Consumer Difficulties with Income-Driven Repayment Plans

Most student loan borrowers know that it is extremely difficult to discharge student loans in bankruptcy. While federal loans do not tend to pose as great a burden to debtors as private loans given the options for income-driven repayment plans, there are always exceptions. According to a recent news release from the Consumer Financial Protection Bureau (CFPB), some of those income-driven repayment plans could be pushing consumers closer to filing for personal bankruptcy.
Alternative Repayment Options for Federal Student Loans
The CFPB recognizes that student loan debt in our country---which total around $1.2 trillion, according to a recent article in Forbes Magazine—is placing a heavy burden on students, their parents, and on the economy. The CFPB assumed that the mere repayment of these loans was not the only problem for borrowers. As with other debtor-creditor situations, student loan borrowers have encountered many different problems with their repayment plans, including but not limited to:
  • Payment processing issues;
  • Servicing transfer problems;
  • Customer service difficulties; and
  • Alternative repayment plan obstacles.
The CFPB set out to learn about the most vexing issues facing student loan borrowers and to think about the ways in which we might help consumers who are struggling to make ends meet. One of the first and most important options for debtors is the existence of income-driven repayment. If you are currently on a standard 10-year repayment plan and are having difficulty making payments, there are several different income-driven repayment options that can help (and may be able to help you to avoid bankruptcy). Among the most common of these options are:
  • Income-Based Repayment (IBR);
  • Income-Contingent Repayment (ICR); and
  • Pay As You Earn (PAYE).
However, as the CFPB learned, borrowers ended up having significant problems with some of these income-driven repayment plans, which ended up being extremely costly.
Recertifying Your Income-Driven Student Loan Payments
Every year, student borrowers who have income-driven repayment plans must go through a process known as “recertification.” In short, borrowers must provide evidence each year that they remain eligible for lower-cost repayment plans based on their income. Typically, this process involves providing an income tax return from the previous year, but it can also require borrowers to submit other forms of documentation.
A small percentage of borrowers provided information for their recertification on time, but the recertification was not processed in a timely manner. As a result, their payments jumped up to the amount they would owe if they were using a standard 10-year repayment plan. Such a jump can mean the difference between a $200 monthly payment and a $1500 monthly payment. For borrowers who already are on a budget, an unexpected payment jump can spell financial trouble. The same is true for borrowers who simply missed the deadline for recertification.
According to the CFPB, last year alone nearly 60 percent of borrowers on income-driven repayment plans failed to provide the proper information for recertification on time. For all of those borrowers, the lack of timeliness led to significant jumps in monthly student loan payments and financial problems in other areas.
Contact an Oak Park Consumer Protection Lawyer
If you have questions about your rights as a consumer or want to learn more about how consumer bankruptcy might be able to help with your financial situation, you should contact a dedicated Oak Park consumer protection attorney to discuss your situation. An advocate at the Emerson Law Firm can answer your questions today.
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