At-Risk & Defaulted Student Loan Borrowers Given a Second Chance

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Affordable Repayment Plans Being Overlooked by the 90% Who Need It Most


Paying back tens of thousands of dollars in student loans can be difficult, and more than 1 million Americans currently have default student loans. on their federal student loans just last year. But why are nearly all of these same borrowers failing to take advantage of programs to help them avoid a defaulted student loan again?

According to a new analysis [PDF] from the Consumer Financial Protection Bureau, 9-in-10 borrowers who are exiting default on their student loans are not enrolling in federal repayment programs that base the amount they pay each month on their earnings.

“The Department of Education estimates that more than eight million federal student loan borrowers have entered default” described as failing to make payment on their debts for at least 12 months.

According to the report,

student loan servicerswho are responsible for informing borrowers about affordable repayment options”are not holding up their end of the bargain when it comes to assisting debtors in avoiding the second default of their loans.

While many borrowers who enter default will be able to bring their accounts back into the black, according to the CFPB analysis not all of them will stay that way despite available programs intended to provide a fresh start.


One option allows borrowers to work with a debt collector to “rehabilitate” their defaulted debt by making a certain number of on-time payments. Once the account is current, loan servicers can assist borrowers in enrolling in an affordable repayment plan. This option is used for roughly 70% of all federal loan collections.

Under the second option, borrowers can refinance the default student loan debt by consolidating it into a new Federal Direct Consolidation loan, which immediately moves them into an affordable repayment plan. The CFPB’s analysis found that fewer than 2% of borrowers were enrolled in repayment plans immediately after bringing their accounts current. One year later, the nine out of 10 borrowers still hadn’t accessed a repayment plan.

Because of this, the CFPB found that nearly half of previously defaulted student loan borrowers will re-enter default within three years of rehabilitating their accounts. Of these borrowers, the report found 75% did not successfully pay a single bill to their student loans servers. Conversely, of those who do enter a repayment program after default, the CFPB found that less than one in 10 end up back in default.


As for the second repayment option — the consolidation of loans — the CFPB analysis found that 95% of high-risk borrowers in this program did not re-default on their loans within 12 months of enrollment. After two years, the analysis found that these borrowers defaulted at a rate one-third lower than the rate for those who rehabilitated their loans but did not consolidate.


According to the CFPB, the new data is evidence that borrowers, taxpayers, and student loan companies can benefit from a clearer, more streamlined process to help previously defaulted student loan borrowers successfully repay their debts over time.


For far too many student loan borrowers, the dream of a fresh start turns into a nightmare of  

default and deeper debt,”

CFPB Student Loan Ombudsman Seth Frotman said in a statement.

When student loan companies know that nearly half of their highest-risk customers will quickly fail,

it’s time to fix the broken system that makes this possible. “

Thankfully, there are privately owned companies who have stepped up to pick up the slack being left by these larger Loan Servicers.

Companies such as Student Loan Guidance Group, a locally owned student loan document preparation company, normally charge a servicing fee for their services. However, when weighing overall value vs cost, it’s quite minuscule in comparison. Just like when hiring a tax accountant for tax season. You’re ensuring your submission is completed within a timely manner, receiving the most beneficial options and more importantly, it’s being done correctly. This is what companies such as Student Loan Guidance Group do for your student loans.