As of March 2021, 46 million Americans owe student loans provided through federal government programs. This is the largest segment of the education loan market. But the system is under a lot of pressure as more students struggle to repay. This is a problem compounded by the complexity of the repayment process.

The Department of Education reported that over 20% of students are in default. Default is typically defined as having gone at least 270 days without a payment. Millions of other borrowers are also behind on their payments. And more than a million loans go into default each year.

Those who fail to repay their loans face lots of serious financial consequences. They can face wage garnishment or money being withheld from social security. They can also have issues with income tax refunds and other federal payments. 

On top of that, it can damage their credit scores. Non-payers can also face ineligibility for other aid programs. One good example of such is being legally disqualified for homeownership assistance programs.

But why are a lot of people struggling with student debts? Here are some of the challenges they encounter while repaying their student loan.

1. Financial Instability

No one wants to be drowned in debts. However, most borrowers stated that their main reason for non-payment is financial difficulty. Such includes unexpected expenses that created ripple effects through their balance sheets.

Some borrowers said they had limited resources. They needed to cover living costs for transportation, and housing. Also childcare, and groceries before paying student loans. 

Among low-income borrowers, these trade-offs were especially severe. And far fewer people in this group reported making payments than other clusters.

2. Difficulty Understanding Income-Driven Repayment Plans

The federal provided specific repayment plans. These are known as income-driven plans. Its goal is to calculate monthly payments considering borrowers’ incomes and family sizes. This helps them have enough budget for living expenses.

However, many students said the complex application and annual recertification processes for these plans made it difficult to take full advantage of these options. And though the federal government recently passed a law to help streamline enrollment in income-driven plans, other challenges remain.

Some students also reported that they did not know about income-driven plans. While some said that their payments would be unaffordable. This is because those borrowers’ incomes were volatile. Not to mention that the repayment plans did not cover other aspects, such as expenses.

To be able to gain control of their finances, borrowers can track their income and expenditure by signing up with Chunk Finance. Such platforms help them get an overview of their finances and help with complex computations and processes.

3. Overwhelmed and Discouraged by Growing Balances

Having a growing balance created financial and psychological barriers to repayment.

The tension between students’ desire for lower repayments and their frustration at rising balances was especially prevalent in conversations around income-driven repayment plans.

Besides, many students are aggravated by the repayment process because of confusing rules. They are also worried about unaffordable payments, negative interactions with services, and impacts on other areas of their financial lives. 

4. Poor Debt Repayment Strategies

Borrowers are supposed to complete an online exit counseling course when they leave school or graduate. The purpose of this is to provide them with information about repayment.

Still, many borrowers say they are confused and lack vital information upon entering repayment.

For example, many of them did not remember selecting a repayment plan, and they are aware of only two options—pay or don’t pay.

For many borrowers, the monthly amount they are to pay—and how it would affect their ability to afford other expenses, such as transportation and childcare. These were the key factors in their choice of a repayment plan, rather than the specific features of each plan or the longer-term costs and benefits.

For instance, repayment plans that decrease monthly payments also increase the time spent in repayment. This costs the borrower more over the long term and causes the principal balance to increase if the repayments are too low to cover the monthly interest.

5. Multiple Negative Experiences Led to Distrust and Disengagement

Repeated incidents of confusion about unaffordable payments, negative interactions with servicers, and growing balances created a generalized distrust and frustration with the repayment process among many students.

Even those who, at first, were motivated to repay and had made some payments said that failures of the system chipped away at their resolve.

In the most severe cases, many students indicated that they had exhausted all their options and gave up on repayment. Thereby ignoring communications from their servicers and resigning to the idea that they would never repay their loans.

 6. Not Prepared for Repayment

Many borrowers reported not feeling prepared to manage repayment. Many of them said they first interacted with their servicers when the servicer reached out after they missed payments.

For some, a huge first bill, compounded by other financial problems contributed to missing payments early in the process.

7. Unwillingness to Pay Debts

Even while facing huge loan payments, many borrowers are not willing to prioritize student loan repayment. Instead, they overspend on luxury and quality-of-life items.

They are very committed to living their life the way they want to. Even though they are frustrated with the student loans debt, they are not willing to make changes.

At the same time, many students reported regret over how much they borrowed to attend college. And few students feel they would have skipped college had they known how expensive it would be.

Conclusion

Higher education is one of the ways to strengthen the economic security of any country. And Americans understand this.

Given the benefits of going to a college, many agree with the idea of borrowing to pay for higher education.

But lots of students have expressed frustration with the complexity of the repayment system.

They are worried about unaffordable payments, inconsistent communication with servicers, and growing balances. Many students said that they regretted borrowing and advised others against it.

Some of the challenges mentioned here show that the loan system is not supporting repayment in a way that helps borrowers.

To improve outcomes and help boost borrowers' repayment success, policymakers should look into the challenges facing borrowers.