College debt a deep financial well for many

The student loan debt problem is framed with lots of big numbers.

Last year, about 1.2 million borrowers defaulted on federal direct loans. That amounted to more than two borrowers every minute.

More than 8 million borrowers are currently in default on federal student loans. There are nearly 42.4 million borrowers that owe nearly $1.4 trillion in total student loan debt.

But there’s another data point approaching staggering proportions that is drawing scrutiny from the federal Consumer Financial Protection Bureau: the number of student loan borrowers who appear to be trapped in a cycle of default.

According to a recent report from the federal watchdog agency, hundreds of thousands of borrowers who were able to get out of default once will end up right back in trouble over the next two years.

In the process, they also will rack up at least $125 million in unnecessary interest charges on missed payments, the CFPB said.

Those charges are unnecessary, the agency said, because the government and loan servicing companies could have provided more helpful options.

While a college education is an important step in the journey to prosperity, it has turned into a financial avalanche for many of the most vulnerable borrowers who aren’t able to find stable paychecks after college to pay down their loans.

Defaulting on a student loan can lead to long-term damaging consequences, including poor credit ratings, wage garnishment and difficulties in buying cars, homes and other big-ticket items. Defaulting twice makes the road to recovery that much steeper.

The CFPB report, released in late May, outlined the problems facing borrowers who are struggling the most. The study built on a report from last fall and included input from several student loan servicing companies, which handle the repayment process.

The agency said communications problems, paperwork processing and customer service breakdowns at loan-servicing companies and the government have prevented “the most vulnerable student loan borrowers from accessing affordable repayment plans — increasing costs to taxpayers and failing to set up borrowers for success over the long term.”

The research paints a “bleak picture” for some of the most vulnerable borrowers, the CFPB said, noting that “nearly half of the highest-risk borrowers not enrolled in an affordable repayment plan re-defaulted within three years.”

Income-driven repayment plans are one of the best and most flexible options for student loan borrowers.

Yet the agency noted that nearly 90 percent of borrowers who worked through a default were not directed into an income-driven plan nearly a year after getting back on track.

That helps explain why more than 75 percent of the borrowers who defaulted for a second time “did not successfully pay a single (student loan) bill after escaping from the first default.”

One bright spot: Borrowers who consolidated their loans after a default and signed up for an income-driven repayment program “have had better short-term outcomes,” the report said.

The CFPB report is yet another reminder of some of the flaws at every stage of the student loan repayment system that trap borrowers again and again. That said, borrowers also need to be more responsible and make better choices when taking on debt. And they owe it to themselves to be better informed about their repayment options.

What’s the answer to avoiding loan defaults? A “clear, streamlined process” to help borrowers succeed over the long term, the consumer agency said.

That’s one good idea, but it will take more than that to break the loan default cycle.