America's graduates aren't taking advantage of a key tool to help them pay back their loans

Student loan debt in the US has reached a staggering $US1.2 trillion, and many refer to the seemingly inexorable levels of mounting debt as a crisis.

Some of that debt, however, may have been avoided if only borrowers understood a key tool that helps them pay back their loans.

A new report by the Consumer Financial Protection Bureau (CFPB) analysed a sample of the Federal Family Education Loan (FFEL) population — 60% of all privately held FFEL loans — and found that a vast majority of borrowers in the sample do not utilise income-driven repayment plans (IDRP).

FFELs are privately issued but federally guaranteed loans. Since 2010, they have been replaced by Direct loans.

Only 6% of FFEL borrowers in the sample used IDRP. That’s shockingly low, especially when the CFPB notes that at least 30% per cent of borrowers with FFELs are either in default or more than 30 days past due.

Many of those borrowers would likely be eligible for IDRP, which helps borrowers tackle student loan debt as they only require them to pay a percentage of their discretionary income each month. If their discretionary income is below a certain amount, they can even qualify to pay $US0 a month.

The CFPB found many factors may interfere with students enrolling in IDRP with the federal government. Many borrowers have difficulty finding information about repayment options or think they are ineligible for the plan. Some say paperwork processing delays discourage them from finalising their enrollment.

The report also notes that there are issues on the loan servicing side, such as inconsistent instructions or difficulty enrolling with their loan servicer.

It’s important to note that there are limitations with the data as it is just a sampling, not a total, of the total federal student loan population. Still, it represents more than half of all privately held FFEL loans.

The report also noted that, “given the limited public data available related to the performance of FFELP loans, this comparison may provide important context to policymakers and market participants seeking to understand the diversity of servicing practices in the student loan market.”

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