By: Jeremy Kates0 comments

Student loan debt continues to burden millions of Americans by souring their financial outlook. Few problems bring out more Monday morning quarterbacks than the student loan debt problem. Everyone seems to have an opinion, and for good reason, they just want to make a dent in this generational problem.

Changing the default payment plan

One option that has become a popular solution is to change the default repayment plan. Currently, borrowers are automatically enrolled in the 10 year repayment plan. While this may be the best option for some borrowers, it’s more likely that borrowers who are just starting their repayment plan would be better served by having the default option be the income driven program.

As with any selection that has a default option, it will easily be the most widely used option. Several studies have shown borrower behavior is such that they will happily keep the status quo of the currently selected option. Marketers have used this technique for years to help push you into the direction that best suits their needs. The key from this explanation is that it bets matches their needs, not necessarily your needs.

So one way of fixing it may be to better educate borrowers on their options. Some may be as simple as renaming the “standard” plan. By using the word standard it tends to make borrowers believe that it’s the best option. In some cases, it may be, but when you look at the default rate for those in an income driven program being less than 1% it makes sense to get this particular part of repayment right. Once you default, your credit is harmed, and it sends borrowers into a downward spiral.

If borrowers were better informed or pushed down a multiple choice selection that qualified them based on their given input, the system could give them recommended options based on their inputs.

Making the income driven program the default may not be the best option either. If you can make the payments, the standard plan is clearly the plan you should choose as you will pay far less interest. While this may be true for some, it’s hard to argue with the fact that a recent graduate with a lot of debt is going to struggle with a loan on top of the general cost of living. With the current problem only growing no option should be discounted as a viable one.



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