Creating an Income-Driven Repayment Structure for Defaulted Loans PDF Download

Author: Persis Yu
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Languages : en
Pages : 0

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Book Description
Before the COVID-19 pandemic, there were approximately 7.7 million student loan borrowers in default on approximately $168 billion in federally-held student loans, including Federal Family Education Loans (“FFEL”) and Direct loans. Though borrowers have in theory been able to get out of default since March 2020 through rehabilitation or consolidation, these numbers have hardly budged. In 2019, the last year before collections were paused due to the ongoing COVID-19 pandemic, total defaulted student loan receivables (principal and interest) serviced by the Department of Education's Default Resolution Group were approximately $185.1 billion. Collections that same year were approximately $14.5 billion. Difficulties with student loan repayment are unevenly distributed. Student loan borrowers in default and subject to collections are disproportionately likely to be from low-income backgrounds and communities of color, older, single, and living in severe financial precarity. Borrowers in default are disproportionately likely to be Black; one study has estimated that “nearly half of all Black students (49 percent) defaulted on at least one loan within 12 years--more than twice the rate of white students (20 percent) and more than four times the rate of Asian students (11 percent).” Borrowers in default are also less likely to have graduated from college than the median borrower, and so are correspondingly less likely to have experienced the income benefits of having a college degree. Student loan borrowers who attended for-profit institutions are also more likely to default than borrowers who attended private non-profit or public institutions. The U.S. Department of Education (“Department”) collects billions of dollars from borrowers in default every year through wage garnishment, tax refund offsets, and federal benefits offsets. These borrowers often rely on federal benefits, wages, and tax refunds to pay for basic necessities such as housing, food, transportation, clothing, childcare, and health care costs. Collections often push these borrowers over the financial brink. Indeed, most borrowers in default have incomes that make them eligible for a low or zero dollar per month income-driven repayment (“IDR”) plan. But many qualified borrowers never accessed IDR due to servicer misconduct or neglect. One of the many troublesome aspects of the debt collection system is the sheer amount that is collected from defaulted borrowers relative to their incomes. Perversely, the default system is designed such that many defaulted borrowers pay significantly higher sums through wage garnishment, benefit garnishment, and tax refund offsets than they would if they were on an IDR plan. Since 1992, the Department has regularly recognized through the creation of its IDR plans that student loan payments based on outstanding loan balance are simply unaffordable for a significant contingent of borrowers, and that time-limited repayment plans based on a borrower's income are more manageable, affordable, and thereby less likely to lead borrowers to default. While IDR plans have been expanded such that they are theoretically available to all borrowers, policy design failures and student loan servicer misconduct have combined to keep borrowers from accessing IDR at all or remaining in these plans over the long-term. Troublingly, Black borrowers in particular are more likely to fall into default without ever accessing IDR. In short, the same “struggling borrowers” that IDR plans are meant to help but fail to assist are ultimately those who default and from whom the Department collects enormous sums of money. Consider the experiences of Ms. Smith, an elderly, disabled, Black woman living on fixed Social Security retirement benefits of $1,800 per month. She suffers from severe back pain, fibromyalgia, and chronic depression. In 2019, Ms. Smith owed around $240,000 on a Federal Family Education Loan (“FFEL”) Consolidated loan. Her loans were on a repayment plan with a $2,100 monthly payment, which she had never been able to afford. Between July 2010 and March 2015, she called her loan servicer five times and told it that she could not afford her monthly payments. Each time her loan servicer put her on forbearance. She finally defaulted in July 2015, and experienced tax refund offsets of money she needed to survive. She rehabilitated her loan out of default in February 2019. At this time, she sought legal aid's help. They immediately submitted an IDR request which was granted, with a $0 monthly payment. The student loan system also failed Ned, a retired, partially disabled, Black veteran. Circa 1990, Ned's employer told him he had to attend a 6-week course at a truck driving school if he wanted to keep his job as a truck driver. He ended up having to take out around $3,000 in federal student loans, and did not learn anything from the course. Ned is now 68 and his loans have ballooned to almost $7,000. He does not have internet access or email. He was unable to keep up with the payments and defaulted in 2008. Ned has had over $7,600 garnished from his tax refund since then--it has all gone towards fees and interest with none applied to the principal balance. A retiree living primarily on Supplemental Security Income, Ned has qualified for a $0 IDR plan for years, which his servicer never told him about. He did not enter such a plan until late 2019 when a legal services organization contacted his servicer to get him out of default and onto an IDR plan, after over a decade of being in default. These experiences are commonplace. We propose several solutions to correct for this policy failure, and in particular urge the Department to (1) amend its regulations to dispense with the acceleration of defaulted debts and (2) reform the amount that is collected through debt collection to reflect an income-driven structure in which borrowers only pay what they can afford. While these reforms would not solve the broken default system, they would mitigate its impact on American families, and ensure that borrowers are never forced to pay more in default than they would under an IDR plan.