CFPB Makes Somewhat Unsurprising Finding in the Ridiculously Complicated World of Student Loan Repayment

The Consumer Financial Protection Bureau (CFPB) released a student loan industry report yesterday that shows 9 in 10 high risk borrowers were not enrolled in federal affordable (or income-driven) repayment plans (IDR) – plans that allow people to make payments based on how much they earn.

The report from the CFPB Student Loan Ombudsman, Seth Frotman, can be found here.

According to the findings, nearly half of those borrowers not enrolled in an affordable repayment plan redefault, as opposed to less than 10 percent of those who are enrolled. Frotman claims that a combination of problematic servicing practices and government programs prevent the most vulnerable student loan borrowers from accessing affordable repayment plans, which increases cost to taxpayers and fails to set up borrowers for success over the long term.

The following are the summary findings:

• The vast majority (greater than 90 percent) of borrowers who rehabilitated one or more defaulted loans were not enrolled and making IDR payments within the first nine months after “curing” a default.
• Borrowers who did not enroll in IDR were five times more likely to default for a second time.
• Nearly one in three borrowers who exited default through rehabilitation defaulted for a second time within 24 months, and over 40 percent of borrowers redefaulted within three years.
• A large majority (over 75 percent) of borrowers who default for a second time did not successfully pay a single bill to their student loan servicer.
• In stark contrast, borrowers who used consolidation to resolve their student loan defaults are more likely to immediately begin to repay their debts successfully.

Frotman concludes from the findings that the data supports the policy recommendations made in the 2016 Annual Report of the CFPB Student Loan Ombudsman. Among those recommendations is to simplify and streamline access to an income-driven repayment plan for all borrowers, irrespective of default status. In other words, the suggestion is to bypass the current collector-driven 10-month rehabilitation process for which, among other things, the Ombudsman questions current financial incentives.

The argument is that the rehabilitation process is a legacy feature of the bank-based guaranteed loan program, and is no longer relevant in the single creditor (Department of Education) environment.

The 2016 report also suggests that policymakers and market participants take near-term steps to address challenges identified in consumer complaints by improving borrower communication throughout the default-to-IDR transition and by streamlining IDR application and enrollment.

insideARM Perspective

While not the only complicating factor in play here, one very important element in this dynamic – hardly mentioned in the 2017 report -- is the ability for servicers and collectors to actually communicate with borrowers. This is required in order to help them. Student loans are complicated. Information is sent by snail mail. Many individuals, especially younger adults, say they don’t open their mail. Phone calls are made. Many individuals, especially younger adults, say they don’t listen to voicemail, and choose not to answer the phone if they don’t recognize the caller – or in the case of a caller looking for payments they feel unable to make, even if they do recognize the caller. 

From the 2016 report:

Policymakers and market participants may wish to consider steps to ensure student loan servicers “reach back” to borrowers during the rehabilitation process in order to establish early communication during the transition out of default.

As noted in prior reports, accurate and actionable information is critical to facilitate successful enrollment in IDR plans. This is particularly true for borrowers with characteristics that are associated with or predictive of future financial distress. In the July 2016 policy direction noted above, the Department of Education identified previously defaulted borrowers as one cohort of “at risk” borrowers. Policymakers and market participants should consider further enhancing servicer communications for borrowers transitioning out of default, including communications related to IDR enrollment that are personalized to reflect the financial circumstances of these borrowers. These communications can be timed to reach borrowers when these communications can be most effective – during the final stages of the rehabilitation process.

The recommendation above relates to timing – and perhaps content, if one interprets what is said. What is not addressed is channel. insideARM encourages policymakers to also take into consideration how all forms of modern communication might be available to servicers or collectors to communicate with borrowers in the way(s) they typically use, and prefer. (Emphasis added)