no chance of ever paying, so they ignore it.  Better informed borrowers would reduce the unnecessarily high default rate.

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