A Student Debt Payment Plan That Saves Now, Yet Costs More Later

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Beware of student loan consultants offering “forbearances,” a fancy word for an option that allows borrowers to temporarily postpone payments.

That’s the finding from a new report by the Government Accountability Office, which details how some colleges hired “default prevention” consultants to contact former students who were falling behind on federal student loan payments. Some consultants may promote short-term fixes that can mire students in more debt down the road, the report said.

On the face of it, preventing student loan defaults sounds like an admirable goal. Defaulting — or missing a certain number of scheduled payments — sets off cascading fees and seriously damages borrowers’ credit scores, hampering their ability to get other loans in the future. But the G.A.O. found that some consultants were steering borrowers into potentially costly “forbearances,” rather than more helpful options like flexible repayment plans.

Students in forbearance can temporarily stop making loan payments yet be considered current on their loans. But interest still piles up, so students can end up owing much more than they did in the first place. (There is generally no limit on the total amount of time borrowers can spend in voluntary forbearance, as long as they don’t exceed 36 consecutive months, the G.A.O. said.)

Colleges have an incentive to keep borrowers up to date on their loans, the report said, because if too many borrowers default within three years of starting repayment, the college may lose its eligibility to offer federal financial aid to current students. Once borrowers pass the three-year mark, a default no longer counts as a blemish on the college’s record. So while encouraging borrowers to postpone payments works to the college’s advantage, it may not help the borrower.

The G.A.O., for instance, described one student who borrowed $34,700, then opted for forbearance and accrued $10,000 in interest over three years. The borrower told the G.A.O. that she would be paying off the loan “for the rest of my days.”

Borrowers in long-term forbearance defaulted more often in what would be their fourth year of repayment, when colleges are no longer penalized for defaults, the report found, suggesting that forbearance had merely delayed default, rather than preventing it.

Consultants have an incentive to promote forbearances, the G.A.O. found, because they usually can be approved quickly over the phone. In contrast, borrowers must fill out an application and submit documentation of their income to switch to a special payment plan. Approval can take two weeks or more.

“This structure can result in borrowers being pushed into forbearance despite better options,” said Melissa Emrey-Arras, an education director at the G.A.O. and a contributor to the report.

The report analyzed data on federal loans that entered repayment from fiscal years 2009 through 2013, and focused on nine companies that offer default prevention services, out of about four dozen such companies. (The nine served about 1,300 colleges, and accounted for about 1.5 million borrowers who entered repayment in 2013.)

Of the nine, five encouraged forbearance over other options, and four sometimes provided “inaccurate or incomplete” information to borrowers, the G.A.O. found. In one case, a consultant mailed forbearance applications to past-due borrowers, along with a letter incorrectly stating that they could lose federal benefits like food assistance if they defaulted on their student loans.

The report did not identify the consultants or the colleges that had hired them. Abby Shafroth, a lawyer with the National Consumer Law Center, said such consultants may often be retained by for-profit colleges, which tend to rely heavily on federal student aid programs for revenue.

Some companies that promote default prevention services on their websites focus on two-year community colleges, although some include testimonials from traditional, four-year colleges.

Here are some questions and answers about forbearances:

Does a forbearance ever make sense?

Forbearance may be a helpful tool for short-term financial setbacks — say, an unexpected medical bill — that you can resolve in a few months to perhaps a year, loan experts say. But they are a bad idea if you simply can’t afford your loan payments and you don’t expect the situation to change anytime soon. In that case, flexible plans that tie monthly payment amounts to your income may make more sense, said Diane Cheng, associate research director at the Institute for College Access and Success.

What should I do if I’m contacted by a default prevention consultant?

If a consultant suggests forbearance, it’s wise to call your loan servicer on your own and explore alternatives, including plans that offer affordable payments tied to your income. A servicer is the company that officially manages your loan, handling tasks like sending you statements, collecting payments and processing changes in your repayment plan. (In some cases, the consultant may even be an affiliate of the servicer, Ms. Cheng said, but it’s the servicer that actually makes the changes.) “Borrowers,” she said, “should know they have options beyond forbearance.”

Several plans are available that adjust monthly payments to reflect your income and family size. Depending on how low your monthly payment is, your debt could actually grow over time, in some cases. But any loan balance remaining after 20 or 25 years (depending on the plan) is forgiven, so there is light at the end of the tunnel. Still, there is a downside to consider: You’ll pay income taxes on the amount forgiven.

What if I don’t know who my loan servicer is?

You can look up your federal loan servicer on the Education Department’s website.

You’ll also find calculators to help you determine if a flexible payment plan will work for you. The Consumer Financial Protection Bureau also offers online tools for student loan borrowers.

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