Income Based repayment Plan

With employment crisis taking an adverse turn, the number of student loan defaulters is ever increasing. According to the latest research, the number of defaulters has touched the mark of $67 billion. Given to this increasing number of defaulters, the Education Department is considering relying upon the privately owned debt collection companies for extracting the payments from the borrowers.

Given to such situations and the increasing amount of defaulted loan amount, the Obama administration is working on plan that advices the loan companies to design repayment plan and collect the amount based on the income of the borrowers. The administration believes that such financial plans might help the country recover from its loan-damaged credit.

For most students, employment crisis in the country and economic woes have led to such situations where they have failed to make the monthly payment in time. Keeping this situation in mind, the administration head by Obama is considering designing exclusive financial plans for collecting the out sanding amounts for avoiding an adverse financial situation in the country.

Since, the cost of education has become huge, over the past few years, the loan that is incurred by the students to meet the tuitions costs of educational institutes are proving to be troublesome and a burden for the borrowers. This statement is best complemented by the fact that the country at present has an owing amount of $67 billion, as defaulted student loans. The proposal that came from the administration of Obama is suggesting the collection companies to design a repayment plan on how much the students in debt can actually afford than, the amount that is owed by the student.

An Education Department Spokesman, Justin Hamilton stated on a telephonic interview to Bloomberg that the department is doing everything it can to serve the interest of both the students and taxpayers. The Obama administration declared through the Department of Education, on last week that debt collectors functioning to squeeze the amount out of the debtors need to comply with a standard norm regarding the information of the borrowers’ debt and income.

If the borrowers, in any case end up protesting on the specific repayment amount then, the collector or the collection agency must provide a repayment plan based on the income of the borrower. The payment amount for these exclusively designed repayment plans can drop down to $50 for an individual having an income of $20,000 yearly and an outstanding amount of $20,000, as student debt.

The idea of income based repayment for collecting the outstanding amount was proposed last year by federal agency. A comment period was offered to the public with plans of getting the actual regulation onto effect from mid-2013. According to legal experts, the final provision that was finally settled was actually lenient for the borrowers than the original proposition. The experts also noted that the proposal would strictly restrict the debt collectors from designing repayment plans for borrowers looking forward to rehabilitate the defaulted account on the amount borrowed.

As per Bloomberg, around 23 private companies of debt collection are present in the country for tracking down the defaulted borrowers. A number of student loan providers also feature their own collection company.

According to latest researches conducted by the Department of Education, the average cost of tuition for a post-secondary educational institute was $8,653 during the year 2000- 2001. Educational institutes having four-year programs charged around $21,856 as tuition fee. The Congress extended a program during the year 2009, which allowed borrowers having a low income bind their payments with the income by incorporating a sliding scale that made for their debt allowances alongside family obligations and salaries.

Last year, during the month of October, the Obama administration has initiated a plan that focused on reducing the payments than the 2009 levels. Additionally, plans such as loan forgiveness that allowed borrowers having a debt for over two years clear the account was also initiated.

Income Based repayment Plan

A. Explanation of student loan defaults:

A student loan default occurs when a borrower fails to make payments on their student loans for an extended period of time. In general, a loan is considered to be in default when the borrower has not made a payment in 270 days or more. Defaults can occur on both federal and private student loans.

When a loan goes into default, it can have serious consequences for the borrower, including damage to their credit score, collection activities such as wage garnishment and tax refund offsets, and legal action. In some cases, borrowers may be unable to get approved for other loans, such as a mortgage or a car loan, because of their default status.

B. Overview of income-based repayment plans:

Income-based repayment plans are a type of student loan repayment plan that takes into account the borrower’s income and family size to determine their monthly payment amount. These plans are designed to make student loan payments more affordable, particularly for borrowers who may be struggling to make payments on their loans.

There are several different types of income-based repayment plans available, including the Income-Based Repayment (IBR) Plan, the Pay As You Earn (PAYE) Plan, and the Revised Pay As You Earn (REPAYE) Plan. Each of these plans has slightly different eligibility requirements and payment terms, but they all share the same basic concept of tying the borrower’s monthly payment to their income.

C. Thesis statement: Despite some limitations, income-based repayment plans can be an effective way to clear student loan defaults.

While income-based repayment plans have some limitations, such as longer repayment periods and potential tax implications, they can be an effective way for borrowers to get out of default and get back on track with their student loan payments. These plans offer lower monthly payments, which can be particularly helpful for borrowers who may be struggling financially, and may also offer loan forgiveness options after a certain period of time. Overall, income-based repayment plans are an important tool for borrowers to consider as they navigate the challenges of student loan repayment, and can be an effective way to get out of default and achieve financial stability.

II. Understanding Student Loan Defaults:

A. What is a student loan default?

Student loan default occurs when a borrower has not made a payment on their student loan for a certain period of time, typically 270 days or more. Defaulting on a student loan means that the borrower has failed to fulfill their contractual obligation to repay the loan according to the agreed-upon terms. This can result in severe consequences for the borrower, such as collection activities and legal action.

B. Consequences of student loan default

The consequences of student loan default can be significant and long-lasting. Some of the common consequences of student loan default include:

Damage to credit score: When a borrower defaults on their student loans, it can have a negative impact on their credit score. This can make it more difficult to obtain credit in the future, including credit cards, car loans, and mortgages.
Collection activities: Once a loan is in default, the lender may initiate collection activities to recover the debt. This can include wage garnishment, tax refund offsets, and legal action.
Legal action: In some cases, lenders may take legal action against borrowers who are in default, which can result in wage garnishment, property liens, and other negative consequences.
Loss of eligibility for future financial aid: Students who default on their federal student loans may lose their eligibility for future financial aid, which can make it more difficult to finance their education.

C. Prevalence of student loan defaults in the US

Student loan defaults are a significant problem in the United States. According to data from the Federal Reserve Bank of New York, as of 2021, over 9% of all outstanding student loan debt is in default. This translates to millions of borrowers who are struggling to make their student loan payments and may be facing serious consequences as a result. The problem of student loan defaults is particularly acute among borrowers who attended for-profit colleges, who are more likely to default on their loans than students who attended public or non-profit institutions. Overall, the high prevalence of student loan defaults in the US highlights the need for effective solutions to help borrowers manage their student loan debt and avoid the negative consequences of default.