1

October 2016

Annual report of the 

CFPB Student Loan 

Ombudsman

Transitioning from default to an income-driven repayment plan
2

Table of contents

Table of contents.........................................................................................................2

Executive summary.....................................................................................................3

1. About this report...................................................................................................6

2. Student loan complaint data................................................................................7

3. Issues faced by borrowers ................................................................................16

3.1 Overview of student loan complaints ..................................................... 16

3.2 Issue highlight: The federal student loan default-to-IDR transition..... 18

4. Ombudsman’s discussion .................................................................................30

4.1 Rehabilitation may not be setting up borrowers for success .................30

4.2 Rehabilitation was designed as a feature of the legacy bank-based 

guaranteed loan program....................................................................... 35

4.3 Consolidation may provide a faster route to IDR for some borrowers.. 41

4.4 Recommendations .................................................................................. 45

5. Contact information............................................................................................53

Appendix A: Federal student loan complaint sample........................................54

Appendix B: Tagging definitions.........................................................................55

Appendix C: Voluntary data request ...................................................................57
3

Executive summary

 Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, this annual 

report analyzes complaints submitted by consumers between September 1, 2015 and August 

31, 2016. During this period, the Bureau handled approximately 5,500 private student loan 

complaints and 2,300 debt collection complaints related to private and federal student 

loans. The Bureau also began handling complaints about problems managing or repaying 

federal student loans and handled 3,900 federal student loan servicing complaints during 

the final six months of this reporting period.

 Over the past 12 months, consumers with student loans identified a range of payment 

processing, billing, customer service, borrower communications, and income-driven 

repayment (IDR) plan enrollment problems. These consumers submitted complaints about 

nearly 300 companies, including student loan servicers, debt collectors, private student 

lenders, and companies marketing student loan “debt relief.” For five of the largest student 

loan servicers, borrowers reported a broad range of servicing problems across each 

company’s operations. The Bureau’s analysis of these complaints suggests that borrowers 

assigned to the largest student loan servicers may encounter widespread problems, whether 

these borrowers are trying to get ahead or struggling to keep up with their student debt.

 This report highlights complaints about the transition from default into an IDR plan, as 

reported by the most economically distressed consumers. Earlier this year, the Department 

of Education reported that more than 8 million federal student loan borrowers are in default 

and that 1.2 million borrowers with Direct Loans defaulted in the past 12 months. The 

Bureau estimates that more than 1-in-4 student loan borrowers are past-due or in default on 

a student loan.

 The Bureau estimates that in the last year, more than 650,000 student loan borrowers 

“rehabilitated” a defaulted federal student loan by making $5 monthly payments for nine 

months. Over the next 24 months, the Bureau projects that more than 220,000 of these 
4

borrowers will default for a second time, unless policymakers and industry take immediate 

action. Based on this projection, the Bureau estimates that this cohort of borrowers will be 

charged more than $125 million in unnecessary interest charges over the next two years. 

 Borrowers who experience financial hardship and are in default have a right under federal 

law to cure their default and to enroll in an IDR plan. The majority of borrowers who cure a 

default and seek to enroll in IDR do so by first rehabilitating their defaulted debt. However, 

these borrowers describe a range of communication, paperwork processing, and customer 

service breakdowns at every stage of the default-to-IDR transition. These borrowers identify

practices that create barriers to long-term success. 

 Inability to secure an IDR plan sets these borrowers up for a payment shock in the nearterm, and may drive the most economically distressed borrowers back into default. This 

report highlights projections by private credit analysts that estimate nearly half (45 percent) 

of borrowers who rehabilitate a federal student loan will default again shortly after curing 

their previous default. 

 The servicing and collections practices highlighted in this report directly affect the most 

economically distressed borrowers. Borrowers with very low incomes have a right under 

federal law to cure a defaulted loan by making a series of $5 payments. Based on the formula 

used to determine eligibility for a $5 rehabilitation payment, the vast majority of these 

borrowers will also be entitled to make a $0 monthly IDR “payment” once they have cured 

their default – protecting them against delinquency and default over the medium-term. 

 Although public, market-wide data about the performance of these borrowers is limited, last 

year, a trade association representing student loan servicers and debt collectors told its 

members that 1-in-3 borrowers who exit default after making $5 rehabilitation payments are 

delinquent within 60 days.

 This report observes that legacy requirements in the rehabilitation program place increased 

burden on borrowers, increase costs for taxpayers, create unnecessary barriers to repayment 

success, and fail to consider the significant changes that have occurred in higher education 

finance market in the past decade. The structure of the rehabilitation program was initially 

designed to work within the bank-based, guaranteed loan program. That same rehabilitation 

process was applied to Direct Lending when the program was established more than two 

decades ago. Rehabilitation has not undergone significant reforms since the creation of IDR

plans or since the termination of bank-based guaranteed lending in 2010.
5

 This report offers recommendations to policymakers and market participants, calling for 

immediate action to improve and strengthen the transition from default to IDR. As Congress 

seeks to reauthorize the Higher Education Act, lawmakers may wish to consider ways to 

improve repayment success for previously defaulted borrowers that include immediate 

access to a stable and long-term IDR plan. 

 Policymakers and market participants can take the steps outlined in this report in the nearterm to address the challenges identified in consumer complaints by improving borrower 

communication throughout the default to IDR transition and by streamlining IDR 

application and enrollment. 

 Borrowers and taxpayers both benefit when borrowers successfully complete the default to

IDR transition and succeed over the long-term. The current compensation structure for debt 

collectors reflects this benefit by incentivizing collectors to rehabilitate loans - in some cases,

collectors earn nearly $40 in compensation for every $1 in cash recovered through certain 

rehabilitations. Collectors earn this compensation irrespective of borrower performance over 

the months or years following a completed rehabilitation, ensuring that collectors have no 

“skin in the game” when a borrower defaults again. Policymakers may wish to reevaluate the 

economic incentives in place for debt collectors and student loan servicers to encourage 

long-term borrower success. 

 This report also recommends immediate action to implement the Department of Education’s 

July 2016 recommendation to monitor the repayment behavior of high-risk borrowers 

through the compilation of public performance metrics on student loan servicing, including 

data on delinquencies and defaults, as well as data on borrower performance in IDR plans.
6

1. About this report

The Dodd-Frank Wall Street Reform and Consumer Protection Act established a Student Loan 

Ombudsman within the Consumer Financial Protection Bureau. Pursuant to the Act, the 

Ombudsman shall compile and analyze data on student loan complaints and make appropriate 

recommendations to the Secretary of the Treasury, the Director of the Consumer Financial 

Protection Bureau, the Secretary of Education, and Congress.

This report analyzes more than 5,500 private student loan complaints and approximately 2,300

debt collection complaints related to student loan debt handled between September 1, 2015, and 

August 31, 2016. Additionally, this report analyzes approximately 3,900 federal student loan 

servicing complaints submitted between March 1, 2016 and August 31, 2016. This report also 

offers analysis and discussion to address issues reported by consumers in the student loan 

marketplace. The information included in this report represents the Ombudsman’s independent 

judgment and does not necessarily represent the view of the Consumer Financial Protection 

Bureau. 

Seth Frotman

Student Loan Ombudsman

Consumer Financial Protection Bureau
7

2. Student loan complaint data

From September 1, 2015, through August 31, 2016, the CFPB handled approximately 5,500

private student loan complaints.1 During this same reporting period, the Bureau handled 

approximately 2,300 debt collection complaints related to student loans. 

On February 25, 2016, the Bureau began handling federal student loan servicing complaints. 

Between March 1, 2016 and August 31, 2016, the Bureau handled approximately 3,900 federal 

student loan complaints. 

Federal student loan complaint data

This section analyzes a sample of over 1,000 complaints against the top ten companies based on 

federal student loan complaint volume.2 This section reports the results of our review.3

 

1

 The publication criteria for consumer complaints is available at 

http://files.consumerfinance.gov/f/201303_cfpb_Final-Policy-Statement-Disclosure-of-Consumer-ComplaintData.pdf.

2 When submitting complaints, consumers select the product, sub-product, issue, and sub-issue that best describes 

their complaint. Consumers’ written complaint narratives provide additional details. The Student Loan Ombudsman 

reviewed the complaint narratives and the company’s response to identify specific issues found in the complaints. 

These concepts were tagged and used to prepare the analysis. For example, complaints in which consumers reported 

problems related to IDR, including enrollment, recertification, qualified payments, and switching between IDR plans, 

were tagged “Income-Driven Repayment.”
8

FIGURE 1: IDENTIFIED ISSUE TAGS IN FEDERAL STUDENT LOAN COMPLAINTS AGAINST TOP TEN 

COMPANIES BY COMPLAINT VOLUME 

Note: This chart represents the problems identified in consumer narratives of 1,062 federal student loan servicing 

complaints submitted between March 1, 2016 and August 31, 3016 against the top 10 companies by federal student 

loan complaint volume. See Appendix B for more information on issue tag definitions. Percentages are rounded and 

therefore may add up to more than 100 percent. 

 

3 In order to identify the problems raised in federal student loan servicing complaints, the Bureau reviewed a sample 

of 1,062 complaints from the top 10 companies, based on federal student loan servicing complaint volume. Issue tags 

were assigned based on an independent review by the Bureau. For companies that received the largest numbers of 

complaints during the reporting period, 200 complaints were randomly sampled for review, with each reviewed 

complaint weighted by its inverse sampling probability. See Appendix A.

Some servicers are selected by the Department of Education to be the sole contractor to perform certain services (e.g., 

Nelnet is the servicer designated to service accounts of borrowers seeking Total and Permanent Disability discharge), 

and as such, may have a greater relative amount of complaints about a certain issue than other market participants. 

For more information on the definitions of the issues identified, see Appendix B. 

2%

2%

3%

4%

4%

5%

5%

7%

8%

8%

16%

17%

20%

Rehabilitation

Enrollment Status

Servicing Transfer

For-Profit

Other

Billing Statements

Payoff

Discharge

Credit Reporting

Customer Service

Borrower Communications

Payment Processing

Income-Driven Repayment
9

FIGURE 2: ISSUE TAGS IDENTIFIED IN COMPLAINTS SUBMITTED AGAINST ACS BETWEEN MARCH 1, 

2016 AND AUGUST 31, 2016

FIGURE 3: ISSUE TAGS IDENTIFIED IN COMPLAINTS SUBMITTED AGAINST AES/PHEAA BETWEEN 

MARCH 1, 2016 AND AUGUST 31, 2016

1%

1%

2%

2%

3%

4%

4%

5%

10%

15%

15%

19%

20%

Other

For-Profit

Servicing Transfer

Discharge

Rehabilitation

Enrollment Status

Credit Reporting

Customer Service

Billing Statements

Borrower Communications

Payoff

Payment Processing

Income-Driven Repayment

ACS

1%

1%

2%

2%

3%

5%

5%

6%

6%

8%

10%

15%

39%

Rehabilitation

Servicing Transfer

Enrollment Status

Billing Statements

For-Profit

Customer Service

Other

Payoff

Credit Reporting

Discharge

Payment Processing

Borrower Communications

Income-Driven Repayment

AES/PHEAA
10

FIGURE 4: ISSUE TAGS IDENTIFIED IN COMPLAINTS SUBMITTED AGAINST GREAT LAKES BETWEEN 

MARCH 1, 2016 AND AUGUST 31, 2016

FIGURE 5: ISSUE TAGS IDENTIFIED IN COMPLAINTS SUBMITTED AGAINST NAVIENT BETWEEN 

MARCH 1, 2016 AND AUGUST 31, 2016

1%

2%

3%

5%

5%

5%

6%

7%

7%

9%

11%

18%

22%

Servicing Transfer

Rehabilitation

Billing Statements

Other

Enrollment Status

Customer Service

Credit Reporting

Payoff

Discharge

For-Profit

Income-Driven Repayment

Borrower Communications

Payment Processing

Great Lakes

2%

2%

3%

3%

3%

5%

5%

6%

10%

12%

12%

18%

22%

Rehabilitation

Enrollment Status

Servicing Transfer

Payoff

Discharge

Other

For-Profit

Billing Statements

Credit Reporting

Customer Service

Income-Driven Repayment

Borrower Communications

Payment Processing

Navient
11

FIGURE 6: ISSUE TAGS IDENTIFIED IN COMPLAINTS SUBMITTED AGAINST NELNET BETWEEN 

MARCH 1, 2016 AND AUGUST 31, 2016

Update from the Consumer Complaint Database

Information about consumer complaints, including information about student loan and debt 

collection complaints, is available to the public through the CFPB’s Consumer Complaint 

Database.4

The database contains anonymized complaint data provided by consumers, including the type of 

complaint, the date of submission, the consumer’s zip code, and the company that the complaint 

concerns. The database also includes information about the actions taken by a company in 

 

4 See Consumer Financial Protection Bureau, Consumer Complaint Database, available at 

http://www.consumerfinance.gov/complaintdatabase/. 

2%

2%

3%

3%

4%

5%

5%

5%

10%

12%

15%

16%

21%

Rehabilitation

Servicing Transfer

Enrollment Status

For-Profit

Billing Statements

Other

Payoff

Customer Service

Credit Reporting

Payment Processing

Borrower Communications

Income-Driven Repayment

Discharge

Nelnet
12

response to a complaint: whether the company’s response was timely, how the company 

responded, and whether the consumer disputed the company’s response. The database does not 

include consumers’ personal information. The database includes web-based features such as the 

ability to filter data based on specific search criteria; to aggregate data in various ways, such as 

by complaint type, company, location, date, or any combination of available variables; and to 

download data.

Private student loan complaint data

The following tables are based on complaints handled from September 1, 2015 through August 

31, 2016, as exported from the public Consumer Complaint Database as of October 1, 2015.5 Due 

to the lack of publicly available data on private student loans, these tables are not indexed for 

market share.6

FIGURE 7: PRIVATE STUDENT LOAN ISSUES REPORTED BY CONSUMERS FROM SEPTEMBER 1, 2015

 

5 Not all complaints handled by the Bureau are published in the public Consumer Complaint Database. Complaints 

are listed in the database after a company responds or after has had the complaint for 15 calendar days, whichever 

comes first. Complaints that do not meet publication criteria may be removed from the database. The publication 

criteria are available at http://files.consumerfinance.gov/f/201303_cfpb_Final-Policy-Statement-Disclosure-ofConsumer-Complaint-Data.pdf. Therefore, the number of complaints published in the database may be fewer than 

the total number of complaints handled by the Bureau.

6 Compared to other large markets of consumer financial products (such as residential mortgages and credit cards), 

availability of market data is quite limited, for private student loans, which grew rapidly in the years leading up to the 

financial crisis. See Consumer Financial Protection Bureau and U.S. Department of Education, Private Student Loans

(2012), available at http://www.consumerfinance.gov/reports/private-student-loans-report/.
13

THROUGH AUGUST 31, 2016

Note: Consumers submitting student loan complaints can select from the following three types of complaint 

categories: “Getting a loan,” “Can’t pay my loan,” and “Dealing with my lender or servicer.” This figure reflects the 

categories consumers selected when submitting a complaint.

FIGURE 8: COMPANIES WITH THE MOST PRIVATE STUDENT LOAN COMPLAINTS RANKED BY 

VOLUME

Company Sept. 2014 – Aug. 2015 Sept. 2015 – Aug. 2016

Navient 1,756 1,613

AES/PHEAA 416 476

Sallie Mae 245 242

Wells Fargo 251 220

Transworld Systems Inc. 121 168

Note: This table reflects complaints where (1) the consumer identified the sub-product as a non-federal student loan 

and (2) the identified company responded to the complaint, confirming a relationship with the consumer. This table 

reflects the top companies by complaint volume for the period of September 1, 2015 through August 31, 2016. 
14

FIGURE 9: ISSUES IDENTIFIED IN PRIVATE STUDENT LOAN COMPLAINTS BY COMPANY FROM

SEPTEMBER 1, 2015 THROUGH AUGUST 31, 2016

Note: This table reflects complaints where (1) the consumer identified the sub-product as a non-federal student loan, 

(2) the consumer identified the issue, and (3) the identified company responded to the complaint, confirming a 

relationship with the consumer. This table reflects the top companies by complaint volume.

Debt collection complaint data

From September 1, 2015, through August 31, 2016, the CFPB handled approximately 2,300 debt 

collection complaints related to student loans.
15

FIGURE 10: TOP RECIPIENTS OF STUDENT LOAN DEBT COLLECTION COMPLAINTS FROM 

SEPTEMBER 1, 2015 THROUGH AUGUST 31, 2016

Federal Student Loans Number of 

Complaints Private Student Loans Number of Complaints

Navient 146 Navient 166

AES/PHEAA 36 AES/PHEAA 68

Transworld Systems Inc. 32 Transworld Systems Inc. 42

ECMC Group, Inc. 28 URS Holding, LLC 23

Allied Interstate LLC 23 Financial Asset Management 

Systems, Inc. 20

Note: This table reflects debt collection complaints where (1) the consumer identified the sub-product as a nonfederal or a federal student loan, and (2) the identified company responded to the complaint, confirming a 

relationship with the consumer. This table also reflects aggregated complaints of subsidiary debt collection companies 

under the parent company.

FIGURE 11: DISTRIBUTION OF LOAN TYPE FOR STUDENT LOAN DEBT COLLECTION COMPLAINTS BY 

COMPANY FROM SEPTEMBER 1, 2015 THROUGH AUGUST 31, 2016

Note: This table reflects debt collection complaints where (1) the consumer identified the sub-product as a nonfederal or a federal student loan and (2) the identified company responded to the complaint, confirming a 

relationship with the consumer. This table was not adjusted to reflect each company’s relative market share. This 

table reflects the top companies by complaint volume. This table also reflects aggregated complaints of subsidiary 

debt collection companies under the parent company.
16

3. Issues faced by borrowers

SOURCES OF INFORMATION 

To identify the range of issues faced by student loan borrowers, this report relies on complaints 

handled by the Bureau. We also reviewed other information, such as comments submitted by 

the public in response to requests for information, submissions to the “Tell Your Story” feature 

on the Bureau’s website, and input from discussions with consumers, regulators and law 

enforcement agencies, and market participants.

LIMITATIONS

Readers should note that this report does not suggest the prevalence of the issues described as 

they relate to the entire student loan market. The information provided by borrowers helps to 

illustrate where there may be a mismatch between borrower expectations and actual service 

delivered. Representatives from industry and borrower assistance organizations will likely find 

the inventory of borrower issues helpful in further understanding the diversity of customer 

experience in the market.

3.1 Overview of student loan complaints 

Over the past 12 months, consumers with student loans identified a range of payment 

processing, billing, customer service, borrower communications, IDR plan enrollment problems. 

These consumers submitted complaints about nearly 300 companies, including student loan 

servicers, debt collectors, private student lenders, and companies marketing student loan “debt 

relief.”
17

In February 2016, the Bureau began handling complaints from borrowers with federal student 

loans related to student loan servicing. As the figures in the preceding section illustrate, for five 

of the largest student loan servicers, borrowers reported a broad range of servicing problems 

across each company’s operations. The Bureau’s analysis of these complaints suggests that 

borrowers assigned to the largest student loan servicers may encounter widespread problems, 

whether they are trying to get ahead or struggling to keep up with their student debt.

The Bureau continues to receive complaints from borrowers related to a range of servicing 

problems, including problems enrolling in and recertifying income under IDR plans, problems 

processing qualified payments for purposes of loan forgiveness, and problems related to 

communications between colleges and servicers as borrowers transition between school and 

repayment.

Over this reporting period, federal student loan borrowers submitted complaints when unable to 

enroll in an IDR plan several months after submitting an application. These borrowers reported 

processing delays and lost application documents, resulting in unnecessary forbearance and an

inability to make qualified payments towards loan forgiveness. Some of these complaints 

suggest that servicing problems are preventing borrowers from making qualified payments in 

pursuit of Public Service Loan Forgiveness (PSLF). When borrowers seek to enroll in an eligible 

repayment plan and contact their lender or servicer to obtain information about PSLF, 

complaints reveal that some of these borrowers may not be provided with accurate information 

about how to certify their progress toward forgiveness or may be directed to enroll in a

repayment plan that is not eligible for PSLF. 

Federal student loan borrowers also submitted complaints noting that their student loans had

unexpectedly entered repayment, when their loans status should indicate an “in-school” status, 

or an “in-school” deferment. These borrowers complain that when servicers receive delayed and 

inaccurate information about a borrower’s enrollment status, it may lead to a loss of grace 

period benefits, unexpected payments due, and unnecessary capitalized interest. 

As the remainder of this report highlights in detail, consumers also report a range of problems

related to the “default-to-IDR transition” for borrowers with federal student loans.

In addition to complaints about federal student loans, private student loan borrowers continue 

to submit complains about co-signer issues, including a lack of information surrounding cosigner release requirements and co-signers’ ability to allocate payments to only co-signed loans 

on borrowers’ accounts. Complaints document ongoing challenges borrowers face when 
18

servicers place performing loans in default following the death of a co-signer or a bankruptcy 

filing.

7 Additionally, borrowers continued to submit complaints regarding the ability to obtain 

flexible repayment options for their private student loans during times of financial distress. 

Complaints indicate that borrowers may be told there are flexible repayment options available, 

but when they seek to apply for such options, they are either ineligible or the repayment plan is 

unavailable. 

3.2 Issue highlight: The federal student 

loan default-to-IDR transition 

This report highlights complaints from borrowers who have defaulted on their federal student 

loans. These borrowers report problems when seeking to cure their default by working with a 

debt collector to “rehabilitate” the debt, one of the ways federal student loan borrowers are 

permitted to cure a defaulted student loan and get back on track. Previously defaulted borrowers 

report similar problems when working with a student loan servicer to stay on track after curing a 

defaulted loan. 

According to a recent estimate by the Department of Education, more than eight million 

borrowers have federal student loans in default (have not made a payment for more than twelve

months) and more than 1.2 million borrowers defaulted within the past 12 months.

8 Borrowers 

 

7 Earlier this year, the Bureau announced it had cited one or more student loan servicers for unfair practices relating 

to this issue. See Consumer Financial Protection Bureau, Supervisory Highlights: Winter 2016 (March 2016), 

available at http://files.consumerfinance.gov/f/201603_cfpb_supervisory-highlights.pdf.

8 See U.S. Department of Education, Federal Student Loan Portfolio (accessed Sept. 14, 2016), available at

https://studentaid.ed.gov/sa/about/data-center/student/portfolio. Readers should note that the Higher Education 

Act defines “default” as a period of nonpayment lasting 270 days (nine months); however, the Federal Student Aid 
19

who are in default cannot access many of the consumer protections established under federal 

law, including the right to enroll in an IDR plan.9

The Higher Education Act provides these borrowers with two options to cure a default and get 

back on track. Borrowers can “rehabilitate” their debt by entering into an agreement with a debt 

collector to make a series of nine on-time monthly payments, set based on their financial 

circumstances.10 Alternatively, borrowers can opt to refinance their defaulted debt with a new 

Direct Consolidation Loan.11 The Department of Education estimates that borrowers complete 

greater than 70 percent of cured defaults through rehabilitation.12 

The servicing and collections practices highlighted in this report directly affect the most 

economically distressed borrowers.

13 Borrowers with very low income have a right under federal 

 

data center defines default as a period of nonpayment lasting 360 days (12 months) for the purposes of public 

reporting on student loan performance. 

9 See U.S. Department of Education, Understanding Default (accessed Sept. 19, 2016), available at

https://studentaid.ed.gov/sa/repay-loans/default#consequences.

10 See 34 C.F.R. § 682.405; 34 C.F.R. § 685.211(f); see also U.S. Department of Education, Getting out of Default

(accessed on Sept. 19, 2016), available at https://studentaid.ed.gov/sa/repay-loans/default/get-out. 

11 See U.S. Department of Education, Loan Consolidation (accessed Sept. 29, 2016), available at

https://studentaid.ed.gov/sa/repay-loans/consolidation.

12 See U.S. Department of Education, Federal Student Aid Data Center: Default Rates FY15 Q4 – FY16 Q3 (accessed 

Sept. 16, 2016), available at https://studentaid.ed.gov/sa/about/data-center/student/default; U.S. Department of 

Education, Federal Student Aid Data Center: FFEL Program Lender and Guaranty Agency Reports July 2015 –

June 2016 (accessed Sept. 16, 2016), available at https://studentaid.ed.gov/sa/about/data-center/lender-guaranty

13 For further discussion of the impact of student loan servicing on financially vulnerable borrowers, see Consumer 

Financial Protection Bureau, Annual Report of the CFPB Student Loan Ombudsman (Oct. 2015), available at

http://files.consumerfinance.gov/f/201510_cfpb_annual-report-of-the-cfpb-student-loan-ombudsman.pdf

(“Borrowers who attend for-profit colleges or two-year colleges make up 70 percent of all borrowers in default, 

according to one recent analysis. Yet the median debt burden and median wages of these borrowers suggest that the 

average borrower likely would qualify for a $0.00 or a substantially lower loan payment under an income-driven 

repayment plan.”).
20

law to rehabilitate a defaulted loan by making a series of $5 payments.

14 Based on the formula 

used to determine eligibility for a $5 rehabilitation payment, the vast majority of these 

borrowers will also be entitled to make a $0 monthly IDR “payment” once they have cured their 

default.

15

The Bureau estimates that, in the last year, more than 650,000 student loan borrowers 

rehabilitated a federal student loan by making a $5 monthly payment.

16 The Bureau projects 

that, over the next 24 months, more than 220,000 of these borrowers will default again without 

immediate action by policymakers and by industry.17 Based on this projection, the Bureau 

estimates that servicers and collectors will charge these borrowers more than $125 million in 

unnecessary interest charges over the next two years. 18

 

14 See U.S. Department of Education, Getting out of Default (accessed on Sept. 19, 2016), available at

https://studentaid.ed.gov/sa/repay-loans/default/get-out.

15 See U.S. Government Accountability Office, GAO-15-663, Federal Student Loans: Education could do more to help 

ensure borrowers are aware of repayment and forgiveness options (Aug. 2015), available at

http://www.gao.gov/products/GAO-15-663.

16 As noted elsewhere in this report, publicly available data on performance of defaulted and previously defaulted 

borrowers is extremely limited. The Bureau developed this estimate based on projections from private credit analysts 

about the expected performance of FFELP securities backed by rehabilitated FFELP loans, and based on historical 

data published by the Education Department for both Direct Loans and FFELP loans. The Bureau validated this 

estimate against publicly-available, historical portfolio snapshot data for the Direct Loan program, published by the 

Department of Education. These data indicate that 162,000 borrowers with Direct Loans defaulted for a second time 

between the first quarter of 2015 and the third quarter of 2016. See U.S. Department of Education, Direct Loan and 

Federal Family Education Loan Portfolio by Loan Status (accessed Oct. 3, 2016), available at 

https://studentaid.ed.gov/sa/about/data-center/student/default and DBRS, Rating U.S. Federal Family Education 

Loan Program Securitizations (Mar. 2014), available at http://dbrs.com/research/265582/rating-u-s-federalfamily-education-loan-program-securitizations.pdf.; see also, Moody’s, Moody’s Proposes to Update Its Approach to 

Rating Securities Backed by FFELP Student Loans (Jan. 18, 2012).

17 Id.

18 The Bureau derived this estimate by comparing two otherwise-identical cohorts of 220,000 previously defaulted 

FFELP and Direct Loan borrowers with identical loan types and interest rates, and who cured default by making $5 
21

The following sections of this report focus on problems experienced by borrowers who seek to 

rehabilitate and by borrowers who seek to access an IDR plan following rehabilitation – a 

process referenced throughout this report as the “default-to-IDR transition.” 

3.2.1 Curing a default through rehabilitation

The “default-to-IDR transition,” as illustrated in Figure 13, occurs in three stages, beginning 

with a borrower’s initial decision to cure defaulted debt through rehabilitation.

19 At the 

completion of this process, the vast majority of borrowers regain the ability to access IDR plans, 

including the right to make a $0 monthly “payment” for borrowers experiencing severe financial 

distress. Borrowers also receive a limited credit benefit – federal law requires the owner of the 

loan to request that consumer reporting agencies remove any notation of the student loan 

default appearing on the borrower’s credit report.20 

 

rehabilitation payments. Based on these assumptions, the Bureau contrasted the cumulative interest charges assessed 

to each cohort. One cohort enrolled (or consolidated and enrolled) in the Revised Pay As You Earn (REPAYE) plan 

immediately following rehabilitation. These borrowers are entitled to a 50 percent interest subsidy for any unpaid 

interest accrued while enrolled in this plan. The other cohort remained in a standard payment plan and re-defaulted 

within 24 months of completing rehabilitation, forgoing the associated interest subsidy and other benefits under 

REPAYE. Readers should note that borrowers with Direct Subsidized Loans or Subsidized Stafford Loans may be 

entitled to additional interest subsidies over-and-above the benefit considered in this analysis. This estimate is 

exclusive of any collection costs assessed to borrowers with FFELP loans upon re-default, which can be as high as 16 

percent of outstanding principal and interest. Supra, note 16.

19 See 34 C.F.R. § 682.405; 34 C.F.R. § 685.211(f); see also U.S. Department of Education, Getting out of Default

(accessed on Sept. 19, 2016), available at https://studentaid.ed.gov/sa/repay-loans/default/get-out. 

20 See 34 C.F.R. § 682.405(b)(3)(i)(B); 34 C.F.R. § 685.211(f)(8). For Direct Loans and ED-held FFELP loans, the 

Secretary performs this function. Loan holders (or the Secretary) do not typically remove information related to past 

history of missed payments, limiting any potential positive credit effects associated with the removal of any notation 

of default.
22

FIGURE 12: FEDERAL STUDENT LOAN DEFAULT-TO-IDR TRANSITION

Note: Consumers have a right to cure default either by rehabilitating a defaulted loan or by refinancing the defaulted 

debt by taking out a new Direct Consolidation Loan. The Department of Education estimates that more than 70

percent of cured defaults are completed through rehabilitation. As used throughout this report, the “default-to-IDR 

transition” occurs in three stages, beginning with a borrower’s initial decision to cure defaulted debt through 

rehabilitation.

Rehabilitation requires a borrower to make a series of nine on-time monthly payments over a 

ten month period, driven by the borrower’s income and family size, rather than the borrower’s 

loan balance.21 Borrowers who are experiencing severe financial hardship may complete an 

income-driven rehabilitation by paying a total of $45 (nine on-time payments of $5, over a 

period of ten months), at which point they are likely to be eligible for a $0 monthly “payment” 

under any of the IDR plans available to borrowers with performing federal loans.22 Market 

participants report that nearly 80 percent of borrowers who seek to rehabilitate make payments 

of five dollars.

23 Borrowers can generally only rehabilitate a defaulted student loan once.24

 

 

21 See 34 C.F.R. § 682.405; 34 C.F.R. § 685.211(f).

22 See U.S. Department of Education, Income-Driven Repayment Plans for Federal Students Loans (Feb. 2016), 

available at https://studentaid.ed.gov/sa/sites/default/files/income-driven-repayment.pdf.

23 Timothy Fitzgibbon, Senior Vice President, National Council of Higher Education Resources (NCHER), Panel 

discussion at the NCHER 2015 Knowledge Symposium, Loan Rehabilitation And Related Collection Cost Issues (Nov. 

5, 2015) available at http://slideplayer.com/slide/9364958.

24 See 34 C.F.R. § 682.405(a)(4); 34 C.F.R. § 685.211(f)(12); The 2008 reauthorization of the Higher Education Act 

imposed a one-time limit on rehabilitation for newly-defaulted borrowers. Borrowers who initially defaulted prior to 

Collector enrolls 

borrower in 

income-driven 

rehabilitation

Borrower 

transferred to 

servicer after 

completed 

rehabilitation

Servicer enrolls 

borrower in 

income-driven 

repayment
23

Borrowers’ monthly income-driven rehabilitation payments can be calculated in one of two 

ways: 

 Fifteen percent of discretionary income. Using a formula similar to the one used to 

calculate payments under the Income-Based Repayment (IBR) program, a borrower’s 

monthly rehabilitation payments are capped at 15 percent of the borrower’s discretionary

income.25 Borrowers with no income or very low wages will have the lowest payments 

under this method, which can be as low as $5 per month. Borrowers who complete a 

rehabilitation using this method will generally have a corresponding entitlement to a 

similar monthly payment once they transition out of default.26

 “Reasonable and affordable” payments. Alternatively, collectors may recalculate

payments to be “reasonable and affordable” for borrowers who cannot afford monthly 

payments based on their income.27 Collectors can consider certain borrower expenses 

when calculating a monthly payment under this method.28 Borrowers with high expenses 

relative to their income will have the lowest payments under this method. Because IDR 

 

the enactment of this provision are permitted to rehabilitate for a second time. In addition, the use of consolidation 

to cure a defaulted federal student loan may restore a borrower’s access to rehabilitation upon a subsequent default. 

25 See 34 C.F.R. § 682.405(b)(1); 34 C.F.R. § 685.211(f)(1).

26 Borrowers with federal student loans are entitled to enroll in an IDR plan upon successfully completing a 

rehabilitation agreement. IDR plans cap monthly payments at 10 or 15 percent of a borrower’s discretionary income. 

See U.S. Department of Education, Income-Driven Plans (accessed Sept. 19, 2016), available at

https://studentaid.ed.gov/sa/repay-loans/understand/plans/income-driven. 

27 Readers should note that the Higher Education Act provides a right to make a “reasonable and affordable” payment 

to borrowers seeking to rehabilitate, authorizing the Department of Education to promulgate regulations further 

defining this process. These regulations provide for the two channels discussed in this section, only one of which is 

informally referred to by the Department of Education and the debt collection industry as “reasonable and affordable.” 

See 34 C.F.R. § 682.405(b)(vii) (1); 34 C.F.R. § 685.211(f)(1).

28 See 34 C.F.R. § 682.405(b)(1)(vii)(C); 34 C.F.R. § 685.211(f)(3).
24

plans do not consider borrowers’ expenses when calculating monthly payments, 

borrowers who complete a rehabilitation using this method may not have a 

corresponding low monthly payment once they transition out of default.

29

Successful rehabilitation can be borrowers’ first step on the path to a stable, long-term payment 

arrangement under an IDR plan.30 However, borrowers report that collection practices and 

servicing problems can lead to dead ends and do-overs resulting in months of additional 

payments before borrowers can cure their default. These delays postpone access to the postdefault borrower protections that an IDR plan provides. In addition, borrowers report that some 

delays leave borrowers in a prolonged “default status,” causing additional negative 

consequences, including the unnecessary offset of tax returns, garnishment of wages or certain 

social security benefits, and prolonged ineligibility for federal student aid.

The following section of this report highlights a broad range of challenges identified by student 

loan borrowers related to each stage of the default-to-IDR transition. 

3.2.2 Delays and dead ends during income-driven 

rehabilitation

A borrower in default on a federal student loan has the right under federal law to work with a

collector to rehabilitate their debt.

31 A debt collector facilitates this process by collecting 

 

29 See 20 U.S.C. § 1078-6; 34 C.F.R. § 682.405; 34 C.F.R. § 685.211.

30 It is important to note that Congress and the Department of Education set the terms and conditions of the 

rehabilitation program for both Direct Loans and FFELP. See 20 U.S.C. § 1078-6; 34 C.F.R. § 682.405; 34 C.F.R. § 

685.211. From a consumer’s perspective, the requirements to rehabilitate a loan in default under both programs are 

substantively similar. However, there may be differences in the way Guaranty Agencies and Private Collections 

Agencies oversee and administer certain aspects of each respective program. 

31 See U.S. Department of Education, Getting out of Default (accessed on Sept. 19, 2016), available at

https://studentaid.ed.gov/sa/repay-loans/default/get-out. Any borrowers that previously rehabilitated their loan 

after August 14, 2008 will not be eligible to rehabilitate again; See 682.405(a)(4); 34 C.F.R. § 685.211(f)(12).
25

information from the borrower necessary to set a monthly rehabilitation payment amount. 

Borrowers report obstacles when attempting to set payment levels and make qualifying 

payments.

FIGURE 13: FIRST STAGE OF FEDERAL STUDENT LOAN DEFAULT-TO-IDR TRANSITION

Borrowers complain about delays, do-overs, and dead ends when making

rehabilitation payments. When rehabilitating a defaulted loan, collectors may calculate the 

payment based on information provided orally by the borrower and provide the borrower with a 

rehabilitation agreement using that amount.32 The collector must request documentation from 

the borrower to confirm the borrower's AGI and family size.33 If the borrower does not provide 

the collector with documentation requested by the collector to calculate or confirm the 

reasonable and affordable payment amount within a reasonable time deadline set by the 

collector, the rehabilitation agreement provided is null and void.

34 Borrowers report roadblocks 

when working with their collector to establish and verify the income-driven payment. 

Specifically, borrowers complain about communications and paperwork processing breakdowns 

throughout the rehabilitation payment-setting process.

Borrowers who are making income-driven rehabilitation payments under a verbal agreement, 

generally by enrolling in automatic payments, complain that they are knocked off track, often 

 

32 See 34 C.F.R. § 682.405(b)(1)(iv); 34 C.F.R. § 685.211(f)(1).

33 Id.

34 Id.

Collector enrolls 

borrower in 

income-driven 

rehabilitation

Borrower 

transferred to 

servicer after 

completed 

rehabilitation

Servicer enrolls 

borrower in 

income-driven 

repayment
26

after several months of payments, when their collector invalidates these payments retroactively. 

Collectors invalidate borrowers’ payments when the monthly payment set by the collector is less 

than what is required based on income documentation subsequently provided by the borrower.

35

Borrowers complain that collectors continue to automatically withdraw incorrect payments from 

their account each month, despite having determined that the payment amount was invalid. 

Some borrowers report not learning that all of their payments were invalid until they proactively 

contact their collector after making all nine required payments. 

3.2.3 Problems transferring from a debt collector to a 

student loan servicer

After a borrower completes rehabilitation, their loans transfer to a new company – a student 

loan servicer – and the borrower is required to begin making regular payments. Once this 

transfer is complete, these borrowers are able to exercise their right under federal law to enroll 

in an IDR plan, potentially qualifying for interest subsidies and making progress toward loan 

forgiveness. However, borrowers report this transfer process takes several months or more, 

during which borrowers are required to continue to make payments to their debt collector – a 

period during which many of the benefits and protections of IDR are unavailable. 

FIGURE 14: SECOND STAGE OF FEDERAL STUDENT LOAN DEFAULT-TO-IDR TRANSITION

 

35 See 34 C.F.R. § 682.405(b)(1)(iv); C.F.R. § 685.211(f)(1), see also U.S. Department of Education, Loan Servicing 

and Collection – Frequently Asked Questions, LR-Q2 (accessed Aug. 3, 2016), available at

https://ifap.ed.gov/LoanServicingandCollectionInfo/LSCFAQ.html#LR-Q2.

Collector enrolls 

borrower in 

income-driven 

rehabilitation

Borrower 

transferred to 

servicer after 

completed 

rehabilitation

Servicer enrolls 

borrower in 

income-driven 

repayment
27

Borrowers report disruptions and communication gaps when transferring 

between a debt collector and student loan servicer. Borrowers report that they 

experience interruptions after completing their required rehabilitation payments. During this 

transitional period, borrowers describe how they believe they have satisfied their obligation to 

their debt collector under their rehabilitation agreement, but that their loans remain in limbo, 

noting that they are uncertain when their loan will transfer to a student loan servicer. 36

Despite this uncertainty, borrowers seeking to cure their default must continue making 

payments.37 Borrowers tell us that, during this period, they do not receive clear communications 

about where they should send payments, what amount to pay, and how those payments apply to 

their loan balance. This repayment limbo can last weeks or months until a servicer contacts the 

borrower to provide payment instructions.38 Additionally, some borrowers report that their 

student loan servicer sets their due date for their first regular payment before they receive any 

introductory communication from their servicer. 

Borrowers complain that collectors do not help facilitate IDR enrollment after 

curing default. Financially distressed borrowers may wish to avoid payment shocks by 

beginning the IDR plan enrollment process before their rehabilitated loan is placed with their 

new student loan servicer.39 Borrowers report that collectors and servicers do not effectively 

 

36 After a borrower makes the required nine on-time payments, a collector transfers a borrower’s defaulted loans to a 

servicer. Private Collection Agencies collecting on behalf of the Department of Education transfer loans to the 

Department’s Default Management System for assignment and transfer to a Department of Education-contracted 

student loan servicer. Guaranty Agencies rehabilitating commercially held FFELP loans must first attempt to sell the 

loan to an investor, who then assigns the loan to a servicer. A Guaranty Agency may assign a loan to the Department 

of Education if the Guaranty Agency is unable to find a private-sector buyer. See 34 C.F.R. § 682.405(b)(2)(ii).

37 See 34 C.F.R. § 682.405(b)(2)(ii).

38 See supra note 35.

39 Readers should note that the Higher Education Act prevents borrowers from enrolling in IDR prior to the 

completion of rehabilitation; however, readers should also note that consumers complain about obstacles when 

seeking to take incremental steps toward IDR enrollment not explicitly prohibited under federal law, including 
28

communicate with each other regarding borrowers’ accounts during the hand off, causing 

borrowers to receive conflicting information from their servicer and collector. Borrowers note 

that this conflicting information leads to confusion over whether they are on track to quickly 

transition to an IDR plan. 

3.2.4 Servicing problems after entering repayment

When a borrower completes the transition from a debt collector to a student loan servicer, 

servicers assume responsibility for managing borrowers’ accounts and facilitating enrollment for 

borrowers seeking alternative repayment plans, including IDR. For borrowers who cured a 

default through an income-driven rehabilitation, enrollment in IDR is the next step necessary to

ensure continuity in their monthly payment level, setting them up for successful repayment over 

the long-term.

FIGURE 15: THIRD STAGE OF FEDERAL STUDENT LOAN DEFAULT-TO-IDR TRANSITION

Borrower complaints suggest that student loan servicers are not providing clear, accurate, and 

actionable information on how to continue making income-driven payments after rehabilitation 

is complete. Once borrowers’ loans are placed with a servicer after rehabilitation, borrowers may 

 

barriers to obtaining information about their expected monthly payment following rehabilitation and obstacles when 

seeking to obtain or populate required paperwork in advance. 

Collector enrolls 

borrower in 

income-driven 

rehabilitation

Borrower 

transferred to 

servicer after 

completed 

rehabilitation

Servicer enrolls 

borrower in 

income-driven 

repayment
29

find it difficult and confusing to transition their income-driven payments in rehabilitation to full 

enrollment in an IDR plan.

40

When seeking to make post-default payments, borrowers report servicing 

problems that can contribute to default. As noted above, available data suggest that the 

vast majority of borrowers curing default through an income-driven rehabilitation make $5

payments, and, consequently, should have a right to make $0 payments under an IDR plan.41

However, borrowers report that servicers do not proactively take the steps necessary to help 

them understand how to access IDR and quickly enroll. Borrowers report that these 

communication and processing problems may lead to subsequent delinquency and re-default.

One borrower who rehabilitated his loan complains that he was facing immediate delinquency 

when he could not afford to make payments under his standard payment plan after 

rehabilitation. The borrower complains that after curing his default, his loan was transferred to 

a servicer where his payment jumped to $1000, which was more than he could afford to pay. He 

expressed frustration that he was placed in this position because the debt collector was aware of 

his financial circumstances, but failed to provide this information to his new servicer.

Borrowers complain that poor customer service creates barriers to enrollment in 

IDR plans, even when they proactively request payment relief. Borrowers report that 

servicers direct them to temporary forbearance and deferment options, instead of providing 

information on and facilitating enrollment in an IDR plan. Borrowers who are experiencing 

continuing financial distress describe how they can quickly fall behind when a short-term 

cessation of payment expires. 

 

40 Borrowers with Parent PLUS loans who complete rehabilitation are not eligible for a repayment plan based on their 

income. However, borrowers who first consolidate their Parent PLUS loans can enroll in the Income-Contingent 

Repayment plan. See U.S. Department of Education, Loan Servicing and Collection – Frequently Asked Questions, 

LR-Q4 (accessed Sept. 28, 2016), available at https://ifap.ed.gov/LoanServicingandCollectionInfo/LSCFAQ.html.

41 See NCHER, supra note 23; GAO, supra note 15. 
30

4. Ombudsman’s discussion

Based on the preceding analysis of complaints and other market trends, additional discussion is 

offered below. This discussion represents the Ombudsman’s independent judgment and does 

not necessarily represent the view of the Consumer Financial Protection Bureau.

4.1 Rehabilitation may not be setting up 

borrowers for success

The preceding section of this report focuses on problems reported by borrowers related to the 

“default-to-IDR transition” for borrowers who elect to rehabilitate a defaulted federal student 

loan. 

Collectors, in some cases, may earn nearly $40 for every dollar in cash recovered through 

rehabilitation, suggesting that the desired outcome – curing default – offers taxpayers a longterm economic value beyond the immediate recovery of cash.42 The Department of Education 

 

42 Consider a borrower who qualifies for a $5 monthly payment under an income-driven rehabilitation. Collectors will 

recover a total of $45 over a period of nine months for borrowers who make consecutive repayments. In exchange for 

completing this rehabilitation, the Department of Education may pay collectors up to $1,710 – nearly 40 times the 

amount of the cash recovery. See U.S. Department of Education, Solicitation ED-FSA-13-R-0006 (Sept. 30, 2014), 

available at https://www.fbo.gov/?s=opportunity&mode=form&id=6b7574995ffcb7209e3b0f5de846f331; and U.S. 
31

estimates that more than 70 percent of cured defaults are completed through rehabilitation.43 In 

contrast to a student loan servicer, which is generally paid a fixed monthly fee irrespective of a 

borrower’s repayment arrangement, many collectors, including the Department of Education’s 

private collection agencies (PCAs), receive supplemental incentive-based compensation driven 

by short-term borrower outcomes.

44 However, recent analyses produced by a broad range of 

stakeholders – including government agencies, student loan market analysts, credit rating 

agencies, and guaranty agencies – highlight poor repayment outcomes over the medium and 

long term. These poor outcomes are driven, in part, by the problems identified by consumers in 

the previous section of this report, suggesting that servicing and collections practices may create 

obstacles for a broad segment of student loan borrowers pursuing rehabilitation.45 As these 

analyses show, many borrowers face significant headwinds when attempting to successfully exit 

rehabilitation, enter repayment, and succeed over the long term – indicating that the borrowers 

experiencing the most severe financial hardship are the most likely to re-default.

 

Department of Education, Solicitation ED-FSA-16-R-0009 (Jan. 22, 2016), available at

https://www.fbo.gov/utils/view?id=738a6d94d03048187f5fc89b70e98b2e. 

43 See U.S. Department of Education, Federal Student Aid Data Center: Default Rates FY15 Q4 – FY16 Q3 (accessed 

Sept. 16, 2016), available at https://studentaid.ed.gov/sa/about/data-center/student/default; U.S. Department of 

Education, Federal Student Aid Data Center: FFEL Program Lender and Guaranty Agency Reports July 2015 –

June 2016 (accessed Sept. 16, 2016), available at https://studentaid.ed.gov/sa/about/data-center/lender-guaranty.

44 See GAO, supra note 15.

45 See, e.g., U.S. Department of the Treasury, Report on Initial Observations from the Fiscal-Federal Student Aid Pilot 

for Servicing Defaulted Student Loan Debt (Jul. 2016), available at 

https://www.treasury.gov/connect/blog/Documents/student-loan-pilot-report-july-2016.pdf; DBRS, Rating U.S. 

Federal Family Education Loan Program Securitizations (Mar. 2014), available at 

http://dbrs.com/research/265582/rating-u-s-federal-family-education-loan-program-securitizations.pdf; Moody’s, 

Moody’s Proposes to Update Its Approach to Rating Securities Backed by FFELP Student Loans (Jan. 18, 2012), 

available at

http://www.nhhefa.com/documents/MoodysProposestoUpdateItsApproachtoRatingSecuritiesBackedbyFFELPStude

ntLoans.pdf. 
32

Although public data related to the performance of previously defaulted borrowers is very 

limited, available data offers insight into the precarious position of many of the most vulnerable 

borrowers with federal student loans. 

The stakes are higher for previously defaulted borrowers. Borrowers are restricted to a 

single rehabilitation over the life of their loan, meaning that a subsequent defaulted loan cannot 

be rehabilitated.46 For a borrower who has previously rehabilitated a loan and is not eligible for 

consolidation, a subsequent default may be a permanent barrier to critical borrower protections. 

For example, borrowers in default cannot access the many benefits of IDR, including short-term 

payment relief, immediate access to interest subsidies, and potential loan forgiveness.

Consequently, for previously defaulted borrowers seeking to succeed over the long term, the 

stakes are higher and the consequences of default are more severe when compared to the 

borrower population at large. 

The volume of defaults cured through rehabilitation is growing. Over the past decade, 

the volume of defaulted federal student loans cured through rehabilitation has grown 

precipitously, from less than $6.2 billion in 2012 to more than $12.5 billion over the past year.

47

According to the Department of Education, rehabilitation of defaulted loans accounts for almost 

70 percent of the $17.5 billion dollars in federal student loans collected by PCAs and Guaranty 

 

46 The 2008 Higher Education Opportunity Act (HEOA) imposed a one-time use limitation on rehabilitations. Prior 

to 2008, borrowers had a right to rehabilitate defaulted federal student loan debt irrespective of whether they had 

previously taken advantage of this protection. See 20 USC §1078-6 (FFELP) and 20 USC §1087a et. seq. (Direct 

Loans). Readers should also note that taking out a Direct Consolidation Loan to refinance a previously rehabilitated 

loan can restore eligibility for rehabilitation if a borrower subsequently defaults on their new Consolidation Loan. 

47 See Vigna, Dwight, U.S. Department of Education, Panel discussion at the NCHER 2014 Knowledge Symposium 

(Nov. 3, 2014) available at https://c.ymcdn.com/sites/www.ncher.us/resource/collection/D9B3BBF9-0F3A-4E76-

BCF5-B82C06A5711C/MON1045ED_Update_-_G3.pptx; U.S. Department of Education, Federal Student Aid Data 

Center: Default Rates FY15 Q4 – FY16 Q3 (accessed Oct. 3, 2016), available at

https://studentaid.ed.gov/sa/about/data-center/student/default; U.S. Department of Education, Federal Student 

Aid Data Center: FFEL Program Lender and Guaranty Agency Reports August 2015 – July 2016 (accessed Oct. 3, 

2016), available at https://studentaid.ed.gov/sa/about/data-center/lender-guaranty.
33

Agencies (GAs) in the last year.

48 Despite the primacy of rehabilitation in the student loan 

collections market, current policies and practices underpinning the rehabilitation process may 

be inadequate to set borrowers up for repayment success over the long term.

Nearly half of rehabilitated borrowers will re-default. Recent projections by industry 

analysts estimate that approximately 45 percent of FFELP borrowers rehabilitating their loans 

will default again.

49 Of those who default, three quarters will default within the first two years 

following rehabilitation.50 This is particularly troubling, given the extended duration of 

delinquency afforded to federal student loan borrowers under the Higher Education Act, which 

requires that a borrower miss a minimum of nine monthly payments prior to default.51 Another 

private-sector estimate of the performance of previously defaulted FFELP loans notes that redefaults could climb as high as 60 percent to 75 percent over the lifetime of a loan.52

 

48 See U.S. Department of Education, Federal Student Aid Data Center: Default Rates FY15 Q4 – FY16 Q3 (accessed 

Sept. 16, 2016), available at https://studentaid.ed.gov/sa/about/data-center/student/default; U.S. Department of 

Education, Federal Student Aid Data Center: FFEL Program Lender and Guaranty Agency Reports July 2015 –

June 2016 (accessed Sept. 16, 2016), available at https://studentaid.ed.gov/sa/about/data-center/lender-guaranty. 

49 See DBRS, Rating U.S. Federal Family Education Loan Program Securitizations (Mar. 2014), available at 

http://dbrs.com/research/265582/rating-u-s-federal-family-education-loan-program-securitizations.pdf.

50 Id. 

51 See 34 C.F.R. §682.200(b)(1); 34 C.F.R. §685.102(b). Due to the elongated period of pre-default delinquency 

required under federal law, re-default is technically impossible for the first 9 months following the completion of 

rehabilitation. For borrowers entitled to 12 months of $0 payments under an IDR plan, inability to pay should not be 

a barrier to remaining current on their obligation. However, this analysis suggests that a substantial share of 

borrowers who re-default never enroll in an IDR plan with a $0 payment and never make another standard payment 

after completing a successful rehabilitation – quickly transitioning from default to a delinquency back into default. 

52 See Moody’s, Moody’s Proposes to Update Its Approach to Rating Securities Backed by FFELP Student Loans (Jan. 

18, 2012), available at

http://www.nhhefa.com/documents/MoodysProposestoUpdateItsApproachtoRatingSecuritiesBackedbyFFELPStude

ntLoans.pdf.
34

One-third of borrowers making $5 rehabilitation payments struggle financially 

immediately after entering repayment. In a recent presentation to its members, an 

industry trade association representing student loan servicers and debt collectors estimated that 

nearly 80 percent of borrowers who seek to rehabilitate their loan make payments of $5.

53 Based 

on the formula used to determine eligibility for a $5 monthly rehabilitation payment, a majority 

of these borrowers should expect an IDR payment of $0 per month following a successful 

rehabilitation – effectively making short-term distress impossible. However, one market 

participant reports that one-third of borrowers who made the minimum $5 monthly 

rehabilitation payment became delinquent after 60 days in repayment.54 In contrast, borrowers 

making monthly rehabilitation payments of greater than $200 were delinquent at half the rate 

of borrowers making $5 payments.

55

This data suggests that the most financially vulnerable borrowers are served poorly, both in the 

short-term and over the long-term, by the current policies and practices that underpin the 

default-to-IDR transition.

56 These servicing and collection practices may also pose additional

challenges for certain borrower populations, particularly borrowers of color, who face 

disproportionately greater economic barriers when paying for college and are more likely to 

experience delinquency and default.

57 Available evidence raises important questions about 

 

53 See NCHER, supra note 23. 

54 Id.

55 Id.

56 Contemporaneously with the publication of this report, the Bureau sent an information request to several of the 

largest student loan servicers calling for new information about the performance of this important segment of student 

loan borrowers. See Appendix C.

57 For further discussion, see Consumer Financial Protection Bureau, The significant impact of student debt on 

communities of color (Sept. 15, 2016), available at http://www.consumerfinance.gov/about-us/blog/significantimpact-student-debt-communities-color/ (“Despite the increased number of repayment options available to federal 

student loan borrowers, one-in-four borrowers are delinquent or in default on their federal student loans. This is 

particularly common for students who leave school before completing their degree or attend for-profit colleges. These 
35

whether the economic incentives that drive collector and servicer practices throughout the 

default-to-IDR transition are properly aligned and, as discussed below, whether rehabilitation 

delivers the intended benefits to consumers, industry, and taxpayers when the program was 

created more than two decades ago. 

4.2 Rehabilitation was designed as a 

feature of the legacy bank-based 

guaranteed loan program 

The basic structure of the rehabilitation program – including the requirement that borrowers 

make a series of payments to a debt collector prior to exiting default – has not been revised in 

more than two decades. This process does not reflect two major changes to the federal student 

loan program in the intervening years – the termination of bank-based guaranteed lending and 

the establishment of a near-universal right for borrowers to make income-driven student loan 

payments. As the preceding section of this report indicates, today, consumers encounter 

significant problems with the debt collection and servicing practices put in place to execute 

certain required program functions, forcing vulnerable borrowers to work with multiple private 

companies to complete seemingly duplicative processes to set affordable student loan payments. 

 

troubling statistics raise concerns that millions of borrowers may not be getting information about repayment options 

or may encounter breakdowns when attempting to enroll in these plans. For borrowers of color, who are more likely 

to attend for-profit colleges and face unique obstacles while completing a degree, these breakdowns may be even 

more troubling. Some research suggests higher rates of student loan defaults and delinquencies in ZIP codes 

populated primarily by minorities with higher income levels,” citing Washington Center for Equitable Growth, 

Geography of Student Debt (2016), available at http://equitablegrowth.org/research-analysis/an-introduction-tothe-geography-of-student-debt/). 
36

Banks once made the vast majority of federal student loans and rehabilitation was 

designed as a feature of this program. Prior to the authorization of the Direct Loan 

program in 1993, banks and other private lenders made all new federal student loans, other than 

those made by colleges and universities.58 Prior to 2010, FFELP loans were the dominant source 

of new student lending, comprising more than 75 percent of all outstanding federal student 

loans as of the end of fiscal year 2009.59 These loans are guaranteed by guarantors and 

reinsured by the federal government.60 Secondary markets and private investors who purchased 

FFELP loans (or bonds backed by FFELP loans) provided liquidity under this federally 

guaranteed lending model.61 Although Congress halted new originations under FFELP in 2010, 

nearly $245 billion in commercial FFELP loans remain outstanding.62

 

58 Readers should note that the 1992 Higher Education Act Amendments created a pilot Direct Loan program, which 

made a limited number of student loans prior to the authorization of the Direct Loan program in 1993. See P.L. 102-

325. The Student Loan Reform Act of 1993, a part of the Omnibus Budget Reconciliation Act of 1993, authorized the 

program in its present form, requiring that the program be implemented on a phased-in basis, reaching scale during 

the 1998-1999 academic year. See Pub. L. 103-66. For further discussion of the structure of the student lending 

market, see Consumer Financial Protection Bureau, Student Loan Servicing (2015), available at 

files.consumerfinance.gov/f/201509_cfpb_student-loan-servicing-report.pdf.

59 See U.S. Department of Education, Federal Student Aid Data Center: Portfolio Summary (accessed Sept. 12, 2016), 

available at https://studentaid.ed.gov/sa/about/data-center/student/portfolio. 

60 To learn more about the structure of the FFEL Program, see 34 C.F.R. § 682.404. 

61 See Consumer Financial Protection Bureau, Testimony of Rohit Chopra Before the Senate Committee on Banking, 

Housing, and Urban Affairs (June 24, 2013), available at http://www.consumerfinance.gov/aboutus/newsroom/the-cfpb-before-the-senate-committee-on-banking-housing-and-urban-affairs/.

62 See U.S. Department of Education, Federal Student Aid Data Center: Portfolio Summary (accessed Sept. 12, 2016), 

available at https://studentaid.ed.gov/sa/about/data-center/student/portfolio; U.S. Department of Education, 

Federal Student Aid Data Center: ED-Held FFEL Portfolio by Loan Status (accessed Sept. 12, 2016), available at 

https://studentaid.ed.gov/sa/about/data-center/student/portfolio.
37

When a borrower with a FFELP loan defaults on his or her obligation, the guarantor repays the 

private investor that owns the loan and assumes ownership of the loan.63 However, the 

guarantor must still attempt to recover the defaulted amount from the borrower, either by 

serving as a first-party debt collector or by contracting with a third-party debt collector. Federal 

law also permits collectors to recover “reasonable collection costs” from a borrower by assessing 

a fee of up to 16 percent of the unpaid principal and accrued interest.64 Guaranty Agencies turn 

over recovered funds and the net of collection costs to the federal government.

Guarantors are not permitted to sell defaulted federal student loan debt to private debt buyers –

under most circumstances, they must continue to pursue collection of all defaulted debt on their 

balance sheet until a borrower cures their default or satisfies his or her obligation.65

Federal law provides for a series of extraordinary tools to collect on this type of defaulted federal 

student loan debt (e.g. administrative wage garnishment, the offset of tax refunds and other 

 

63 Under certain circumstances, the federal government then reimburses the guarantor.

64 20 U.S.C. § 1078–6(a)(1). Prior to July 1, 2014, federal law permitted collection costs up to a maximum of 18.5 

percent. The Department of Education has ceased imposing collection costs for borrowers with loans on its balance 

sheet who cure default through rehabilitation; however, this practice continues for borrowers who cure default on a 

privately held FFELP loan. The U.S. Department of Education has attempted to halt the imposition of collections 

costs by Guaranty Agencies when a borrower has initiated rehabilitation within 60 days of default. For further 

discussion, see U.S. Department of Education, Dear Colleague Letter GEN-14-15 (July 10, 2015), available at

https://www.ifap.ed.gov/dpcletters/attachments/GEN1514.pdf; and see Bible v. USA Funds Inc., 799 F.3d 633 (7th 

Cir. 2015). 

65 See 34 C.F.R. § 682.405. Readers should note that under certain circumstances Guaranty Agencies are also 

permitted to assign defaulted student loans to the Department of Education after performing “due diligence” to 

collect on the defaulted debt. 
38

government benefits).66 Congress subsequently established the rehabilitation program to 

provide consumers with a path to cure default and return to good standing.67 

As described in detail in the preceding section, borrowers are required to make nine timely 

payments over a period of ten months in order to rehabilitate a defaulted loan.68 Borrowers with 

FFELP loans depend on their loan guarantor to take an additional step in order to complete 

rehabilitation – the guarantor must find a lender or other loan holder to “repurchase” the 

defaulted loan.69 Establishing a history of timely payments, and requiring additional 

 

66 See, e.g., 20 U.S.C. § 1095a (Administrative Wage Garnishment); and 31 U.S.C. § 3720A (Tax Offset Program); see,

generally 34 C.F.R. § 682. For further discussion, see InsideARM, The Evolution of Student Loan Collections (2014), 

available at www.insidearm.com/opinion/evolution-of-student-loan-collections/.

67 See 20 U.S.C. § 1078-6 (FFELP) and 20 U.S.C. § 1087a et. seq . (Direct Loans). For further discussion, see Higher 

Education Act Amendments of 1992, Conference Report, Conf. Rept. 102-630 (June 29, 1992), available at 

http://files.eric.ed.gov/fulltext/ED351985.pdf. (“The conferees intend that the new loan rehabilitation provisions are 

to provide a second chance, particularly to low-income borrowers many of whom were defrauded by unscrupulous 

schools and never received promised jobs or training and who now have ruined credit or even judgements against 

them because of defaulted loans.”) 

68 See 20 USC § 1078-6 (FFELP) and 20 USC § 1087a et. seq. (Direct Loans).

69 Regulations for the FFELP program explicitly prescribe the relationship between the rehabilitation process and the 

future sale of this debt. See 34 C.F.R. § 682.405(a). (“A guaranty agency that has a basic program agreement must 

enter into a loan rehabilitation agreement with the Secretary. The guaranty agency must establish a loan 

rehabilitation program for all borrowers with an enforceable promissory note for the purpose of rehabilitating 

defaulted loans...so that the loan may be purchased, if practicable, by an eligible lender and removed from default 

status”). Readers should note, however, that as the outstanding volume of commercial FFELP loans continues to 

decline and remaining privately held FFELP student loans show signs of elevated distress when compared to other 

asset classes, guarantors may encounter obstacles when seeking to sell rehabilitated loans to investors. As a result, in 

2015, the Department of Education created a new conduit to purchase rehabilitated loans from guarantors, in the 

event that a guarantor is unable to find a private-sector buyer. See also 34 C.F.R. § 682.405(a)(2)(ii).
39

documentation and information from the borrower (e.g., references and a signed rehabilitation 

agreement) can help guarantors market rehabilitated loans to investors as performing assets.70

The rehabilitation program was designed to offer “reasonable and affordable” 

payments to defaulted borrowers before Congress created a widespread 

entitlement to an income-driven repayment plan. In 1992, Congress instructed 

Guaranty Agencies to permit borrowers to rehabilitate defaulted loans by making a series of 

monthly payments that were “reasonable and affordable” based on a borrower’s financial 

circumstances.71 For more than two decades, program requirements permitted collectors to 

negotiate reasonable and affordable payment levels with individual consumers as part of a 

rehabilitation agreement. This individualized process persisted despite the near-universal right 

to Income-Based Repayment for non-defaulted borrowers beginning in 2009.

72

 In 2014, the 

Education Department implemented regulations further defining “reasonable and affordable” to 

 

70 See 34 C.F.R. § 682.405; See, also Consumer Bankers Association et. al., Comment Letter in response to Education 

Department NPRM defining “Reasonable and Affordable” payments, Docket ID ED-2013-OPE-0063 (2013), 

available at 

http://consumerbankers.com/sites/default/files/082813_CBA%20Joint%20Comment%20Letter%20to%20Departm

ent%20of%20Education%20Regarding%20Federal%20Loan%20Programs.pdf (“Guaranty agencies may also 

currently require a borrower to provide updated references and contact information to facilitate the rehabilitation 

process . . . This enhances a guaranty agency’s ability to sell the borrower’s rehabilitation-eligible loans.”); Douglas 

Lederman, Left Out by the Bailout (Inside Higher Education, November 26, 2008), available at

https://www.insidehighered.com/news/2008/11/26/rehab (“In normal times, guarantee agencies have sold bunches 

of such loans to banks or other investors that see them as a worthy asset, and "under normal market conditions, these 

loans were actively sought out," because the borrowers have shown their willingness and ability to overcome the odds 

and pay them off, says Fitzgibbons of the council of loan programs.”); and Deanne Loonin, Memorandum to National 

Council of Higher Education Resources (December 2008), available at

http://otrans.3cdn.net/a0379eab4e8e4e7482_gam6bnhw0.pdf ("We have heard many different views about the 

criteria for selling rehabilitated loans. Some GA staff people have told us that a certain minimum monthly payment is 

required in order to successfully sell the loan. Others say that the loans can be sold regardless of the borrower’s 

payment plan. We understand that the market is volatile and that currently there is little or no market at all for 

rehabilitated loans.”)

71 20 USC 1078-6

72 20 USC 1098e (FFELP) and 20 USC 1087e (Direct Loans)
40

align with IBR, attempting to ensure both programs offer consistent payment levels to 

borrowers experiencing financial hardship.73 These changes did not alter the structure of the 

rehabilitation process.

Despite recent changes, the structure and cadence of rehabilitation remains

rooted in a design created to work within a bank-based, guaranteed lending model. 

Despite the substantial changes outlined above, the structure and cadence designed primarily 

for the legacy FFEL Program endure in both the FFELP and DL markets. This includes 

requirements that consumers make nine on-time monthly payments before their loans can be 

restored to a non-default status. The current process also continues to mire rehabilitated loans 

in an extended transition between collections and loan servicing, delaying borrowers’ access to

certain consumer protections available to non-defaulted borrowers, especially IDR. 

Congress provided Direct Loan borrowers in default with the same consumer protections 

afforded to FFELP loan borrowers, including the ability to rehabilitate defaulted loans.74

However, in contrast to FFELP loans, the Department of Education retains ownership of all 

Direct Loans for the lifetime of the obligation. Beginning in 2015, the Education Department 

permits FFELP guarantors to transfer successfully rehabilitated FFELP loans immediately to the 

Department of Education, rather than selling these loans to a new private-sector buyer.75

Consequently, policymakers may have an opportunity to further streamline the structure for 

rehabilitation, given that there is no need to accommodate a secondary market. 

 

73 See 34 CFR 685.211 (Direct Loans), 34 CFR 682.405 (FFELP)

74 See Pub.L. 103-66. When creating the Direct Loan program, Congress also provided the Department of Education 

with the same extraordinary collection tools provided to guarantors of FFELP loans, such as Administrative Wage 

Garnishment and tax refund offset. Policymakers envisioned rehabilitation as an important countervailing protection 

for consumers, providing borrowers with a path to avoid compulsory collections. See also 20 U.S.C. § 1087a et seq.

75 34 C.F.R. § 682.405(a)(2)(ii).
41

Market participants, trade associations representing the student loan servicing and collections 

industries, consumer advocates, and policymakers have called for simplification of the student 

loan repayment process for borrowers with performing loans.76 As the preceding discussion 

demonstrates, the Higher Education Act also forces defaulted borrowers to navigate a complex 

and complicated process driven by program rules designed for a bank-based, guaranteed 

lending model. The legacy requirements that underpin the default-to-IDR transition place an

increased burden on borrowers, increase costs for taxpayers, create unnecessary barriers to 

repayment success, and fail to consider the significant changes that have occurred in the higher 

education finance market in the past decade. 

4.3 Consolidation may provide a faster

route to IDR for some borrowers

As discussed in the preceding section, eligible borrowers seeking to cure a defaulted federal 

student loan can choose between rehabilitating this debt and refinancing their defaulted loan 

with a new Direct Consolidation Loan. Part three of this report focuses extensively on 

rehabilitation and the range of problems reported by consumers seeking to exercise their right 

to cure default through this channel. Alternatively, eligible borrowers can choose to cure 

defaulted federal student loans by refinancing this debt with a new Direct Consolidation Loan. 

Borrowers can consolidate their loans with the assistance of a collector or initiate the process 

directly through the Department of Education’s website. As part of this process, borrowers may 

 

76 See, e.g., Comment from Student Loan Servicing Alliance, CFPB-2016-0018-0670 (June 2016), available at

https://www.regulations.gov/document?D=CFPB-2016-0018-0670; Comment from National Council of Higher 

Education Resources, CFPB-2016-0018-0674 (June 2016), available at

https://www.regulations.gov/document?D=CFPB-2016-0018-0674; Jack Remondi, Editorial, Navient chief: There 

are 56 options for repaying federal student loans. It’s time to simplify., Wash. Post (Aug. 26, 2016), available at

https://www.washingtonpost.com/news/grade-point/wp/2016/08/26/navient-chief-there-are-56-options-forrepaying-federal-student-loans-its-time-to-simplify/#comments.
42

apply to enroll in IDR at the time of the application for consolidation. Both rehabilitation and 

consolidation offer similar and different (mutually exclusive) benefits for consumers. The 

following discussion seeks to explore the differences in structure and cadence associated with 

each option, which may be instructive as policymakers assess opportunities to reform the 

“default-to-IDR transition.”

Borrowers who cure default through consolidation can immediately regain access to borrower

protections and benefits provided under the Higher Education Act, making it a faster and 

potentially lower-cost solution for borrowers seeking long-term payment relief under IDR, or 

those seeking to restore eligibility for federal student aid.77 Additionally, borrowers with Parent 

PLUS loans are required to refinance their debt with a new Direct Consolidation Loan in order 

to access a repayment plan based on their income.78 

 

77 Over time, the assessment of collection costs by debt collectors has varied. Historically, many consumers pursued 

rehabilitation because debt collectors offered (or were required by the Department of Education to offer) a waiver of 

collection costs, generally 16 percent of outstanding principal and interest. Under current practice, Direct Loan 

borrowers may also qualify for a waiver of collection costs when consolidating to cure a default; however, FFELP 

borrowers are generally assessed these costs, which are capitalized (added to the outstanding principal balance) as 

part of the refinancing process.

78 See U.S. Department of Education, Loan Servicing and Collection – Frequently Asked Questions, LR-Q4 (accessed 

Sept. 28, 2016), available at https://ifap.ed.gov/LoanServicingandCollectionInfo/LSCFAQ.html.
43
44

For some borrowers, consolidation offers a faster track into IDR. In contrast to the 

months-long rehabilitation process, borrowers may take out a new Direct Consolidation Loan 

and repay their defaulted debt, irrespective of whether they defaulted on a FFELP loan or a 

Direct Loan, but not, as noted above, a Direct Consolidation Loan.

79 This process effectively 

refinances a defaulted loan and extends a new credit obligation to the borrower through the 

Direct Loan program. Borrowers experiencing financial hardship can immediately cure default 

without making any payments to a debt collector by completing the required paperwork to 

enroll their new Direct Consolidation Loan in an IDR plan. 80 After submitting income 

documentation, the lowest income borrowers can access a $0 “payment.”

81 This process can also

more-quickly contribute to strengthened household balance sheets by freeing up cash for 

savings or other expenses. Borrowers enrolled in IDR may also begin to reverse the damage 

done to their credit by their initial loan default as new information is furnished indicating a 

successful history of monthly payments under IDR.82

 

79 See U.S. Department of Education, Loan Consolidation (accessed Sept. 19, 2016), available at 

https://studentaid.ed.gov/sa/repay-loans/consolidation. Note that borrowers under Administrative Wage 

Garnishment are not eligible for consolidation. 

80 See U.S. Department of Education, Loan Consolidation (accessed Sept. 19, 2016), available at 

https://studentaid.ed.gov/sa/repay-loans/consolidation. Borrowers generally can only consolidate once. Borrowers 

can consolidate more than once if the new Direct Consolidation Loan includes an additional Direct Loan or FFELP 

loan; borrowers can also reconsolidate their loans without an additional loan in certain circumstances, such as FFELP 

borrowers expressing interest in pursuing the Public Service Loan Forgiveness program.

81 Alternatively, borrowers can consolidate their defaulted loan and repay the new loan under any repayment plan 

after making three consecutive, voluntary, on-time, full monthly payments to a debt collector. See U.S. Department of 

Education, Getting out of Default (accessed on Sept. 19, 2016), available at https://studentaid.ed.gov/sa/repayloans/default/get-out.

82 Readers should note that the limited credit benefit offered by the Rehabilitation program is not afforded to 

previously defaulted borrowers who use consolidation to exit default.
45

For borrowers who are entitled to access this consumer protection and seek to quickly enroll in 

IDR, a Direct Consolidation Loan may offer a faster alternative to rehabilitation.83 However, 

many of the concerns identified in the preceding section of this report suggest that this option 

may not be widely advertised by debt collectors or well understood by borrowers in default. 

As policymakers consider steps to streamline the “default-to-IDR transition,” the simplified IDR 

enrollment structure available to borrowers who are currently entitled to cure default through 

consolidation may offer important context. 

4.4 Recommendations

Policymakers and market participants may wish to consider the following recommendations to 

address the specific problems identified in this report.

Streamlining access to IDR for all federal student loan 

borrowers

The most recent reauthorization of the Higher Education Act took place in in 2008.84 Since this 

legislation was last reauthorized, the market for higher education finance shifted and, as noted 

above, many of the legacy policies and programs established to underpin a bank-based 

guaranteed loan scheme are now applied to the Direct Loan program, without significant 

revision to account for the single-creditor structure of this program or a near-universal 

entitlement to IDR. 

 

83 For further discussion, see National Consumer Law Center, Pounding Student Loan Borrowers (Sept. 2014), 

available at https://www.nclc.org/images/pdf/pr-reports/report-sl-debt-collectors.pdf.

84 See Pub. L. 110-135.
46

In light of these recent shifts, as reauthorization of HEA is considered, consumers and taxpayers 

would benefit from a reassessment of the treatment of borrowers with severely delinquent and 

defaulted loans.

Simplify and streamline access to an income-driven repayment for all borrowers, 

irrespective of default status. The most economically distressed borrowers are affected 

directly by the servicing and collections practices highlighted in this report. Regulatory changes 

made subsequent to the 2008 reauthorization of HEA provide an expanded universe of 

borrowers with access to an income-driven student loan payment, irrespective of whether their 

loan is performing or in default. The issues discussed in this report suggest that the “default-toIDR transition” is failing to achieve its intended purpose – setting borrowers up for repayment 

success over the long-term. 

This raises questions about whether many of the legacy features and economic incentives of the 

bank-based guaranteed loan program are still relevant in the current single creditor 

environment. In particular, as policymakers evaluate the efficacy of the default-to-IDR 

transition, they may wish to examine whether an extended period of income-driven 

rehabilitation payments and a complicated collector-to-servicer transition are necessary, where 

a servicer will then be required to enroll a borrower in a new arrangement, but with a similar 

income-driven structure. As policymakers consider steps to simplify the process of repaying a 

student loan, they may wish streamline, simplify or enhance the current consumer protections 

in place for borrowers with defaulted and previously defaulted loans to ensure that the 

protections are in the best interest of consumers and taxpayers. 

In addition to the policy changes recommended above, policymakers and market participants 

may also wish to consider incremental changes in the immediate term, in order to address the 

problems described in this report.

Strengthening borrower communications during the 

rehabilitation-to-IDR transition 

As previously discussed, borrowers report a range of operational and communications 

challenges that may push long-term financial stability beyond reach. In 2015, the Department of 

Education sought to further “eas[e] the transition of borrowers from rehabilitation to servicing” 
47

by providing both collectors and servicers with an additional set of tools to improve this 

process.85 All collectors are now required to inform borrowers about the availability of incomedriven repayment plans and the process for enrolling, an industry practice in place under the 

Direct Loan program prior to this rule change.86 However, evidence suggests that these reforms 

may be insufficient to assist a substantial share of borrowers navigating the default-to-IDR 

transition.87

In July, the Education Department issued new policy direction to Federal Student Aid (FSA), 

directing FSA to implement robust servicing standards as part of the Education Department’s 

new vision for servicing student loan borrowers. This guidance directs a process that will 

include the creation of a new student loan servicing platform for borrowers with Direct Loans 

and enhanced servicing standards to assist “at risk” borrowers, including borrowers with 

 

85 See U.S. Department of Education, Student Assistance General Provisions, Federal Family Education Loan 

Program, and William D. Ford Federal Direct Loan Program (Final Rule), 80 Fed. Reg. 67204 (Oct. 30, 2015), 

available at https://www.gpo.gov/fdsys/pkg/FR-2015-10-30/pdf/2015-27143.pdf.

86 See 34 C.F.R. § 682.405 and 34 CFR § 685.211

87 Readers should note that the Education Department made incremental changes to enhance the communications 

required for student loan servicers and private collection agencies under the Direct Loan program, prior to this rule 

change. In addition, the Education Department required procedural changes to ensure Direct Loan borrowers 

could continue making payments at the level set in their rehabilitation agreement for three months following the 

completion of a rehabilitation. Recent Education Department data suggests that the volume of borrowers 

defaulting for a second time has remained steady over the preceding seven quarters. See U.S. Department of

Education, Federal Student Aid Data Center: Default Rates (Accessed on October 10, 2016), available at

https://studentaid.ed.gov/sa/about/data-center/student/default./ See also Masten, Nancy, Loan Rehabilitation 

Counter Proposal (Submitted to Negotiated Rulemaking Session 2 on March 30, 2015), available at 

http://www2.ed.gov/policy/highered/reg/hearulemaking/2015/paye2-loanrehab-counterprop.doc (“We 

understand that Direct Loan servicers currently permit these borrowers to continue making the monthly payment 

amount established under the loan rehabilitation agreement for the first three monthly payments after 

rehabilitation is complete, to provide ample time for the borrowers to select a repayment plan and submit any 

required documentation.”).
48

previously-defaulted loans.88 Policymakers and market participants should consider immediate 

action to improve borrower communication throughout the transition from rehabilitation into 

an IDR plan. 

Policymakers and market participants should consider methods for PCAs and 

Guaranty Agencies to facilitate the application for IDR plans. As described above, 

PCAs and guaranty agencies work with borrowers to document and verify income and family 

size – the prerequisites for enrollment in both income-driven rehabilitation and IDR plans. 

Collectors have strong economic incentives to complete rehabilitations successfully, as shortterm borrower outcomes drive collectors’ compensation. This is in sharp contrast to a student 

loan servicer, which generally is paid a fixed monthly fee irrespective of a borrower’s repayment 

arrangement. Given existing economic incentives, the demonstrated capacity for collectors to 

process income and family size documentation, and the growing body of evidence suggesting 

that IDR plans drive better borrower outcomes over the long-term,89 collectors should be 

required to initiate and assist borrowers seeking to complete applications for IDR plans during 

the final months of the rehabilitation process.

90 Collectors should also be required to hand-off 

these documents to student loan servicers for processing. This change in practice would ensure 

 

88 See U.S. Department of Education, Education Department to Implement Improved Customer Service and 

Enhanced Protections for Student Loan Borrowers (July 2015), available at http://www.ed.gov/news/pressreleases/education-department-implement-improved-customer-service-and-enhanced-protections-student-loanborrowers. 

89 See Consumer Financial Protection Bureau, Student Loan Servicing (2015), available at

http://files.consumerfinance.gov/f/201509_cfpb_student-loan-servicing-report.pdf.

90 As noted before, Department of Education regulations only require Guaranty Agencies collecting on FFELP loans to 

provide borrowers pursuing rehabilitation with information on repayment plans available to the borrower after 

rehabilitating the defaulted loan; explain to the borrower how to select a repayment plan; and provide financial and 

economic education materials to borrowers who successfully complete loan rehabilitation. In the Direct Loan 

Program, borrowers who rehabilitate a defaulted Direct Loan are placed initially in an alternative repayment plan, 

allowing the borrower to continue making the same payments as in rehabilitation for three months while the their 

student loan servicer provides information to the borrower about the availability of other repayment plans. See 34 

C.F.R. § 682.405; 34 C.F.R. § 685.211. 
49

that borrowers avoid surprise payment shocks and benefit from the promised continuity 

between rehabilitation and IDR envisioned by policymakers. 

Policymakers and market participants may wish to consider steps to ensure 

student loan servicers “reach back” to borrowers during the rehabilitation process 

in order to establish early communication during the transition out of default. As 

noted in prior reports, accurate and actionable information is critical to facilitate successful 

enrollment in IDR plans.91 This is particularly true for borrowers with characteristics that are 

associated with or predictive of future financial distress. In the July 2016 policy direction noted 

above, the Department of Education identified previously defaulted borrowers as one cohort of 

“at risk” borrowers.92 Policymakers and market participants should consider further enhancing

servicer communications for borrowers transitioning out of default, including communications 

related to IDR enrollment that are personalized to reflect the financial circumstances of these 

borrowers. These communications can be timed to reach borrowers when these 

communications can be most effective – during the final stages of the rehabilitation process.93 

Policymakers may wish to strengthen protections to ensure taxpayer investment in 

loan servicing and collections is consistent with the intent of these programs. As 

discussed above, activity in the market for post-default collection of federal student debt 

 

91 See Consumer Financial Protection Bureau, Midyear Update on Student Loan Complaints: Income-Driven 

Repayment Plan Application Issues (August 2016), available at

http://files.consumerfinance.gov/f/documents/201608_cfpb_StudentLoanOmbudsmanMidYearReport.pdf.

92 See U.S. Department of Education, Memorandum from U.S. Department of Education Under Secretary Ted 

Mitchell on Policy Direction on Federal Student Loan Servicing (July 20, 2016), available at

http://www2.ed.gov/documents/press-releases/loan-servicing-policy-memo.pdf.

93 In April, the Bureau joined with the Department of Education to release several prototype “payback playbooks” 

focused on different borrower segments and personalized to reflect borrowers’ individual financial circumstances. 

Market participants may wish to consider adoption of personalized disclosures for borrowers’ completing 

rehabilitation. See Consumer Financial Protection Bureau, Payback Playbook (Apr. 2016), available at 

http://www.consumerfinance.gov/payback-playbook/.
50

transitioned rapidly to focus on the rehabilitation of these loans. Economic incentives heavily 

compensate debt collectors for the completion of a rehabilitation at levels greatly in excess of 

any cash recovered.94 Available data suggests that a substantial share of these borrowers 

subsequently default, raising questions about who benefits from an incentive structure that 

succeeds at assisting borrowers in curing default, but fails to provide support over the longterm.95

Policymakers should consider whether a compensation structure contingent upon a borrower’s 

long-term repayment success better serves borrowers and taxpayers. Reassessing the economic 

incentives in place for debt collectors and student loan servicers responsible for administering 

this process can help ensure that companies do not receive an unnecessary windfall for 

rehabilitating borrowers who experience immediate financial hardship following default. 

In light of the issues identified by consumers at every stage of the default-to-IDR transition, 

policymakers may want to consider incentive compensation contingent upon completion of this 

entire process – linking debt collector and servicer pay to the completion of a rehabilitation, 

enrollment in IDR and successful recertification of income after the first year of IDR enrollment. 

 

94 See U.S. Department of Education, Solicitation ED-FSA-13-R-0006 (September 30, 2014), available at

https://www.fbo.gov/?s=opportunity&mode=form&id=6b7574995ffcb7209e3b0f5de846f331; and U.S. Department 

of Education, Solicitation ED-FSA-16-R-0009 (Jan. 22, 2016), available at

https://www.fbo.gov/utils/view?id=738a6d94d03048187f5fc89b70e98b2e. 

95 For further discussion of the potential disincentives in place in student loan servicing and the effect of this 

economic structure on IDR enrollment, see Consumer Financial Protection Bureau, Annual Report of the CFPB 

Student Loan Ombudsman (2015), available at http://files.consumerfinance.gov/f/201510_cfpb_annual-report-ofthe-cfpb-student-loan-ombudsman.pdf.
51

Strengthening transparency through improved access to data 

about the performance of previously defaulted loans

As discussed in this report and in past publications, public data on student loan performance is 

limited when compared to available data on origination and performance of other consumer 

financial products, particularly mortgages.96 This is particularly concerning, given mounting 

evidence that current servicing practices are inadequate to prevent default for a substantial 

share of “at risk” borrowers, including borrowers previously in default.97

As part of the Department of Education’s July 2016 policy guidance, the Department of 

Education directed Federal Student Aid to implement a series of servicer-level public 

“dashboards.”98 The “Previously Defaulted Borrower Dashboard” included in the policy 

directive can serve as a potential framework for policymakers considering action to improve 

transparency.

99

Borrowers, market participants, and regulators would all benefit from the periodic publication 

of identifiable, servicer-level data related to the performance of previously defaulted borrowers: 

 

96 See, e.g., Consumer Financial Protection Bureau, 2015 Annual Report of the CFPB Student Loan Ombudsman 

(October 2015), available at http://files.consumerfinance.gov/f/201510_cfpb_annual-report-of-the-cfpb-studentloan-ombudsman.pdf.

97 See U.S. Department of Education, Memorandum from U.S. Department of Education Under Secretary Ted 

Mitchell on Policy Direction on Federal Student Loan Servicing (July 20, 2016), available at

http://www2.ed.gov/documents/press-releases/loan-servicing-policy-memo.pdf. 

98 See U.S. Department of Education, Memorandum from U.S. Department of Education Under Secretary Ted 

Mitchell on Policy Direction on Federal Student Loan Servicing (July 20, 2016), available at

http://www2.ed.gov/documents/press-releases/loan-servicing-policy-memo.pdf.

99 Id.
52

 Servicer-level data on loan performance for previously defaulted borrowers, including 

loan status, delinquency status, lifetime re-default rate, school sector and type, and 

repayment cohort;

 Servicer-level data on repayment plan selection by previously defaulted borrowers, 

including metrics on IDR plan enrollment, recertification, utilization of forbearance, and 

the share of previously defaulted borrowers making partial financial hardship payments; 

and

 Servicer-level data tracking a series of new “cohort re-default rates,” documenting loan 

performance of previously defaulted borrowers over 12-, 24- and 36-month periods 

following the transition from default to repayment. 

In recent months, policymakers and market participants have placed renewed emphasis on 

expanding IDR utilization amid continued reports of challenges for borrowers seeking to enroll 

or recertify. Publication of robust performance metrics can better position policymakers and 

market participants to target resources to assist consumers and can inform future initiatives to 

establish industrywide standards for the servicing of student loans.
53

5. Contact information

To reach the CFPB’s Student Loan Ombudsman: 

By email students@cfpb.gov

By mail Consumer Financial Protection Bureau 

1700 G Street NW 

Washington, DC 20552

To submit a complaint:

Online consumerfinance.gov/complaint 

By phone 180+ languages, M-F 8am-8pm EST

Toll-Free: (855) 411-CFPB (2372) 

TTY/TDD: (855) 729-CFPB (2372)

By mail Consumer Financial Protection Bureau 

PO Box 4503 

Iowa City, Iowa 52244 

By fax (855) 237-2392

Press and media requests 

By email press@consumerfinance.gov

Congressional inquiries

By phone (202) 435-7960

Additional resources to assist student loan borrowers 

Repay Student Debt web tool

http://www.consumerfinance.gov/paying-for-college/repay-student-debt

Paying for College suite of tools 

www.consumerfinance.gov/paying-for-college/

Ask CFPB 

http://www.consumerfinance.gov/askcfpb/
54

APPENDIX A: FEDERAL STUDENT LOAN COMPLAINT 

SAMPLE

Company Total complaints handled March 1, 

2016 – August 31, 2016

Total complaints reviewed in 

sample set

Navient Solutions, Inc.* 812 200

AES/PHEAA* 580 200

Nelnet* 259 200

Great Lakes 152 152

ACS Education 

Services 117 117

ECMC Group, Inc. 48 48

MOHELA 47 47

Utah System of Higher 

Education 39 39

Heartland Payment 

Systems 37 37

EdFinancial Services 21 21

*For companies with over 200 complaints handled during the reporting period, a random sample of 200 

complaints was reviewed. 
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APPENDIX B: TAGGING DEFINITIONS 

Issue Tag Definition

Billing Statements

Consumer complained about information related to a billing statement, 

including timely receipt of a bill, method of receipt (paperless inbox, paper 

mail, etc.), or ability to review previous payments made.

Borrower Repayment 

Communications

Consumer complained of student loan debt and is seeking general 

payment relief, but does not identify specific issues related to IDR plans. 

Issue tag also includes problems related to extended and graduated 

repayment plans. 

Credit Reporting

Consumer complained of either (1) individual loans are reported as trade 

lines, when they are grouped for billing or account purposes; or (2) 

deferment and/or forbearance not reported as “paid as agreed.”

Customer Service

Consumer complained of problems related to a company’s customer 

service representative, including receiving conflicting or incorrect 

information, excessive calls, and debt collection tactics.

Discharge

Consumer complained of problems related to student loan discharge, 

including discharge for total and permanent disability, closed school, 

defense to repayment, and teacher loan forgiveness programs.

Enrollment Status Consumer complained of problems relating to or resulting from the 

consumer’s enrollment status with his or her institution.

For-Profit Consumer complained of problems related to attending a for-profit 

institution.

Income-Driven Repayment

Consumer complained of problems related to income-driven repayment, 

including enrollment, recertification, qualified payments, and switching 

between IDR plans.

Other Consumer complained of a problem not captured by other tags, including 

debt relief scams.

Payment Processing Consumer complained of problems related to payment allocation, default 

allocation methodology, autopay, or submission of payments.

Payoff Consumer complained of problems related to paying off a student loan, 

including loan consolidation and refinance.

Rehabilitation

Consumer complained of problems related to federal student loan 

rehabilitation, enrolling in or exiting rehabilitation, making payments during 

rehabilitation; also includes problems related to defaulted borrowers 

seeking to make payments but have not yet entered a rehabilitation 
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program.

Servicing Transfer

Consumer complained of problems relating to or resulting from the 

transfer of a loan or account to a new servicer. Issue tag may include 

changes to auto pay or interest reductions. 
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APPENDIX C: VOLUNTARY DATA REQUEST

DATE, 2016 

Name 

Company

Address Line 1 

Address Line 2 

Dear [Name]:

We have heard from consumers who have encountered problems related to the transition out of 

default and into repayment under an income-driven repayment (IDR) plan, following the 

rehabilitation or consolidation of their defaulted federal student loans. The Bureau estimates 

that more than 220,000 previously defaulted student loan borrowers who are potentially 

eligible to make zero dollar payments under an IDR plan will end up back in default over the 

next 24 months. Over this period, these borrowers will incur more than $125 million in 

unnecessary interest charges - a direct consequence of these borrowers’ inability to secure an 

income-driven payment. The purpose of this letter is to request additional information about the 

policies and procedures in place at your company related to the service you provide to your 

previously defaulted customers. 

Performance of rehabilitated loans and loans consolidated from default

If you hold or service commercial FFELP loans, ED-held FFELP loans, or federal Direct Loans 

that have been rehabilitated or consolidated from default, it would be helpful to understand the 

extent to which borrowers of these loans select specific repayment plans, continue to maintain a 

current payment status, and ultimately remain in good standing. 

Information on policies and procedures related to the servicing of rehabilitated 

student loans and loans consolidated from default. Please describe your company’s 

practices, policies, and procedures when servicing newly rehabilitated loans and loans 

consolidated from default. Please include any relevant information related to initial 

communication, payment plan selection, and any special assistance provided to borrowers. 
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Please note any specific efforts related to assisting these borrowers in enrolling in an IDR plan 

and the extent to which your company has specially trained staff who proactively work with 

these “at risk” borrowers. Additionally, please include the point, if at all, in the rehabilitation or 

consolidation process in which your company first initiates contact with a borrower before their 

loan is placed with your company.

Information about repayment plans for newly rehabilitated loans. For rehabilitated 

loans from accounts with only undergraduate loans (Subsidized and Unsubsidized Stafford) 

received by your company in calendar year 2015, accounts that include rehabilitated graduate 

and professional loans (e.g., Subsidized Stafford, Unsubsidized Stafford, and PLUS loans 

borrowed by graduate and professional students) that you received in 2015, and accounts with 

rehabilitated Parent PLUS100 loans that you received in 2015, separated by federal loan program 

(Commercial FFEL, ED-held FFEL, and Direct Loans), please describe:

a. The breakdown between number of accounts that were in an IDR plan and those not in 

an IDR plan on borrowers’ first, second, third, fourth, sixth, and ninth billing due 

dates.101

b. The number of accounts, number of rehabilitated loans, and dollar amount of 

rehabilitated loans for those accounts in each repayment category for each billing cycle 

described in (a). 

 

100 All loans for accounts with both undergraduate and graduate loans should only be counted in the graduate and 

professional account type. Similarly, all loans for accounts with any Parent PLUS loans should only be counted in the 

Parent PLUS account type.

101 IDR plans include Income-Based Repayment, Income-Contingent Repayment, Pay as You Earn, and Revised Pay 

as You Earn. For the purposes of this data request, all loans from accounts with both Direct Loans and FFELP loans 

should be categorized in the analysis based on the highest outstanding balance between programs. 
59

To determine what portion of accounts received by your company were rehabilitated, please also 

indicate the total number of accounts, number of loans, and dollar amount of loans received by 

your company during the same timeframe.

Information about repayment plans for newly consolidated loans comprised of 

previously defaulted loans. For loans consolidated from default within accounts containing 

consolidated undergraduate loans (Subsidized and Unsubsidized Stafford) received by your 

company in calendar year 2015, accounts that include consolidated graduate and professional 

loans (e.g., Subsidized Stafford, Unsubsidized Stafford, and PLUS loans borrowed by graduate 

and professional students) that you received in 2015, and accounts with consolidated Parent 

PLUS102 loans that you received in 2015, separated by federal loan program (Commercial FFEL,

ED-held FFEL, and Direct Loans), please describe:

a. The breakdown between number of accounts that were in an IDR plan and those not in 

an IDR plan on a borrowers’ first, second, third, fourth, sixth, and ninth billing due 

dates.103

b. The number of accounts, number of consolidation loans, and dollar amount of 

consolidation loans for those accounts in each repayment category for each billing cycle 

described in (a). 

Information on successful repayment for rehabilitated loans. For rehabilitated loans 

serviced by your company, please describe the following, separated by federal loan program 

(Commercial FFEL, ED-held FFEL, and Direct Loans), account type (accounts with 

 

102 See note 100. 

103 See note 101. 
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undergraduate loans, accounts with graduate and professional loans, and accounts with Parent 

PLUS) and by repayment plan (an IDR plan or non-IDR plan):

a. The total number of accounts with rehabilitated loans, number of rehabilitated loans, 

and dollar amount of rehabilitated loans for those accounts;

b. Number of accounts, average number of loans, and average dollar amount placed with 

ED or purchased by a Guarantee Agency on or before December 31st, 2015; 

c. The average number of billing cycles an account identified in subsection (a) is in 

repayment before placement with ED or purchased by a Guarantee Agency; and 

d. The percentage of accounts identified in subsection (a) that are placed with ED or 

purchased by a Guarantee Agency without making a single successful payment.104

Please provide this information separately for account cohorts that were received by your 

company in each of the calendar years 2012, 2013, and 2014. 

Information on repayment success for consolidated loans. For loans consolidated 

from default and received by your company, please describe the following, separated by federal 

loan program (Commercial FFEL, ED-held FFEL, and Direct Loans), account type (accounts 

with undergraduate loans, accounts with graduate and professional loans, and accounts with 

Parent PLUS) and by repayment plan (an IDR plan or non-IDR plan):

a. The total number of accounts with consolidation loans, number of consolidation loans, 

and dollar amount of consolidation loans for those accounts;

 

104 For the purposes of this data request, a successful payment is one that meets or exceeds the amount due in a 

monthly billing statement made under a standard payment plan or a repayment plan selected by the borrower. A loan 

with a zero dollar payment in a borrower selected IDR plan should be considered as paid in full for that month. 

Payments made during rehabilitation, or before you start billing, do not count as successful payments. Months under 

a deferment, forbearance, or similar status does not count as a successful payment.
61

b. Number of accounts, average number of loans, and average dollar amount placed with 

ED or purchased by a Guarantee Agency on or before December 31st, 2015; 

c. The average number of billing cycles an account identified in subsection (a) is in 

repayment before placement with ED or purchased by a Guarantee Agency; and

d. The percentage of accounts identified in subsection (a) that are placed with ED or 

purchased by a Guarantee Agency without making a single successful payment.105

Please provide this information separately for account cohorts that were received by your 

company in each of the calendar years 2012, 2013, and 2014. To determine what portion of loans 

consolidated from default and serviced by your company are placed with ED or purchased by a 

Guarantee Agency; please also indicate the total number of consolidated loan accounts you 

received for servicing during each of these calendar years.

Information about payment history for rehabilitated loans. Please describe how your 

company processes payments from a borrower made after making his or her ninth successful 

rehabilitation payment with his or her collector. After a borrower has made nine successful 

payments, please describe how your company applies any additional borrower payments made 

to his or her collector before his or her loan is received by your company for regular servicing. 

This is not a request for confidential supervisory information and your response is voluntary. 

Information provided in response to this request will support the Bureau’s ongoing consumer 

education and market analysis functions and will be treated in accordance with the Bureau’s 

confidentiality regulations, 12 C.F.R. Part 1070. We may make public certain information we 

gather in response to this request, but we will not identify any specific market participants when 

doing so. Information provided may be subject to public disclosure to the extent required by 

law. 

 

105 See previous note. 
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If you choose to respond, the information that you provide must not include any personally 

identifiable information that directly identifies any consumer, such as a consumer’s name, 

address, telephone number, social security number, or account number. Data and other 

submissions should be provided to the CFPB via a secure method appropriate to the sensitivity 

of the information. (For example, you can use a Secure File Transfer Protocol (sFTP) server). 

If you have any questions about this request, please do not hesitate to let us know. Please 

respond by XXXX, 2016. We hope to share aggregate results from responses by various market 

participants. Thank you in advance for your participation. 

Sincerely, 

Seth Frotman 

Assistant Director and Student Loan Ombudsman

Consumer Financial Protection Bureau