This Simple Step Sets Borrowers up for Success After Student Loan Default

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Struggling to pay your student loan debt?

Like, really struggling?

If you’re working your way out of default status, you should be aware of this major hangup borrowers like you face.

When you get out of default status, you keep paying your loans. Pretty simple.

But if you’re not set up with an affordable income-driven repayment plan, you’re getting set up to fail all over again. A new report by the Consumer Financial Protection Bureau revealed that half of previously defaulted student loan borrowers default again if they’re not set up with an affordable income-driven repayment plan.

What You Need to Do After Student Loan Default

If you’re one of the more than 1 million borrowers who defaulted on federal student loans last year, you were probably placed in a rehabilitation program run by a debt collector. Under this program, you can exit default status if you make on-time online payments for at least 9 out of 10 months.

Typically, a debt collector oversees you as you make your required payments, then transfers you back to your servicer or the government for assignment to a student loan servicer. Then, that servicer can help you enroll in an income-driven repayment plan.

It seems pretty simple.

The catch: The CFPB found that 9 out of 10 high-risk borrowers who completed a rehabilitation program were not set up with an affordable repayment plan nearly a year after exiting default status.

“Fewer than two percent of borrowers accessed this protection immediately after paying a debt collector to get out of default,” the CFPB reported.

It’s as if DJ Khaled was onto something when he declared, “They don’t want you to win.”

A Better Way to Repay Student Loans if You’re Struggling

Meanwhile, there’s another way you can get out of default on your federal student loans. You can refinance your debt into a new Federal Direct Consolidation Loan, which will automatically set you up with a post-default affordable repayment plan.

The CFPB found that 95% of highest-risk borrowers don’t default again within the first year if they consolidate their loans into an affordable repayment plan.  

The CFPB wants to overhaul student loan repayment programs to simplify repayment options, create industrywide servicing standards and provide a more steady footing for “economically vulnerable” borrowers (isn’t that all of us?!).

But just about every aspect of federal financial aid and student loan repayment is on the chopping block with President Trump’s new budget proposal, so stay tuned. This could all change in an instant.

For now, troubled graduate, here’s what you can do:

  1. If you’re in default and headed toward collections, ask for loan consolidation over a rehabilitation program.
  2. If you’re exiting default or expect to do so soon (good job!), ask for an income-based repayment plan to make it easier for you to continue making on-time payments.

Lisa Rowan is a writer and producer at The Penny Hoarder. She will be paying off her graduate school loans until the rapture, and probably after.

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