A student debt repayment plan that saves now, but costs more later

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

That’s the finding of a new report from the Office of Government Accountability, 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 solutions that may cause students to go into more debt in the future, according to the report.

At first glance, preventing student loan defaults seems like an admirable goal. Defaulting on, or missing a certain number of scheduled payments, triggers cascading fees and severely damages borrowers’ credit ratings, hampering their ability to obtain other loans in the future. But the GAO found that some consultants were directing borrowers toward potentially costly “forbearances,” rather than more useful options like flexible repayment plans.

Students in forbearance can temporarily stop making loan payments and still be considered current on their loans. But interest keeps piling up, so students may end up owing much more than they originally had. (There is generally no limit to the total amount of time borrowers can spend in voluntary forbearance, as long as they don’t exceed 36 consecutive months, the GAO said.)

Colleges have an incentive to keep borrowers current on their loans, according to the report, because if too many borrowers fail to comply within three years of initiating payment, the university may lose its eligibility to offer federal financial aid to students. current students. Once borrowers pass the three-year mark, a default no longer counts as a default on the college record. So while encouraging borrowers to postpone payments benefits college, it may not help the borrower.

The GAO, for example, described a student who borrowed $ 34,700, then opted for forbearance, and accumulated $ 10,000 in interest over three years. The borrower told GAO that she would repay the loan “for the rest of my days.”

Long-term forbearance borrowers 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 simply delayed default, rather than preventing it. .

Consultants have an incentive to promote indulgences, the GAO found, because they can usually be quickly approved over the phone. Rather, borrowers must complete an application and submit documentation of their income to switch to a special repayment plan. Approval can take two weeks or more.

“This structure can result in borrowers being pressured into tolerance despite having better options,” said Melissa Emrey-Arras, GAO director of education and a contributor to the report.

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

Of the nine, five encouraged tolerance for other options, and four sometimes provided “inaccurate or incomplete” information to borrowers, the GAO found. In one case, a consultant mailed forbearance requests to overdue 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 universities that had hired them. Abby Shafroth, an attorney for the National Center for Consumer Law, said such consultants can often be hired by for-profit colleges, which tend to rely heavily on federal student aid programs for income.

Some companies that promote noncompliance 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 indulgences:

Does tolerance make sense?

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

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

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

There are several plans available that adjust monthly payments to reflect your income and family size. Depending on how low your monthly payment is, your debt could increase over time, in some cases. But any remaining loan balance 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 will pay income tax on the forgiven amount.

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

You can find your federal loan servicer on the Department of Education website.

You will 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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