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Analysis: Current Student Loan System Isn't Working

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Together, 44 million Americans owe more than $1.4 trillion in student loan debt. Loan defaults are the norm, and it often falls on the federal government to pick up those checks. Many believe the U.S. has a student loan problem, and it impacts more than just those with loan debt.

According to Bloomberg News, the federal government has paid close to $1B annually since 2013 to help borrowers who have defaulted on loans in a process known as rehabilitation. But new analysis by the Consumer Financial Protection Bureau shows that nearly half of all those borrowers defaulted again on their loans within three years, and the government pays out more than 40 times what these debt collectors brought in.

The federal government pays debt collectors up to $1,710 from the Department of Education each time a borrower begins paying off one of these defaulted accounts. Even if those borrowers default again, however, the debt collectors still keep their money. Those figures have many at the Department of Education and within the CFPB wondering if current efforts are actually working.

DOE Secretary Betsy DeVos has suggested that the student loan system in the U.S. has to start fresh, and has proposed slashing the department's budget to reflect this new mindset. Part of that would derail a major student loan forgiveness program that offered to erase debts after 10 years working for a government or nonprofit employer.

As reported by Slate, about $10.6 billion would be cut under the new DOE's budget, effectively ending any federal student loan forgiveness programs for public sector and nonprofit workers. That would land even more borrowers into this high-risk pool of possible-defaulters. And since those more likely to pursue these public sector and nonprofit positions are also more likely to pursue advanced degrees, cutting this particular program could push America's debt problem to new depths.

According to this CFPB analysis, the government actually has several programs designed to keep people from defaulting again after they rehabilitated their debt, yet nearly 90 percent of debtors failed to enroll. These are people who could be paying $0 every month to keep their accounts from defaulting, yet for one reason or another do not complete the paperwork for enrollment. It has left experts stunned inside and outside the department.

The CFPB cited poor business counseling, misleading information from debt collectors, and bad loan servicing as reasons for the failure of these programs. Various officials promised to "do a better job", but with the DOE set to slash budgets to make a statement, it's unclear what that will mean for many Americans indebted to collectors.

Sources: Bloomberg News, Slate, Student Loan Hero / Photo Credit: DonkeyHotey/Flickr

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