Defaulted Student Loans: Obama Suggests Income-Based Repayment Plan

Norman Byrd's picture

There are $67 billion in defaulted student loans. Working on the premise that getting something is better than nothing and in an effort to help Americans restore their loan-shattered credit, the Obama administration has suggested loan companies collect based on borrowers' incomes.

Suffering from a heavy student loan or economic woes placed you in a bind where you cannot and/or haven't been paying off your student loans? Noting the huge amount of defaulted student loans and the rising number of complaints against those contracted by the Department of Education to collect on those defaulted accounts, the Obama administration may have found an acceptable solution.

Because education costs can be enormous, the debt incurred by taking out federally backed post-secondary school loans can be -- and has historically proven to be -- burdensome to the borrower. This is best exhibited in the fact that there are currently $67 billion of student loans in default. The Obama administration's proposal would require those attempting to collect the defaulted loans base the repayments on what the former student can actually afford instead of on how much the student owes.

“We definitely feel a sense of urgency to make sure we are doing everything we can to serve the interests of taxpayers and students,” Justin Hamilton, an Education Department spokesman, told Bloomberg in a telephone interview.

The Obama administration proposed Friday via the Department of Education that debt collectors be required to follow a standard form with regard to borrowers information on income and debt. If borrowers protest the standard amount of repayment, debt collectors would then offer a payment plan based entirely on the borrowers income. The payments would go as low as $50 for a person making $20,000 per year and holding $20,000 in outstanding student loans.

The federal agency proposed the idea last year. A public comment period was allowed for and the actual regulation might go into effect in mid-2013. The final provision agreed upon was more lenient toward borrowers than the original, according to attorney Deanne Loonin of the National Consumer Law Center in Boston.

Loonin also noted that the proposal would prohibit the debt collectors from basing a repayment plan for a borrower attempting to "rehabilitate" a default account on the borrowed amount, which is the common current practice.

According to Bloomberg, there are 23 private debt-collection companies to track down borrowers in default. Sallie Mae, which is the largest student loan company, has their own debt collection unit, Pioneer Credit Recovery.

And it is easy to see how many former students could have found themselves in default over the past decade. Since March 2011, the U. S. experienced two recessions. The first recession, which lasted from March to November 2011, was the direct result of the bubble implosion and exacerbated by the economic uncertainty following the September 11 terrorist attacks. The latter recession, now dubbed the Great Recession, lasted from Dec. 2007 to June 2009, a result of the subprime mortgage crisis and the housing industry collapse. The number of unemployed ascended to numbers unseen since the Great Depression, with long-term unemployment (27 weeks or longer) reaching and maintaining record levels.

As a result, many with student loans soon found themselves in default. With a sluggish recovery, many of those student loans remain in default.

According to statistics compiled by the Department of Education, average tuition cost for a post-secondary public institution for 2000-01 was $8,653. For a four-year private institution, the average tuition cost was $21,856.

Congress expanded a program in 2009 that allowed low income borrowers tie their payments to their incomes, implementing a sliding scale that also made allowances for their debt, salaries and family obligations.

Back in October, Obama proposed making payments lower than the 2009 levels. There was also a plan to forgive loans that had been outstanding for two decades for certain borrowers. The latter alteration could take effect within the current year.

(photo credit: Swimmerguy269, Creative Commons)

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