Aware of the vast numbers of people struggling to keep up with their student loan repayments, the government has been working to come up with options to help. With programs like Income-Based Repayment, which has been around since 2007, people who have lost their jobs or are just earning enough to make ends meet can restructure their plans. With this plan, monthly student loan payments can be reduced to next to nothing. So if there are all these great options available to help people avoid defaulting, why has the number of people who have fallen at least one year behind in their payments risen by about a third in the last five years? Why has one in every six borrowers defaulted on their student loan? Shouldn’t these numbers be going the other way? The problem is that most people don’t know how easily the nightmare of defaulting can be avoided.
Nightmare is no exaggeration. With penalties and fees, people end up owing many times the original amount owed once they’ve fallen into default. Defaulters end up digging themselves a hopelessly big hole from which it becomes harder and harder to climb out. On top of which: their credit rating completely tanks. The other problem is that there’s really no hiding from the federal government; they have the money, the means and the desire to recover what you owe.
Currently, there is about $76 billion dollars worth of defaulted federal loans. Yet the federal government has an 86% loan recovery rate. The upshot is, they will eventually find you and they will eventually make you pay. One of the main ways they go about maintaining that percentage rate is by hiring collection agencies to go after borrowers in default. Last year the Department of Education spent $1.4 billion dollars on collection agencies and other groups to recover defaulted payments. Another common method is to use the IRS to withhold income tax returns, putting them toward defaulted loans instead of into your pocket.
There are a lot of problems in our society that are difficult and unwieldy; complex problems that require serious consideration and a willingness to listen on all sides. This is not one of those problems. This one has been fixed. The rate of people defaulting on federal student loans does not have to to keep climbing when there are programs in place that are specifically designed as an alternative to bankruptcy and default.
Critics complain that the two biggest problems with Income-Based Repayment and other alternative repayment plans of its breed are twofold: a lack of awareness of the benefits of switching to such plans, and that such plans are too complex for people to understand. It really seems like both of those problems are easy fixes, doesn’t it? A lot of people who work with student loans have come to the same conclusion and are working hard to spread the word. There are organizations in place that have the knowledge to help; organizations that are designed for the expressed purpose of helping students out of a debt crisis via information spread and loan optimization.