Income-driven repayment plans are intended to help borrowers manage their monthly federal payments by capping them at a percentage of their incomes.
Any amount that's unpaid after 20 to 25 years of making qualified payments on those plans will be forgiven. The report released last week covers federal and private student loans as well as auto loans, mortgages and fair lending.
"Despite [having] the right to an income-driven plan, borrowers still struggle to enroll," CFPB ombudsman Seth Frotman said. "Generally, processing your application should take no more than two weeks. However, many borrowers have told us that their applications sit under review for months at a time."
When borrowers are prevented from participating in affordable repayment plans, the consequences can be costly.
Payments on the standard repayment plan, for example, typically are higher than on an income-driven repayment plan, so it's easier to fall behind. That can lead to unnecessary costs, such as capitalized interest if a loan goes into forbearance, or they potentially can put borrowers at risk of default. Borrowers may also lose out on months of qualified affordable payments that would count toward loan forgiveness.
Lauren Asher, president of the nonprofit Institute for College Access & Success, said the CFPB report highlights how important it is that student loan servicers alert struggling borrowers to this option, instead of ushering them into forbearance.
"Income-driven repayment won't be the best choice for every borrower, but it's essential that every borrower know that IDR is an option," she said.
Other student-loan servicing issues highlighted in the report:
- Servicers misleading borrowers who pay in advance. Some companies aren’t giving accurate information, as required by law, about how much interest will accrue when borrowers of private and federal loans pay ahead by at least one month.
- Problematic payment allocation for borrowers. Some servicers aren’t offering borrowers choices on how payments can be applied across multiple loans. Servicers aren’t telling some borrowers who make extra payments that they can direct those extra dollars toward higher-interest loans and thereby reduce debt faster.
- System errors drawing out the repayment process. Some federal borrowers received incorrect bills for their next-to-last payments. Since the amounts listed were less than what was required by their repayment plans, they continued to be billed for months, or even years, as interest continued to accrue.