13 Confusing Student Loan Terms You Need to Know

It's important you understand your student loans, and that starts with learning the meaning of the terms you're likely to encounter in the student-loan worl

There’s no need to sugarcoat it: Student loans are complicated, and everyone from new borrowers to those who’ve been paying them for more than a decade find them confusing. As much as you might want to not think about them, it’s important you understand your student loans, and that starts with knowing the meaning of the terms you’re likely to encounter in the student-loan world. Here are 13 confusing loan terms you need to know.

1. Servicer

Your student loan servicer is the company to whom you send your student loan payments. It may or may not be the place you got your student loans in the first place, and your servicer could change as you repay your loans. Federal loan borrowers can find out their student loan servicer by logging into the National Student Loan Data System. If you have private student loans, your student loan servicer is the institution from which you borrowed the money.

2. Repayment Options

Federal student loan borrowers can pay back their student loans in several ways, and they can change their plan at any time for free (though it can take some time). The options include plans that allow you to lower your payments based on your income and plans that allow you to spread out your payments over a longer term. You can read more about your student loan repayment options here.

3. Forbearance

Forbearance is a temporary suspension or reduction of your student loan payments when you are unable to make payments as a result of financial problems, medical expenses, unemployment or “other reasons acceptable to your loan servicer,” according to the Education Department. Your loan will continue to accrue interest during this time and will be added to the principal balance when you exit forbearance. You must apply for forbearance. There are several circumstances under which your servicer is required to grant forbearance (mandatory forbearance), including a medical or dental internship or residency, National Guard duty and many others. You can only receive forbearance for 12 months at a time. If you have a private student loan, check with your lender to see if they offer forbearance.

4. Deferment

Deferment is a temporary suspension or reduction of your student loan payments during certain situations like unemployment, economic hardship, enrollment in school or active military duty, among others. You are not responsible for paying the interest that accrues on some student loans during deferment, but you are for most. You must request deferment, and you can stay in deferment as long as you meet the requirements. If you have a private student loan, check with your lender to see if they offer deferment.

5. Student Loan Forgiveness

There are several programs that allow you to get rid of some or all of your federal student loans, and you can read about them here. Keep in mind you may have to pay taxes on the forgiven balance, as the IRS may see it as income.

6. Delinquency

You are delinquent on a student loan when you haven’t made a payment on your student loans for 30 or more days since your last payment’s due date. Your student loan servicer will most likely report the late payment to the major credit reporting agencies, which will hurt your credit. (You can see how your student loans affect your credit standing by viewing your free credit report summary on Credit.com.) Delinquency also tends to come with late fees.

7. Auto Debit

Many student loan servicers call automatic payments “auto debit,” meaning your payment is automatically taken from your bank account on the due date every month. You can often get an interest rate reduction by enrolling in auto debit. It’s usually at least 0.25 percentage points.

8. Default

Default means you have not made student loan payments in a long time, and as a result, your entire student loan balance is now due. Your loan will have likely been sent to a debt collector at this point. For federal student loans, you enter default after you’ve failed to make a payment for more than 270 days. That time period is generally shorter for private student loans. You can learn more about the (very) negative consequences of student loan default here, as well as how to recover from it.

9. Refinancing

Refinancing your student loans means taking out a new loan to pay off your existing loans, ideally to make your loans more affordable. For example, you can take out a student loan that has a lower interest rate than the average interest rate of all your existing student loans, which can save you money over the life of the loan. Student loan refinancing requires taking out a private student loan, as the federal government offers no refinancing option. You could also refinance a student loan by paying it off with a home equity line of credit.

10. Consolidation

A federal consolidation loan combines all your eligible federal student loans into a single loan with one payment. The interest rate on that loan is the weighted average of all the included loans’ interest rates, rounded up to the nearest one-eighth of one percent.

11. Subsidized

With a subsidized loan, the government pays the interest on your student loan while you are in school or in deferment.

12. Unsubsidized

With an unsubsidized loan, you are responsible for all the interest that accrues on your loan during school, deferment and forbearance. If you do not pay the interest during that time, it is added to your principal loan balance.

13. Capitalized Interest

Any interest you accrue while not in repayment can be added to your principal balance, meaning you will pay interest on top of that interest. That’s capitalized interest.

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9 Questions to Ask About Student Loans Before You Graduate

Graduation's around the corner, so don't put off asking the hard questions about how to handle your student loan debt.

It may not be your first priority, but preparing to repay your student loans should be on your pre-graduation to-do list. How you manage your student loan payments will shape your finances for decades to come, so know what you’re dealing with before you get swept up in the day-to-day demands of post-graduate life.

Before you leave school, also make sure you know the answers to the following questions. Good news: We’re giving you them (or at least telling how to find them on your own).

1. What Kind of Loans Do I Have?

You either have private student loans or federal loans. You can look up your federal loans using the National Student Loan Data System (NLDS). You should have the paperwork from your lender or student loan servicer (private and federal) from when you took out the loan. Private loans generally come from traditional banking institutions, while federal loans are issued by the government. Common federal loans include Direct subsidized loans, Direct unsubsidized loans and Perkins loans.

2. Whom Do I Owe?

You can find this information in the resources referenced above. Your financial aid office should have information on file as well, since they receive the money. If you haven’t gone through student loan exit counseling at school, you need to before you graduate. They’ll explain whom to pay, and it’s the perfect time to ask any questions. Once you know who’s managing your loans, set up an online account to access all your information.

3. What Are My Repayment Options?

This depends on the type of loans you have. Private student loan repayment tends to follow a typical installment loan repayment structure, in which you make monthly payments for a fixed loan term. Federal student loans offer more options. The default play is called standard repayment: fixed monthly payments for 10 years. If you want a lower monthly payment when you start out, you can change your repayment plan at any time for free, though the change may not take effect immediately. If you want to enroll in an income-driven repayment plan, graduated repayment or extended repayment, be sure to request a new plan through your student loan servicer as soon as you can. You can learn more about student loan repayment options here.

4. How Much Are My Monthly Payments?

For loans with a set repayment term, the payment will be the same every month if you have a fixed-interest rate (as all federal loans do), or your monthly payment amount will change if you have a variable-interest rate (as some private loans do). Monthly payments through income-driven plans will depend on how much money you make. You should be able to get this information from your lender or servicer.

5. When’s My First Payment Due?

Federal student loans generally have a grace period of six months, meaning your first payment comes due six months after you graduate, leave school or drop below half-time enrollment. Some grace periods are nine months. If you have a private lender, you may not have a grace period — find out as soon as possible.

6. How Do I Pay?

You’ll start hearing from your lender or servicer soon if you haven’t already. Like most bills, you can go the old-school route of sending a check, or you can pay online. Keep in mind you don’t have to wait till your grace period ends to make a payment, and you can also enroll in automatic payments to make sure you don’t miss any. On that note: You don’t want to miss any student loan payments, because it will damage your credit, and your credit score plays a role in how much you pay for other credit products, as well as renting a home or buying a cellphone. You can keep tabs on how your student loans are affecting your credit by getting two free credit scores every month on Credit.com. If you’re thinking about getting a credit card after college, here are a few good options for new grads.

7. What’s My Interest Rate?

This should be in your loan paperwork and in your online account. Make sure you know if it’s a fixed- or variable-interest rate.

8. How Can I Make Repaying My Loans Easier?

If you have multiple federal student loans, which most borrowers do, you can consider consolidating them. With a federal Direct consolidation loan, you can qualify for certain loan forgiveness and loan repayment options (though you may not have to consolidate to qualify), and you’ll only have to make one monthly payment, rather than several to multiple servicers.

You could also consider refinancing multiple loans with a private lender, but know that you’ll be giving up many of the benefits that come with federal loans if you do this. There is no federal refinancing option. You can also enroll in automatic payments to make your life a little easier — just be sure to check that it goes through every month and that your bank account has enough money to cover the bill.

9. How Can I Make My Loans More Affordable?

Among the benefits previously noted, enrolling in automatic payments usually gets you a 0.25% discount on your interest rate. Private loan refinancing could also help you save money if you have good credit and can qualify for a lower interest rate. Additionally, changing your repayment plan to a longer term or an income-driven plan can lower your monthly payments.

There’s another way to look at loan affordability: long-term savings. For example, all the interest your loan accrued while you were in school will be added to the principal once your grace period expires, meaning you’ll have to pay interest on interest. You can avoid this by paying off the interest before your first loan payment comes due. You can also pay more than your minimum payment each month, which can help you pay off your loans early.

Student loans can be complicated, so reach out to your student loan servicer if you have questions. Conversely, if you’re having issues with your student loan servicer, you can file a complaint with the Consumer Financial Protection Bureau.

Credit.com can offer help with your student loans, too. If you have questions about them or other money stuff, leave your questions in the comments. 

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7 Effective Ways to Lower Your Student Loan Payments

Here are seven ways you can pay less on your student loans each month.

Nobody takes out student loans expecting to have trouble repaying them. But once the realities of post-college life set in, many borrowers do find that keeping up on payments is a struggle.

In fact, more Americans are burdened by student loan debt than ever, with a delinquency rate of 11.2%. And that doesn’t include many more who are barely keeping up.

Student loan payments can become unmanageable for a number of reasons: a job loss, pay cut, unexpected expense or simply too much student loan debt to begin with. If you’re struggling to make your payments, know that missing them can lead to disastrous consequences for your finances. (You can see how your student loans are affecting your credit by viewing two of your free credit scores on Credit.com.)

Fortunately, there are several ways to get your payments lowered to a more manageable amount. Here are seven ways you can pay less on your student loans each month.

1. Income-Driven Repayment Plans

For federal student loans, income-driven repayment (IDR) plans can be a smart way to manage student loans. There are currently four IDR plans available for federal student loans:

  • Income-Based Repayment (IBR)
  • Pay As You Earn (PAYE)
  • Revised Pay As You Earn (REPAYE)
  • Income-Contingent Repayment (ICR)

Borrowers who enroll in income-driven repayment have their student loan payments lowered to a percentage of their income — 10 to 20%, depending on the plan. Payments can even be as low as $0 under IDR.

Some income-driven repayment plans also take local living costs into consideration when calculating the lower payment. This gives extra relief to payers in pricey cities.

Income-driven plans also offer student loan forgiveness on any remaining balance after 20 to 25 years of loan payments.

To enroll in an income-driven repayment plan, contact your federal student loan servicer. They can discuss your options with you and give you the correct forms to apply for IDR.

2. Student Loan Refinancing

If you have private student loans, one of the only ways to lower payments is to refinance.

By refinancing, you replace your old student loan(s) with a new one through a private student loan refinancing lender. This allows you to lower your monthly payments by getting a lower interest rate, extending the repayment period, or both.

For borrowers who have older federal loans with high interest rates (such as Grad or Parent PLUS loans), it can be worth it to refinance to lower interest rates. Keep in mind you will lose federal benefits, like access to IDR, if you refinance with a private lender. Extending the repayment period can also result in lower monthly payments, but might end up costing more in interest over time.

If you’re not sure if student loan refinancing could benefit you, shop around and get some rate estimates from private student loan companies. Most will perform a soft credit check to pre-qualify you, which won’t affect your credit. (You can learn more about soft credit checks here.)

3. Student Loan Repayment Assistance Programs

Another option to manage student loan payments is to get help through a student loan repayment assistance program (LRAP). This is free help with your student loans. Many states, government agencies, nonprofits and other organizations offer student loan assistance, usually as a way to attract qualified employees.

This student loan repayment assistance tool can help you filter LRAPs by your occupation, state and type of assistance. It’s worth checking to see if you can get free help with your student loans.

4. Deferment or Forbearance

If you need a break from your student loan payments altogether, deferment and forbearance can help by pausing payments.

Deferment can be a good option for federal student loans. It can be granted for disability, unemployment, financial hardship, a return to college or military service. Subsidized student loans won’t accrue interest while in deferment.

Forbearance can also be granted to pause student loan payments. However, all student loans will continue to accrue interest while in forbearance.

With either option, make sure you understand how your loans will accrue interest. If necessary, consider making interest-only payments so your balance doesn’t grow to be bigger than when you started.

5. Graduated Repayment Plan

A graduated repayment plan can help set payments low to start with, then increase every two years (hopefully as your income also rises) over 10 years.

This can be a good fit if you can’t afford full student loan payments now — but you expect to be able to afford to pay more later. If you want to stick to paying student loans off in 10 years, a graduated repayment plan can help you do it.

6. Extended Repayment Plan

The standard student loan repayment schedule is 10 years. But if you stretch your student loan repayment out over more time, this will lower the amount you pay each month.

The extended repayment plan can help you do this by extending repayment to up to 25 years, with either fixed or graduated payments. You’ll need to have more than $30,000 in student loans to get on the extended repayment plan.

This can be a good option if you want to extend your repayment schedule to between 10 to 20 years. However, if you expect to be repaying student loans for 20 or more years, the forgiveness that comes with IDR plans could make those a better option. Again, extending the repayment period can also cost you more in interest over time, so consider this option carefully.

7. Consolidate Federal Student Loans

Federal student loan consolidation combines federal student loans into a single Direct Consolidation Loan. The new interest rate is a weighted average of the previous rates on your consolidated loans.

Consolidating also gives you the option to choose a repayment period of at least 10 years and up to 30 years, which can greatly lower your monthly payments. Some other repayment plans might also require you to consolidate federal student loans to make them eligible for participation.

Keep in mind that unlike refinancing, federal consolidation does not result in a lower interest rate or savings of any kind. It can, however, simplify the repayment process and help open up monthly cash flow with lower payments.

Getting Student Loans Under Control

There are several ways to manage both private and federal student loans. With these options to lower student loan payments, there’s no reason to keep struggling every month.

Remember, you owe it to yourself and your financial health to investigate your student debt repayment choices and move forward with the right one.

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How the Incoming Trump Administration Can Help Student Loan Borrowers

trump_student_loans

The 2016 presidential election is settled and a new administration will take office in two months’ time. Considering all that was said during this particularly contentious campaign, it’s no surprise that student loan borrowers are concerned about what that will mean to them beginning in 2017.

Two of the many items on my list of concerns have to do with the future of the Consumer Financial Protection Bureau, within the context of a potential repeal or overhaul of the Dodd-Frank legislation that created the consumer watchdog agency in the first place, and the Federal Direct Student Loan program, which the Obama administration established in 2010 as a successor to the simultaneously discontinued Federal Family Education Loan program.

The Possible Negatives

In the case of the CFPB, should Congress move to curtail the agency’s regulatory authority and/or impose more stringent oversight on its activities, I worry that less will be done to address loan-servicing-related problems, which include the misapplication of remittances on the part of private-sector administrators and their failure to promptly conduit financially distressed debtors into a government-sponsored payment relief program, or to prevent collection companies from pursuing past-due payments in a manner that violates the Fair Debt Collection Practices Act. (You can see how your student loan repayments are impacting your credit by checking your two free credit scores, updated every 14 days, on Credit.com.)

As for the Federal Direct Loan program, a financial services industry that benefited from virtually risk-free income courtesy of the government-guaranteed FFEL program is probably getting pretty excited about the potential for its reincarnation, now that smaller-government-minded lawmakers are in control of all three branches of our system. And not just for the new loans that will be taken out in the future.

A Fresh Approach

At present, roughly one trillion dollars’ worth of Federal Direct Loans are currently on the books, plus another $200 billion to $300 billion in legacy FFELs.

But if one were to tally together all the federally-backed loans that are at present delinquent and in default, plus all those that have been granted temporary forbearance and longer-term relief to date, and compare that total to the aggregate value of all the loans that are currently in repayment, that number would approach 50%.

Any loan portfolio that looks anything like that is one whose loan agreements were improperly structured at the outset. If we want these debts to be repaid anytime soon — without continuing to spend outrageous sums of money to accomplish that objective — the new administration would be wise to bite the bullet and restructure all these contracts over an extended term at a rate that properly reflects the federal government’s costs.

That’s the first step.

The second is to lock in that cost by financing the Federal Direct loans that currently reside on the education department’s balance sheet as any prudent private-sector lending institution would, instead of continuing the government’s potentially ruinous tact of borrowing short to lend long in a rising-interest-rate environment. The new financing can take the form of direct borrowing on the part of the federal government as it does now, or the education department can oversee the sale of these loans into the private sector while retaining administrative oversight of their servicing.

This stands in contrast to the old FFEL program, where private-sector lenders originated student loans backed by the federal government, and had the option to later sell these contracts into the secondary market for added profit. Not only did that program create significant remunerative opportunities at the expense of taxpayers (who would be called upon to make good on the government’s guarantees), but it also distanced the feds from directly overseeing the administration of the loans it backed.

In a nutshell, that’s the key reason why there’s been so much foot-dragging on the part of the companies that service the FFEL loans that are in repayment: the interests of the private-sector note holders and investors are at odds with those of the taxpayers.

Finally, the new administration would also be wise to address the matter of student loan dischargeability in bankruptcy. Not so that borrowers would have an easier time getting out from under the legitimate debts they incurred, but so the potential for abject loss at the point of default would inspire all lenders to negotiate in good faith with financially distressed debtors who, for the most part, truly desire to honor their obligations.

All of this boils down to having the courage to take an evenhanded approach to solving a trillion-dollar problem. Hopefully, this new administration has enough of that to go around.

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.

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5 Reasons Why You Might Not Want to Refinance Your Federal Student Loans

refinance-your-federal-student-loans

Many private student lenders are making a big push for a piece of the student loan refinancing pie.

Banks and venture capital-backed nonbank financial services companies are hard at work slicing and dicing that trillion-dollar market into bite-size, demographically based refinancing opportunities. Their primary targets? Borrowers who have the best longer-term earnings potential because of the schools they attend, their areas of study or for other reasons.

The lure is in the form of seemingly lower rates and streamlined documentation processes, which, on the surface, presents a good deal of appeal. That is, for borrowers with higher-priced private student loans and perhaps state-sponsored debts as well.

Those who’ve funded their higher educational pursuits with government-backed loans, however, may want to think twice, for the following five reasons.

1. Credit Underwriting

Despite the fact that all education-related loans — public and private alike — are virtually impossible to discharge in bankruptcy (thanks to the successful lobbying efforts on the part of the financial services industry in 2005, atop an anti anti-establishment scheme that dates back to the mid-1970s), today’s private lenders aren’t taking that invulnerability for granted. And they shouldn’t. Not with so many consumer advocates who are calling for the restoration of the bankruptcy code with regard to this form of debt.

So unlike the federal government, which blithely continues to process loan requests as it has before, private-sector lenders are looking more carefully at a prospective borrower’s ability to service the loan he or she is requesting. Things like historical earnings, debt levels, leverage and credit scores. And when these aren’t enough (or too much, as the case may be), they’re asking for family members and others who are financially better situated to co-sign the loan.

Pity the co-signer, though, when that occurs, because they will have a heck of a time getting out from under that responsibility, even after the primary borrower’s economic outlook improves to the point of self-sustainment.

2. Fixed Versus Floating Rate Loans

Also unlike the government-backed loan programs, some private lenders are tempting debtors with what amounts to low introductory-rate financing, much the same way that some banks and private mortgage lenders tempt other consumers with adjustable rate mortgages (ARMs).

In both instances, interest-rate risk is effectively transferred to the borrower from the lender. In other words, when rates move up, so will the amount of the loan payment. When rates move down, however, you may well find the payment amount will not decline below a certain point.

Certainly, there are those who are comfortable rolling this pair of dice. The question is, is it worth the gamble in the first place?

The average level of per capita student debt is roughly $35,000 as of 2015. At 2% interest — not an uncommon introductory rate — the monthly payment on a 10-year education loan amounts to $322. In contrast, that same loan would run $350 per month under the Federal Direct program, which charges 3.76% interest at present.

I don’t know about you, but I’m not willing to wager on the direction of interest rates for $336 per year.

3. Prepayment Penalties

And then there’s the matter of loan pre-payability.

Federal student loan borrowers have the right to pay off their debt in full or in part at any time, without penalty. That means, whatever interest the borrower would have been charged over the remaining term of his or her loan is waived when the debt is fully paid off, or discounted when the loan balance is reduced quicker than it otherwise would have been.

Not necessarily so in the private sector.

Depending on the terms of the refinancing agreement, the lender may require its borrower to pay a premium — a word that the financial services industry prefers to fee — to retire their loan ahead of time.

4. Superior Relief

Perhaps the key difference between public and private higher-education loans is the quality, quantity and active promotion of the relief programs that are available to financially distressed borrowers.

Setting aside for the moment the problems that the government is attempting to remedy with the loan-servicing companies to which the Department of Education subcontracts the administration of the student loans it originates, no other lender is as willing to accommodate both temporary and longer-term hardships than the federal government.

Whether you chalk that up to Uncle Sam’s sincere desire to assist troubled debtors or to protect the taxpayers who will ultimately be left holding the bag on this financing program, hands down, the government’s income-based, income-contingent and public-service debt-forgiveness plans are superior to all others.

5. No Going Back

Last but not least, there are no round-trip tickets when it comes to financing government-backed student loans that were refinanced by private lenders. Once these loans are off the government’s books — what happens when a loan that’s made by one lender is financed at a later date by another — they are no longer eligible to be refinanced under any of the government’s standard or distressed-borrower relief programs.

With all this in mind, while it could make sense to refinance existing education-related debts that were originated in the private sector — provided you’re not being asked to give up more in the form of co-signors, prepayment penalties and so forth in exchange for that consideration — it’s hard to justify refinancing your government-backed debts in this manner.

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.

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Why All Government Student Loans Are Not Created Equal

government-student-loans

The timing of an article in The New York Times couldn’t have been more ironic.

There we were, the day before we celebrate America’s Declaration of Independence, and the Times published an exposé on the hardball tactics that the State of New Jersey allegedly takes against student-loan borrowers who are unable to continue making their payments.

It seems that for those who fund their college education with state-sponsored money — which all 50 states and the District of Columbia offer — the word independence is actually two words: in and dependence.

How Student Loan Management Can Differ

I say that because, generally speaking, the principal difference between the loan programs run by the individual states and those run by the federal government is the government’s willingness to work with financially distressed borrowers so they can remain independent.

Something else that distinguishes federally backed higher education loans from those originated by all others — including the states and private-sector lenders — is the outsize influence the government wields on distressed-loan restructuring without regard for the ultimate disposition of the underlying contract.

In other words, even if a government-guaranteed student loan is sold to another entity — public or private, as has been the case with the discontinued Federal Family Education Loan (FFEL) program — the feds reserve the right to mandate a change in the contract’s repayment schedule, even though such a move would likely to have a deleterious aftermarket effect on noteholder rates of return (for example, when the repayment term is extended or a portion of the principal is forgiven).

This helps to explain why there has been so much foot-dragging on the part of loan administration companies that are subcontracted by noteholders to service FFEL contracts that have subsequently been securitized.

And then there is the matter of what constitutes a government loan.

Some time ago, a recent state-university graduate contacted me for advice on restructuring his education-related debts. He was the first in his family to go to college and, given his and his mom’s limited financial means, he funded his education by taking on a fair amount of debt — nearly three times his current annual salary.

We talked about the Department of Education’s various income-based repayment plans, and, armed with that knowledge, he contacted his loan administrator. Several days later, he wrote again to say that his debts were not eligible for relief. “How can that be?” I asked. “You told me these were government loans and the monthly payments consume roughly half your take-home pay. Clearly, you should qualify for IBR.”

As it turned out, the “government” loans he believed he’d taken out were from his state (he insists that his university’s financial aid office referred to these loans as “governmental”). A bit more digging on my part also revealed that program was, in effect, a public-private venture. Similar to the manner in which the now-discontinued FFEL program was structured, his state guaranteed against default loans that were originated, funded and later securitized by private-sector lenders. But unlike the federal government, his state seemed unwilling or unable at that point to mandate distressed-debt restructures after the fact.

Consequently, my young friend ended up like too many of his peers: living in his mother’s basement.

There are those who would say, “Yet another reason for the government to get the hell out of the education-lending business!” Certainly, the manner in which public-backed student loans are administered leaves much to be desired.

But that shortfall, as significant as it is, doesn’t outweigh the two key benefits of the Federal Direct loan program and its predecessor: lower interest rates and a panoply of relief options for when a borrower’s financial circumstances cause him to become unable to meet his payment obligations.

In fact, I would take this a step further by advocating for the federal program to accept for restructuring all types of higher-education loans, without regard for origination channel (state, private and peer-to-peer alike) or repayment status.

Think about it. Even if the base rate that the Federal Direct loan program currently charges is increased to compensate taxpayers for the added risk of guaranteeing these nongovernment loans against default, it would still yield a better social and economic outcome for the country, not least because most financially distressed borrowers are sincere in their desire to repay their debts.

The concept of independence is, after all, meaningless if the means for attaining it are nonexistent.

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.

More on Student Loans:

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The Letter That’s Helping One College’s Students Understand Their Student Loan Debt

Indiana University is changing the way its students are borrowing to pay for their education.

Back in 2012, the school began sending letters to students, estimating their total student loan debt and future monthly payments. Since then, the university says borrowing by undergraduates has dropped by 18%.

“We want students at every year to understand the debt they have,” says Jim Kennedy, associate vice president for student services and systems. “They get this every year, and they can see where they’re at.”

Back in 2012, after holding a series of focus groups in which students revealed they were confused about how much debt they had, the school decided to launch a series of initiatives designed to empower them financially.

Any of IU’s 110,000 students carrying loans receive the letter (you can see an example letter below), and they also have access to MoneySmarts, a series of podcasts and campus programs that focus on the intersection of college and money. (The most popular, according to Kennedy, is “How Not to Move in With Your Parents.”)

Around each of the school’s seven campuses, signs and posters encourage students to take “15 to finish,” or 15 credits so that they graduate in four years, thereby minimizing their loans. Peer-to-peer counseling and a service that contacts students post-graduation about their repayment options are two other ways the school is trying to secure its graduates’ future.

“We’re just very concerned about students and student loan debt, and our administration is very concerned,” says Kennedy.

He adds, “Anything that colleges can do to raise awareness about student loans is a very positive thing.”

Remember, defaulting on a student or any other type of loan seriously damages your credit score, and because student loans are rarely discharged in bankruptcy, the debt can beat down on you for decades. (You can see how your student loans are currently impacting your credit scores for free on Credit.com.)

There are some options for people who are behind on payments to get back on track, though. To get out of default, you can combine eligible loans with a federal Direct Consolidation Loan, or you can go through the government’s default rehabilitation program. If you make nine consecutive on-time payments (the payments can be extremely low), your account goes back into good standing, and the default is removed from your credit report.

An example of the school’s loan letter is below:

Loan-Debt-Letter-example-1 Loan-Debt-Letter-example-2

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If Average Student Loan Payment Amounts Are ‘Affordable,’ Why Are So Many Past Due?

student-loan-debt

Math is infinite.

Conjure up the largest number you can you can imagine and multiply that value by itself over and over again. You still wouldn’t reach an endpoint because there is none.

I thought about all that as I read Dr. Joel Elvery’s intriguing article on student loan debt in a recent issue of Forefront, a publication of the Federal Reserve Bank of Cleveland.

According to Dr. Elvery’s calculations, the average monthly installment for student loan borrowers between 20 and 30 years old amounts to a very manageable $351 per month. I use the words very manageable because that payment represents less than 9% of the average pre-tax starting salary for recent college graduates, as reported by the National Association of Colleges and Employers ($48,127 for 2014 grads, or $4,010.58 per month).

As such, it would be perfectly reasonable to ask, “Then why the big deal about student loan debt?”

I reached out to Dr. Elvery for a bit more detail behind the numbers. He wrote that the data for his analysis was drawn from the Federal Reserve Bank of New York’s Consumer Credit Panel.

This is the same FRBNY that recently reported how education-related debts that are 90 or more days past due totaled 11% of the nearly $1.3 trillion in loans that are currently outstanding.

It is also the same FRBNY that acknowledges in a footnote that this percentage rate is understated by roughly 50% (because only about half of these debts are actually in repayment), which makes the true percentage of student debts that are over 90 days late closer to 22%. And that doesn’t even take into account loans that are between 30 and 90 days past due (which, frankly, is the proper way to measure delinquency). Nor does it take into effect loans that are in temporary forbearance because the borrowers are unable to make the payments.

All told, the percentage of troubled student loans that are currently in repayment is actually closer to 40%.

No matter how you do the math, though, the fact remains that student loan payment delinquencies are significantly higher than for any other forms of consumer debt — the raw 11% statistic is nearly three times that of credit card obligations that are similarly uncollateralized.

So a better question to ask might be: Why are so many borrowers having so much trouble when the average installment payment amount appears to be so reasonable?

As Dr. Elvery explained in our email exchanges, his calculations involved a certain amount of data “cleaning” to address what he describes as “high outliers and other noise.” He offers as an example the process of estimating what borrowers would normally pay on loans that are 90 or more days past due; loans he terms as “in default.” His rationale for these downward adjustments is that the contractual payments on loans that are declared to be in default typically increase as a result.

Generally speaking, that’s true, but not in this case.

Unlike all other forms of consumer finance, student loan defaults are actually measured at 270 or more days past due. Consequently, the monthly payments are likely to remain unchanged until that time, which means that Dr. Elvery may have adjusted payments that didn’t need to be adjusted in the first place.

On the other hand, Dr. Elvery elected to include loans with zero payments due, even though these could represent debts that are in deferment (because the borrowers are still in school) and in forbearance (because the borrowers are unable to meet their contractual obligations).

Simply put, by excluding some high-value outliers and including certain zero-value payments, Dr. Elvery may have inadvertently excluded data that could have contributed to a fuller explanation.

Given the infinite nature of math, the most enlightening analysis is sometimes accomplished with the least amount of tinkering.

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.

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9 Things Everyone Should Know About Student Loans Before They Graduate

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The Ugly Truth About the Federal Direct Student Loan Program

federal Direct student loan

The Department of Education recently published a series of performance summaries for its Federal Direct, Federal Family Education and Perkins student loan programs. A little more than $1.2 trillion is due from roughly 42 million students, who owe an average $29,000 each.

The most comprehensive of these reports pertains to $855 billion in Federal Direct loans, of which $440 billion is in routine repayment. That’s “routine” in that it excludes loans in deferment, forbearance or default, yet 15%, or $66 billion, of the remainder are 31 or more days past due. That’s a horrendous statistic, particularly for a “scrubbed” portfolio like the one just described, and considering the delinquency rate for credit card balances — i.e., debts that are comparably unsecured, or uncollateralized — stands at 2%, plus a little decimal dust.

It also significantly understates the extent of the problem.

Of the $88 billion in deferment, $12 billion represents loans to borrowers who are currently unemployed or suffering other economic hardships; another $97 billion of loans are in forbearance, $56 billion are in default and $6 billion are characterized as “other.” That’s another $171 billion in past-due debt, which, when added to the aforementioned $66 billion of past-due accounts in the “routine” portfolio segment, amounts to $237 billion out of an adjusted total of $611 billion ($440 billion plus $171 billion).

In other words, nearly 40% of all Federal Direct loans qualify as troubled debts of varying degrees.

That doesn’t even take into account the increasing number of loans being granted relief under the government’s various income-based repayment plans, such as IBR and Pay As You Earn (PAYE). If not for that support, the delinquency rate could very well soar by an additional 10% to 20%.

Clearly, it’s a public and private sector engendered fiasco. The only logical course of action is to break apart the problem: address the loans that have already been made, and revamp the program going forward.

A portfolio in which nearly half the loans are past due, in default, deferred, in forbearance or require significant restructuring is one that was improperly conceived. Although it makes a certain degree of sense to link installment payments to household income (as the government is now doing), the process is awful: The onus is on individual borrowers to ask for and ensure they receive the help they need, year after year.

What I’ve just described is the definition of a portfolio that’s “managed by exception” as opposed to one this is “actively managed.” It’s the difference between waiting for the phone to ring instead of making the call in the first place.

Given the magnitude of the problem, the government has no choice but to restructure all existing contracts by extending repayment durations and adjusting interest rates to the current rate for new Federal Direct loans.

Doubling Loan Terms: A First Step

Specifically, the standard 10-year (120 months) loan term should be doubled to 20 years (240 months) for loans in repayment, less twice the number of monthly payments that have been made to date (since we’re talking about doubling the original duration). Borrowers should also have the right to accelerate their loan at any time without incurring a penalty.

For example, suppose a student accumulated $30,000 in debt with a 6.8% interest rate. The monthly installment comes to $345.24. Also suppose the student commenced his repayment two years ago. At this point, his balance would be $25,508.

Now let’s take that balance and spread it out over an additional 192 months (240 months less 48 months, which represents twice the 24 months that have been repaid) and finance it at the current 4.29% rate for Federal Direct loans. The monthly installment would be nearly halved to $183.36.

And should this borrower have the ability to continue making payments at the original amount of $345.24 per month, the reduced interest rate would cause his repayment term to contract to 74 months instead of the originally remaining 96 months.

No more pandering for relief, no more follow-up calls to confirm it was done correctly, no more marking the calendar for annual requalification. Not only would rates of delinquency, default, deferment and forbearance decline because the payments would become more affordable, the government would save money with subcontractors paid large bonuses for remediating problems caused by misguided loan structuring at the start.

Now, to address the program going forward, a 20-year repayment term is just the first step.

How to Make Better Loans Moving Forward

Loan approvals should be based on projected post-graduation financial capacity. Routinely reported average starting-salary levels for recent graduates could be used for this purpose. Also, the ability to discharge education-related debts in bankruptcy should be restored, if only to disabuse public-sector policymakers and private-sector lenders of the notion that student loan borrowers have no choice but to repay however much debt they saddle them with.

Finally, at whatever point the government decides (or is compelled by Congress) to begin divesting the immense amount of Federal Direct loans on its balance sheet, it should do so as principal rather than through private-sector intermediaries. By that I mean as long as the government continues backstopping these loans, it is entitled to dictate standards for transactions moving into the private sector. In particular, the must ensure financially distressed borrowers are identified early and dealt with forthrightly, wherever these divested contracts end up. Anything less will put taxpayers at risk.

At that point, our attention should turn to the reason we have this problem in the first place: the price of tuition.

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.

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