LB Note: I'm busy prepping this week for #FinCon17 (which is this Wednesday thru Sunday in Dallas – hit me up on twitter @finbestlife if you'll be there!), so I thought it'd be the perfect time to share this guest post from my friend Jacob over at DollarDiligence.com. Be sure to let us know what you think of the post in the comments. Cheers!
Since the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, the student loan industry has been under intense scrutiny; in part because of the unbridled growth of student loans, and in part due to the increasing number of complaints made against student loan servicers by borrowers. However, the increased scrutiny hasn’t seemed to dissuade some student loan servicers from engaging in unfair practices which result in increased costs to borrowers.
The most recent example of such practices came to light in a lawsuit filed by the Consumer Financial Protection Bureau (CFPB), a consumer watchdog agency created under the Dodd-Frank Act, against Navient, the largest student loan servicer in the country.
The CFPB suit has accused Navient of creating obstacles to repayment by providing erroneous information or withholding information regarding borrowers’ options to lower repayments, which resulted in their paying more than necessary on their loans. According to the suit, Navient used shortcuts and deception to save on operating costs and increase revenues from interest.
But…What Your Loan Servicer Might Not Tell You Could Cost You Big Time
Student borrowers have to rely on their student loan services for the proper management of their student loans – for processing payments correctly, getting timely communications and, when appropriate, informing them of their options. Not all loan servicers are created equal. There are some very good servicers who excel in servicing their customer’s loans, and there are some that have a history of complaints.
Unfortunately, student borrowers don’t have a choice in who will service their loans as they are assigned by the lender.
However, they can better control the relationship when they know what they should expect from their servicer.
These are a few things every student borrower should know about their loans with a loan servicer….
#1 – You Can Cut a Quarter Point Off Your Interest
All student loan servicers are required to offer their borrowers a quarter point discount off their loan rate for enrolling in auto-pay. That is when you have your monthly payment automatically deducted from your checking account. If you are not offered this discount, ask for it. You are entitled to receive it.
#2 – You Must Be Offered Repayment Options if You’re Eligible
Many of the complaints against servicers have to do with their failure to inform borrowers of income-driven repayment options when they are struggling with their payments. Students who have a hard time making their monthly payments on federal loans may be eligible for a number of repayment options that can lower their monthly payment. Eligibility and the amount of the payment reduction are based on the borrower’s income and family size.
In some cases, the loan payment can be reduced to nothing, but borrowers have to reapply each year which can change the amount of the payment. Navient was accused of not only withholding information on repayment options from borrowers but also steering them in the direction of the forbearance option instead.
Forbearance suspends the loan payment for a period of time, but the interest on the loan continues to accrue.
For servicers there is more money to be made through forbearance than through reduced loan payments. The CFPB believes that Navient added $4 billion in interest charges to principal balances using this method.
When you start on an income-driven repayment plan, it doesn’t continue on its own. In order to continue with the plan, you have to reapply each year. If you don’t you can’t continue the plan. If that happens, you could wind up accruing interest and lose any progress you made towards loan forgiveness. It is the servicer’s responsibility to notify you when it is time to reapply. Just to be safe, mark the reapply date two weeks ahead of time on your calendar.
#3 – You Must Be Offered Forbearance if You Need It
A forbearance is an option even if you are on an income-driven repayment plan. Forbearance allows you to suspend your monthly payments for 24 to 36 months over the life of the loan. The problem with forbearance is that the interest continues to accrue and is usually capitalized into the loan, which can make it more expensive when you start making payments again.
Still, it is better than defaulting on your loan. When you first inform your servicer of financial trouble all of your options, including forbearance should be fully explained to you.
#4 – You Can Refinance Your Loans Away from Your Servicer
What your loan servicer certainly won’t tell you is that you have the option to find a lender who will refinance all of your debt. Refinancing is always possible no matter what kind of loans you have and it can make sense if you can qualify with a lender that offers a lower rate than what you are paying (on average) with your current loans. It’s important to note that, if you refinance any federal loans, you will no longer be eligible for income-driven repayment options of loan forgiveness. But if you can get a fixed rate that is low enough, you may not need those options.
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