Outstanding student loan debt in the U.S. has tripled over the last decade, surpassing auto and credit card debt and only second to housing debt, and now stands at almost $1.5 trillion. That’s in part because many people are seeing their individual balances spiral out of control.
“Loans doubling, tripling, quadrupling, it really does happen all the time,” said Persis Yu, director of the Student Loan Borrower Assistance Project at the National Consumer Law Center, a nonprofit advocacy group.
“There are ways these loans are structured that encourage this ballooning,” Yu said.
The Problem With Forbearance
Schools can lose their ability to participate in financial aid programs if too many of their students default on their loans within their first three years of repayment. In 2016, 10 schools were subject to the Education Department’s sanctions.
In response, many schools hire consultants to encourage struggling borrowers to put their loans into forbearance — a temporary postponement of their payments, for that three-year window, according to an April report by the Government Accountability Office.
Although forbearance does avoid a default, the solution is temporary, and is sometimes suggested over other, potentially more affordable options for borrowers, such as income-driven repayment plans, the GAO found.
Nearly 70 percent of people who began repaying their student loans in 2013 had their debt in forbearance for at least a period of time.
Student loan rehabilitation is one of the cruelest of all tricks being played on the citizens by the Department of Education and its financial partners. When the debt leaves forbearance most debt holders are shocked to find out that their new balance has ballooned to new heights depending on how long they were in forbearance, and the terms of their loan.
How Forbearance Cripples People With Loans
Imagine a person has borrowed $40,000 in federal student loans, at a 7 percent interest rate and with a 25-year repayment period. If she made four years of on-time payments, but then fell into default, interest would accrue at a rate of around $230 a month during her nonpayment.
If the borrower then went through rehabilitation to take her loan out of default, a collection fee of 16 percent would be added to her new loan, increasing her debt to around $50,000.
In other words, even after the four years of on-time payments, her debt would still be $10,000 more than she’d first borrowed.
And more than 40 percent of borrowers who go through rehabilitation will fall back into default within three years, according to the Consumer Financial Protection Bureau.