Why are so few using federal student loan repayment program?

On Behalf of | Aug 8, 2013 | Bankruptcy |

It is one of the hardest truths about bankruptcy; student loans are generally not subject to being dismissed. While credit card and car loan debt may be completely discharged through bankruptcy proceedings in Texas, student loans remain the obligation of the borrower unless circumstances develop that make repayment impossible. Then it becomes a matter to discuss with an attorney.

Considering how essential a college education is to long-term earning power in the U.S. economy, it’s really no wonder that so many borrow to pay for school. What some find puzzling, though, is why more students don’t take advantage of federal loans over private loans. 

With all the different repayment options that are now available through federal programs, it might seem to be an easy decision, but the numbers suggest something is getting in the way. The Consumer Financial Protection Bureau points to the fact that of the $1 trillion in current outstanding direct student loans, only one third are in special programs designed to allow borrowers to adjust monthly payment amounts to fit their budgets.  

Often these plans stretch the life of a loan out over more years, increasing the total amount of interest paid. But some allow remaining balances to be forgiven after a certain amount of time. All things considered, the options tend to make loans more affordable.

Interestingly, the government says the reason the loan repayment programs aren’t used more is a lack of education. Officials say borrowers report they never hear about the options from the private loan servicing companies. And servicing companies say they don’t get compensated adequately to dedicate the time and energy toward getting borrowers into the income-based repayment plans.

The Obama administration has taken action in the past year to make the IBR application process easier. It’s also moved to pay loan services more so that IBRs are more attractive. Another option being promoted by some is one that would automatically slide a borrower into one of the IBR plans if they fall behind on payments and default on the loan completely.

Source: BusinessWeek.com, “The U.S. Has a Really Helpful Student Loan Repayment Program—and No One’s Using It,” Karen Weise, Aug. 7, 2013