The U.S. Department of Education released a series of reports earlier this month on the state of federal student loan repayments.
While the average borrower is likely to ignore these reports, they reveal interesting trends in student loan repayments that you can use to your advantage.
Default and Delinquency Rates
According to the Education Department, around 312,000 new direct loan borrowers are in default, totaling $6.8 billion. These borrowers represent 1.8 percent of the total direct loan borrowers in repayment during the last quarter of 2017.
The good news is defaults have leveled out over the last year. The number of defaults during the first quarter of this year — 1.3 percent among all student loan borrowers with direct loans — is nearly the same as this time last year.
Even better, for borrowers in repayment status, the number who are more than 31 days delinquent dropped 7 percent with a corresponding 5 percent decrease in the total dollar amount delinquent. Borrowers who are in repayment status are not in deferment, forbearance or in a grace period.
The Department of Education reports show a slightly favorable trend in federal student loan borrowers being able to keep up with their monthly payments. From the department’s recent findings, here’s how borrowers can set themselves up for repayment success.
[Understand the consequences of student loan default.]
Who Is Succeeding and Who Is Struggling?
You can’t change how old you are, how much you already borrowed or where you currently live, but understanding how other borrowers are faring can help you choose the right repayment plan.
According to the reports, borrowers under age 24 have the highest 31-day-plus delinquency rate — 18.2 percent — compared to borrowers age 62 and older at 13.7 percent. If you’re a borrower under age 24, you may want to set up automatic payments to help keep your loans in good standing and reduce your risk of delinquency.
Many borrowers may not be aware that their loans are enrolled automatically into the 10-year standard plan during the repayment phase unless they select a different option. In fact, the 10-year standard plan and the income-contingent repayment, commonly referred to as ICR, hold high delinquency rates at around 21 percent.
To keep borrowers from defaulting, the Department of Education has developed multiple income-driven repayment plans — known as IDR plans — that may allow you to not only make your monthly payments, but also see some relief in the form of student loan forgiveness in the future.
[See how income-driven student loan repayment plans can cost more.]
The Plan With the Best Track Record
The plan with the lowest 31-day-plus delinquency rate is Revised Pay As You Earn — REPAYE — at 4 percent, according to the Education Department’s student loan portfolio reports.
Under REPAYE, borrowers’ monthly payments are capped at 10 percent of discretionary income. REPAYE offers forgiveness on the remaining balance after 20 years of eligible payments on undergraduate loans or 25 years of eligible payments if you have any graduate loans. Payments can go up or down annually, since you need to certify your income each year. Not recertifying your income kicks you out of this repayment plan.
[Don’t fall for eight student loan repayment myths.]
REPAYE may offer relief to borrowers who are struggling with their monthly payments, since the vast majority of borrowers with REPAYE remain current with their payments. Knowing this, and that the plan likely offers the lowest monthly payment amount, REPAYE looks like an enticing option. But borrowers need to make sure they submit their income and household size information each year by their annual deadline. If they fail to do so, their loan will be entered into the alternative repayment plan, which will increase their monthly payments significantly.
Payments under the alternative repayment plan are no longer based on your income. Under the alternative repayment plan, payments are the amount needed to repay the loan in full in either 10 years from the start of the alternative plan or from the end date of the 20 or 25 years of the REPAYE period. Borrowers with the alternative repayment plan default at the highest rate — 29 percent, according to the recent student loan portfolio data.
The Student Loan Ranger points out that it’s unclear from the Education Department data whether borrowers who are paying under IDR plans, other than REPAYE, and fail to recertify their income information annually, default at a high rate. Other IDR plans also increase payment amounts significantly if the borrower doesn’t provide annual income information. In these instances, borrowers aren’t placed in a tracked repayment option, such as the alternative repayment plan. But the Ranger says it’s a good bet these borrowers are falling behind in their payments, too.
Picking a plan that works best for you depends on multiple factors other than the data from the Education Department.
Your own personal and financial circumstances affect your ability to repay. This is why the flexibility of an IDR plan, such as REPAYE, can help you keep your loans in good standing. Given that there are now five different IDR plans, it can be confusing to determine which one you should choose. But the data from the Education Department supports REPAYE as a positive option — just make sure to reapply annually.
More from U.S. News
Understand the Consequences of Student Loan Default
Tips to Avoid Student Loan Default Before, During and After College
6 Common Questions About Student Loan Defaults and Tax Refunds
How to Choose the Right Student Loan Repayment Plan to Avoid Delinquency originally appeared on usnews.com
