Want to Pause Your Student Loan Payments? Here’s What You Need to Know

You might be able to postpone your student loan payments, but make sure you've considered the financial consequences before you do.

If you’re struggling with a medical emergency, unemployment or other financial crisis, making your student loan payments can be impossible. Rather than fall behind, you can opt to put your payments on hold through student loan deferment or forbearance.

Deferment is an option that lets you postpone both your principal and interest payments. If you qualify, you can pause payments for up to three years. Forbearance is more temporary — you can postpone or reduce your monthly payments for up to 12 months.

However, delaying your payments through deferment or forbearance can have serious financial repercussions. Depending on the type of loans you have, your loan balance can continue to grow due to interest and other fees.

Choosing Deferment or Forbearance

Below, find out how your loan type affects deferment and forbearance, and what alternatives you may have.

Deferring Federal Loans

With certain federal loans, you don’t have to worry about interest payments if you enter deferment.

If you have federal Perkins loans, Direct subsidized loans or subsidized Stafford loans, the government will cover the interest that accrues on your loans while your loans are in deferment. With your interest taken care of while you get back on your feet, you will have less to pay back in interest.

If you have unsubsidized federal loans or PLUS loans, the government will not pay for the interest that accrues during deferment. If you defer your loans, they will continue to gain interest, possibly causing your balance to balloon and costing you thousands. Not to mention your debt-to-income ratio will get worse, making it more difficult to qualify for new credit such as a mortgage or car loan. (Not sure where your credit stands? You can view two of your scores, with updates every 14 days, for free on Credit.com.)

Before entering deferment, use a student loan deferment calculator to find out how much interest will accrue on your student loans if you postpone your payments.

Federal Loans and Forbearance

Unlike deferment, your federal loans will continue to accrue interest in forbearance, regardless of the loan type. Because interest continues to build, entering forbearance can be costly, but it’s still better than missing payments and defaulting on your loans.

Is Deferment/Forbearance Available on Private Loans?

Technically, deferment and forbearance are federal loan benefits. Not all private loan servicers offer similar options — but some do. For example, SoFi offers deferment for students who are going back to school. And if you’re facing a financial difficulty, you may be able to enter forbearance for up to a year.

If you’re experiencing financial hardship, it’s worth asking your servicer if deferment or forbearance is an option. Just keep in mind that entering deferment or forbearance with private loans can be more expensive than federal loans. There are often fees you have to pay, and interest will accrue while you postpone your payments.

Alternatives to Deferment or Forbearance

If you want to avoid pausing your student loan payments completely, there are other ways to manage payments when they’re too high:

Income-Driven Repayment Plans

If you have federal student loans, you may be eligible for an income-driven repayment (IDR) plan. There are four IDR plans available today: income-based repayment (IBR), income-contingent repayment (ICR), Pay As You Earn (PAYE), and Revised Pay As You Earn (REPAYE).

Under each plan, the basics are about the same: The federal government extends your repayment term 20 to 25 years and caps your monthly payment at a percentage of your discretionary income. At the end of the term, your remaining balance (if any) is discharged. You still have to pay income taxes on the forgiven amount, however.

Enrolling in an IDR plan can drastically reduce your payments and give your budget more breathing room. Depending on your income and family situation, you may qualify for a payment as low as $0 per month.

Refinancing

Unfortunately, if you have private loans, your options are more limited. But one effective way to reduce your monthly payments is to refinance your debt. By refinancing, you take out a new loan that pays off your old private loans. Your new loan will have completely new terms, including — ideally — a lower interest rate.

Refinancing private loans can help lower your payments and help you pay less in interest over time. It’s a smart way to save money while giving yourself more room in your budget. Be sure to keep in mind that if you refinance federal student loans with a private lender, however, you forfeit federal protections such as IDR and deferment/forbearance eligibility.

Deciding What to Do in a Hardship

Student loan forbearance and deferment are useful options when you experience a financial hardship. If you’re facing an emergency and can’t keep up with your payments, deferment or forbearance can give you a much-needed break while you get back on your feet.

While entering deferment or forbearance is a much wiser option than defaulting on your debt, there are still consequences. Make sure you understand the financial impact of postponing your payments, as putting them off can add thousands to your student loan balance. And in the case of private loans, postponing may not be an option at all.

If you’re struggling to keep up with your loans, the most important thing is to be proactive and talk directly with your servicer to find out what options are available to you.

Image: PeopleImages

The post Want to Pause Your Student Loan Payments? Here’s What You Need to Know appeared first on Credit.com.

Will Rising Interest Rates Really Impact Student Loan Borrowers?

Will rising interest rates affect student loans? Here's what you need to know.

The Federal Reserve’s benchmark interest rate is on the rise. These rates already increased once in December, and experts are predicting another three rate increases for 2017.

This could mean more earnings on your savings, but it could also mean higher interest on your debt. While that’s hardly a welcome announcement for anyone paying down debt, it’s not all bad.

Federal Rates on the Rise

You might be wondering why, in a time of deep student loan debt, the Federal Reserve would consider raising its rate. According to Janet Yellen, the Fed’s chairwoman, the rate increase is “a vote of confidence in the economy.”

This is because the Fed decreases its benchmark rate during times of economic uncertainty. Since the Great Recession, rates have been historically low to give borrowers a chance to get out from underneath crushing debt. But as the economy improves, the rate needs to increase to prevent inflation.

In short, a higher federal benchmark interest rate means a strengthening economy. But what does it mean for your student loans? That answer will depend on the kind of student loans you have.

Fixed- vs. Variable-Rate Loans

First, it’s important to understand the differences between fixed and variable rates.

Fixed-rate student loans have interest rates that remain the same for the entire repayment period; they don’t change with the market. So let’s say you took out a 10-year student loan with a fixed rate of 6%. If the Fed raises rates today, your student loan interest rate will remain 6% until the loan is paid off. However, anyone who takes out a new loan after rates increase could end up with a higher rate than you.

If you have a private student loan, on the other hand, it could have a variable interest rate. Variable rates are tied to the market and can increase or decrease according to federal rate changes. How much and how often the rate changes is up to the particular lender.

If you’re wondering whether the rates on your student loans are fixed or variable, read your statements to find out. While you don’t have to worry about federal fixed-rate student loans, there’s no telling how much a variable-rate loan might increase. The Fed’s rate is a benchmark, but it’s entirely up to banks and lenders where to go from there.

How to Handle Rising Rates

If you have variable-rate student loans, it might be a good idea to do something now in case of potential increases. Here are a few things you can do to get ahead of the curve.

1. Look Into Refinancing

If you’re worried about any variable rates on your private student loans rising, refinancing can be a good strategy for lowering your rate as well as switching to a fixed-rate loan.

Currently, it’s only possible to refinance student loans through a private lender. That means refinancing federal student loans would result in some drawbacks, including the loss of federal loan protections such as forbearance, deferment and forgiveness.

In this case, however, there’s no need to refinance federal student loans; refinancing private variable-rate loans is what will protect you against future rate increases.

2. Strategize to Pay Your Loans Off Faster

If your rates are already as low as possible, an interest rate hike might be good motivation to get ahead of your debt.

Of course, you might not have the extra cash to pay off your loans faster. Instead try making bi-weekly payments: Split your monthly payment in half, and apply that amount to your loans every other week.

Why? This will result in making one extra payment per year without taking a huge chunk out of your budget. Just make sure your first two bi-weekly payments hit your account before the next month’s due date. You want to avoid accidentally paying less than the minimum.

3. Communicate With Your Servicer

If the interest rate on any of your student loans does increase and your monthly payment grows beyond what you can afford, contact your loan servicer immediately.

It can be a scary step to take, but it’s far more helpful than ignoring an impending issue. Missing payments on your student loans risks going into default, taking a big hit to your credit score — or even having your paychecks or tax refund garnished. Most lenders would rather work with you to come up with a payment plan, so find out what your options are right away. (Not sure where your credit stands? You can view two of your credit scores, with updates every two weeks, on Credit.com.)

Whatever You Do, Don’t Panic

Anyone with student loan debt can speak to the way it seems to affect every aspect of life. That’s why news of things like an interest rate hike can be so worrisome. But if you’re feeling nervous right now, don’t panic.

When the Fed raises rates, it does so incrementally. Though your lender doesn’t have to follow suit with an incremental increase, you probably won’t see a massive jump in your current rate. Until you know what your lender is going to do, stay calm and keep making those payments.

Use these tips to help you get out from under the rock of student loan debt. No matter what the Fed does to its benchmark interest rate, you’ve got this.

Image: mihailomilovanovic

The post Will Rising Interest Rates Really Impact Student Loan Borrowers? appeared first on Credit.com.

A Quick Guide to Whether You Should Refinance Your Student Loans

refinance-your-student-loans

College graduates with a history of earnings and good credit may be able to save a significant amount of money by refinancing their student loans at lower interest rates, but less than half of Millennials are taking advantage of refinancing, consolidation, or other options to get a better deal.

Granted, refinancing is not for everyone. It’s best suited to people with good credit that are currently paying a high-interest rate on their student debts. Beyond that, there are also some potential drawbacks borrowers should take into consideration before they move to refinance. But it’s worth your consideration. Here we lay out the pros and cons of refinancing student loans so you can make the best decision for you.

When Refinancing Can Be Right for You

If you’ve been making your regular monthly student loan payments, but it’s still going to take many years to pay them off, your interest rates might be to blame. This is especially true if you took out your loans between 2006 and 2013, when interest rates on unsubsidized loans were higher than they are currently.

Refinancing could help you lower the rates on your loans, so more of your money can go toward paying off your principal balance. Refinancing is the process by which a borrower pays off their student loan debt by taking out a new loan with a private lender. This process can also combine all the loans you refinance into one payment.

Refinancing doesn’t guarantee lower monthly payments, but, depending on the repayment plan you choose, you could pay off your debt faster and save money.

The Drawbacks to Refinancing

Unlike federal student loans, which guarantee every borrower a fixed, low interest rate, private student loans come with fixed or variable rates and require credit checks — so, if you don’t have good credit, you could end up with a higher rate.

You also generally have fewer borrower protections if you refinance your federal student loans into private loans. For instance, private student lenders are not required to offer forbearance or deferment options. Those that do may charge a fee for the option. (You can learn more about private student loans here.)

Assessing All Your Options

If you have government loans, you’re probably aware that federal loans offer certain borrower benefits.  A debt consolidation loan from the U.S. Department of Education, for instance, allows you to consolidate multiple federal student loans into a single loan so you’ll have one payment each month. A Direct Consolidation Loan also may lower your monthly payments by giving you as long as 30 years to repay.

Income-driven repayment (IDR) plans can also help you lower your monthly payments by limiting your monthly payments to a percentage of your disposable income, and by extending your loan term by up to 25 years. Under an IDR plan, your monthly payment will be capped at 10, 15 or 20% of your income, depending on the plan.

The Drawbacks to Direct Consolidation & IDR Plans

For those borrowers looking to lower the amount devoted to student loan payments each month, these plans can be the way to go. But, here, too, there are some trade-offs to keep in mind.

Consolidation loans, for instance, won’t lower you interest rate. In fact, while that lower monthly payment can provide some much-needed relief, by increasing your loan repayment period, you’ll have more payments to make and, therefore, pay more interest. (Note: There are no prepayment penalties with a Direct Consolidation Loan, so you can pay ahead.)

Here are a few things to note if you’re thinking about an IDR plan.

  • IDR plans help you lower your monthly payments by stretching out your repayment term. Again, while this means you pay less each month, stretching out your loan term may mean you’ll end up paying more in interest overall.
  • If, for whatever reason, you need to leave an IDR plan halfway through (or you’re no longer eligible because your income exceeds the income cap), you’ll still be responsible for paying back some or all of the unpaid interest that’s piled up (this is called “interest capitalization”).
  • Under an IDR plan, you could qualify for loan forgiveness after 20 or 25 years of qualified repayments. However, if you do, remember the amount that’s forgiven is considered taxable income, and you’ll have to pay interest on it. If you work for the government or a nonprofit, and qualify for Public Service Loan Forgiveness after 10 years, that amount will not be taxed.

Student Loan Refinancing 101

If you do decide to explore refinancing, it’s important to comparison shop.  You’ll want to find out what interest rate range is being offered, whether there are any origination fees and if forbearance of deferment is an option when vetting lenders, among other things. You’ll also want to check your credit so you have an idea of what offers you may qualify for. (You can do so by viewing two of your credit scores, updated every 14 days, for free on Credit.com.) If your credit is in rough shape, you may want to take steps to improve it before applying.

Not everyone will qualify to refinance their student loans — it helps to have good credit and a low debt-to-income ratio. But while refinancing isn’t for everybody, everybody should at least consider it.

Image: Petar Chernaev

The post A Quick Guide to Whether You Should Refinance Your Student Loans appeared first on Credit.com.

Wells Fargo, Amazon Nix Their Private Student Loan Deal

private-student-loans

Wells Fargo and Amazon appear to have ended their private student loan partnership.

Just six weeks after announcing that Amazon Prime members were eligible for interest rate discounts on the bank’s private student loan products, traces of the deal were removed from the online retailer’s student-centric site. Wells’ previously Amazon-focused landing page also now redirects to the bank’s generic private student loan landing page.

A spokesperson for Wells Fargo confirmed via an email to Credit.com that the promotion had ended but did not respond to request for comment as to why. Amazon similarly confirmed the promotion had ended via an email without giving a reason why.

The promotion, announced July 21, offered Prime members and their co-signers a potential 0.50% base interest rate discount on all Wells Fargo private student loan products. They were also eligible for a 0.25% interest rate reduction if they enrolled in Wells Fargo’s automatic monthly loan repayment plan.

The bank’s website currently lists the the variable interest rates on its private student loans as ranging from 3.39% to 9.03%. Its fixed interest rates range from 5.94% to 10.93%.

The promotion’s end comes on the heels of Wells’ agreement to pay a $3.6 million civil penalty to the Consumer Financial Protection Bureau to settle allegations of illegal student loan servicing practices. (The bank declined to answer questions as to whether the two were directly related.)

Private Student Loans 101

Given the climbing cost of a college education, many students may be thinking of taking on a private student loan to cover their tuition. But it’s important to do your research before applying because these loans typically tout variable interest rates that, unlike the fixed rate associated with federal student loans, can fluctuate with market conditions. They also have fewer borrower protections than federal loans. (For instance, private student lenders are not required to offer forbearance or deferment options.) And, particularly if your credit is not in tip-top shape, the interest rate on these loans can climb quite high. (You can view two of your credit scores for free each month on Credit.com.)

If you do decide to take on a private student loan, be sure to read the terms and conditions carefully to find the best financing for you. Repayment plans tend to vary by lender, and some charge fees to process forbearance and deferment requests. You can learn more about what to watch out for when applying for private student loans here.

Image: BraunS

The post Wells Fargo, Amazon Nix Their Private Student Loan Deal appeared first on Credit.com.

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.

Image: BraunS

The post 5 Reasons Why You Might Not Want to Refinance Your Federal Student Loans appeared first on Credit.com.

Fewer People Are Behind on Their Private Student Loans

private-student-loans

Any good news about student loans is sure to raise an eyebrow or two. After all, there aren’t a lot of good things to say about something that’s weighing on Americans’ finances and breaking records like an athlete hopped up on performance-enhancing drugs.

Despite that, there seems to be something positive happening in the world of private student loans. According to a new report, fewer borrowers are falling behind on their loan payments, which suggests they are better able to handle their education debt than they were a few years ago.

The report comes from MeasureOne Private Student Loan Consortium, which includes the six largest holders and lenders of education debt: Citizens Bank, Discover, Navient, PNC, Sallie Mae and Wells Fargo. Their portfolios make up more than 65% of private education lending in the U.S., according to MeasureOne’s website.

Private student loan delinquency and charge-off rates are at their lowest since before the financial crisis, the report says, and a smaller share of borrowers have put their loans into a state of forbearance.

The report focuses on data from the first quarter of 2016 and how it compares to first-quarter data from previous years. It does not include consolidation loans.

Here are some standout figures:

  • There was a 16.8% decline from last year in the late-stage delinquency rate (loans more than 90 days past due).
  • The early stage delinquency rate (loans 30 to 89 days past due) is down 9% from last year.
  • 2.2% of loans were in forbearance, which is a 4.1% decline from the same time last year and down 26.6% over the last 5 years.
  • Charge-offs made up 2.3% of loans in the first quarter, down from 5.1% five years ago. That’s a 54.5% decline. (A lender charges off a loan when it does not expect to get the money back from the borrower. That’s generally when a loan is sold to a debt collector.)

It’s important to note that private student loans only make up a very small portion of the more than $1.35 trillion in outstanding student loan debt in the U.S. (about 7.5%, or $102 billion, according to the report).

Still, the repayment improvement among this subset of student loan debtors is noteworthy. Private student loans generally don’t offer a lot of flexibility to borrowers who may have trouble affording their payments, which can make them even harder to repay than federal student loans. (In addition to forbearance, federal student loan borrowers can look into repayment options like deferment, income-based repayment or student loan forgiveness.)

Paying Back Your Student Loans

Struggling to make student loan payments can be really problematic, considering how missing any loan payment, education or otherwise, can have a seriously negative effect on your credit score, and a bad credit score can lead to all sorts of financial obstacles.

On top of that, the vast majority of private student loan borrowers need a co-signer to get these loans, meaning the missed payments affect not just the primary borrower (presumably the student) but also the person who helped get the loan. That’s often a parent or close family member. (You can see how student loans affect your credit by getting two free credit scores and regular updates on Credit.com.)

Since student loans can be very difficult to discharge in bankruptcy (though it’s possible), that makes it even more important to find a way to manage them, whether that’s looking into some sort of repayment plan or student loan consolidation.

If you have questions about your repayment options, start by talking to your student loan servicer. You can also share your questions on student loans in the comments.

More on Student Loans:

Image: Wavebreakmedia

The post Fewer People Are Behind on Their Private Student Loans appeared first on Credit.com.

Op/Ed: Student Borrowers Will Continue to Struggle Despite the CFPB’s Efforts

student-loan-borrower

The financial services industry erupted earlier this month, soon after the Consumer Financial Protection Bureau published a set of proposed rules for limiting the use of forced arbitration clauses by broad range of entities, including certain providers of financial products and services.

This longstanding practice, whose origin dates back to 1925, of incorporating language that requires consumers and others to waive their constitutional right to a jury trial is attracting a lot of attention these days because of concerns that it favors the interests of lenders over debtors, schools over students, services firms over customers, and even employers over employees.

Arguably, the most cherished and, at the same time, abhorred aspect of this contractual provision is how it prevents groups of (allegedly) unjustly treated parties from filing class-action lawsuits for damages.

The CFPB wants to change that.

Once the 90-day commentary period has lapsed and the bureau’s final rules are put into place, the first of these will prohibit the prospective use of litigation-limiting “arb-clauses” in certain consumer transactions. (Unfortunately, those who have existing contracts with this language will continue to be bound by its terms.)

The second serves as a sanity check of sorts. It stipulates that those companies and institutions that will become subject to the bureau’s new rules will also be required to “submit specified arbital records to the Bureau” at specific intervals.

In other words, the CFPB wants to know that what it ultimately implements is having the intended effect. If that’s not the case, presumably the bureau will consider revising the rules it set forth.

One of the many consumer financial products that the Dodd-Frank legislation authorizes the CFPB to regulate is private student loans. The bureau oversees the entities that originate these loans, along with the firms that administer the resulting contracts on their (originators and entities to which the loans may later be sold) behalf.

That’s great, except for the fact that private loans comprise barely 10% of outstanding education-related debts. So the obvious question is: What effect, if any, will the bureau’s new rules have on firms that service federal student loans, the 90% over which the CFPB has no regulatory oversight?

I ask because buried within its proposed rulemaking document, on the bottom of page 193, is a request for comments on whether businesses created by governmental entities (the State of Pennsylvania is the footnoted reference) should be exempted from these new rules as they are from other consumer protection laws such as the Fair Credit Reporting Act.

It’s an important question, not least because the Department of Education subcontracts a certain portion of its loan administration work to such firms (the Higher Education Loan Authority of the State of Missouri, or MOHELA, is one example).

But we’re just scratching the surface.

What about all the other loan servicing companies? They may not share MOHELA’s parentage, but they and others like them are collectively servicing more than $300 billion in Federal Family Education loans and nearly $1 trillion in Federal Direct loans.

To what extent are these firms similarly shielded? Let me ask this: Do you recall reading about any class action suit that was filed against any of these companies where the plaintiffs prevailed? Neither do I, and here’s why: federal preemption.

As the Center for Responsible Lending points out in its July 13, 2015 letter to Consumer Financial Protection Bureau Director Richard Cordray, although private student lenders and their agents (subcontracted loan servicers, in this instance) rely on the forced arbitration clauses that are embedded within the contracts that govern their transactions, certain federal student loan servicers have successfully “invoked preemption under the Higher Education Act (1965) to get lawsuits based on state-law claims dismissed.”

Once his case is tossed out of court, the consumer-plaintiff isn’t even entitled to seek recompense through arbitration.

Although the ED has signaled its intent to restrict the use of arb-clauses in college enrollment contracts (used to protect the institution against later challenge) and private lenders, it has yet to call on lawmakers to amend the Higher Education Act — which Congress is in in the process of overhauling — with regard to the matter of the broad protections the Act grants to servicers.

The fact that 90% of all student loans — involving some 40 million borrowers — are somehow off-limits for the regulator that was created to protect consumers is bad enough. But to prevent these student debtors — whether individually or in groups — from the legal recourse that is due them is indefensibly unjust.

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:

Image: AmmentorpDK

The post Op/Ed: Student Borrowers Will Continue to Struggle Despite the CFPB’s Efforts appeared first on Credit.com.

9 Things Everyone Should Know About Student Loans Before They Graduate

college-graduation-ceremony

Image: Pamela Moore

The post 9 Things Everyone Should Know About Student Loans Before They Graduate appeared first on Credit.com.

Inside the Student Loan Experiment Happening at Purdue

studentloandebt

It all started when Mitch Daniels, the president of Purdue University, got a crazy idea: What if the public college in West Lafayette, Indiana allowed students to apply for education funding in exchange for a chunk of their earnings?

Purdue would be the first American university in 50 years to revisit the concept, known as an income-share agreement, or ISA, and if it worked, it would provide a revolutionary alternative to private student loans.

“I was pretty skeptical,” said Ted Malone, executive director for the school’s division of financial aid. “It was sounding like the idea was to have individual investors back individual investors, so I was picturing something like ‘Shark Tank.'”

He was also concerned for his students. “I thought it would be easy for someone to take advantage of them, to convince them to take loans with terrible rates and maybe not disclose all the things that they should,” Malone said.

After interviewing a handful of financial services firms, Purdue struck a deal with Vemo Education, a Reston-based firm with deep knowledge of ISAs. The program, Back a Boiler, was unveiled April 4, and since then the school has hosted information sessions and created a website to bring students and parents up to speed on the differences between ISAs and loans. It hasn’t been easy, and for the uninitiated, ISAs are new territory indeed.

“It’s an experiment,” Malone said.

How It Works  

Under Back a Boiler, students repay their debt in the years immediately following graduation based on a fixed rate linked to their expected income. Unlike a bank loan, there is no set loan balance; again, there is only a fixed rate to which their income is tied for the duration of the contract. In general, the terms are shorter (nine years or less) than those offered by private loans, although students’ monthly payments could be slightly higher. In this way, an ISA adopts the logic behind a short-term mortgage: The less time spent paying it off, the more money you save.

Awards will start at $5,000, and payments will kick in six months after students leave school. The money repaid will be used to replenish the fund for future investments. The exact terms of agreements will vary by student and factor in how far along they are in their studies, any cumulative debt, area of study and projected earnings.

A Replacement for Private Student Debt? 

Purdue offers an online comparison tool for students to enter their major, credit hours and expected graduation date to assess repayment terms based on possible income. A incoming senior majoring in Economics, for example, who’s expected to graduate in May 2017, could expect to pay 9.02% of his income, whatever it is (the school comes up with an estimate), if he were to accept an ISA of $32,000. If he wound up with a low salary after college, this wouldn’t be so bad, and may present a viable alternative to private student debt and federal Parent Plus loans.

However, if his income were higher, he’d be taking a gamble. The rate may sound paltry for someone not earning much out of school, but if he were to earn more, his wallet would feel it. “If you’re less successful, your payment rate goes down,” Malone said. “If you’re more successful, your payment rate goes up.”

Mark Kantrowitz, a student loan expert, isn’t convinced Purdue’s program will be the cure-all to students’ debt woes. Though it “avoids some of the problems in other proposals, such as cross-subsidization of disciplines — i.e., some programs charge the same amount of humanities and STEM graduates — and long repayment terms, it does not eliminate student debt,” he wrote via email. An ISA is just debt in another form. “Some risk of failure is transferred from borrower to lender, yielding an education financing product that may be more attractive and more accessible to low-income students,” Kantrowitz said.

For now, at least there’s an option.

Remember, it pays to read the terms and conditions carefully on any financing you are considering for college so you can find the loan that’s best for you. It can also help to have a good credit score, since it may qualify you for better rates on private student loans, for instance. (You can see where you credit score currently stands by viewing your two free credit scores, updated each month, on Credit.com.)

More on Student Loans:

Image: Rawpixel Ltd

The post Inside the Student Loan Experiment Happening at Purdue appeared first on Credit.com.

The Wrong People Are Managing Your Student Loan Debt

Senators Patty Murray (D-Wash.), Elizabeth Warren (D-Mass.) and Richard Blumenthal (D-Conn.) received some disturbing news on leap year day 2016.

That’s when the U.S. Department of Education’s Office of Inspector General officially informed the senators that it had determined that the Education Department had failed to properly audit certain student-loan serving companies’ compliances with the Servicemember Civil Relief Act (SCRA) — a failure that appears to have resulted in the department’s unconditional renewal of the subject companies’ contracts.

Among other things, the Inspector General’s report cites statistical errors, improper sampling and review process errors on the part of the department, and its failure to take appropriately corrective actions when called for.

Now, from this damning disclosure some might infer that there’s a malevolent scheme afoot to enrich private sector enterprises at taxpayer — and borrower — expense. But let’s not confuse abject incompetence with willful duplicity.

Clearly, public-sector policymakers are no match for private-sector experts. The same folks that know loans that are temporarily accommodated with skipped or reduced payments may bypass the delinquency reports and contracts that are retroactively adjusted might dodge an out-of-compliance citation. They also know that the interests of financially distressed borrowers of government-guaranteed loans that have since been securitized run contrary to those of the investors who now own those debts. And they know how to earn even more money when loans that are serviced by one entity end up at an affiliated firm charged with collecting on the contracts that defaulted while on the former’s watch.

So while the IG’s letter may be focused on SCRA violations, it’s not unreasonable to view these findings as a broader indictment of the Education Department’s seeming inability to competently administer all of the nearly $1 trillion worth of education-related loans that currently reside on its balance sheet.

The reason this is important — apart from the obvious — is that at some point, the political tide will turn and the feds will once again look to the private sector for liquidity, as it had before the Obama Administration discontinued the Federal Family Education Loan in program in 2010 in favor of the current Federal Direct loan program.

When that happens — and I believe the time for that is at hand — unless the Education Department has its act together and can properly administer the administrators, the nightmares that today’s debtors continue to experience will be visited upon the next generation of borrowers.

To that end, there’s been a lot of talk about curtailing the flow of financial services professionals into public policymaking positions — fox in the henhouse, and all that. But not as much about those who leave public service for positions in the private sector, where they are able to put to profitable use their knowledge of how to work with — or around — the rules.

Perhaps instead of populating the Education Department with career public-sector policymakers, it would do better to recruit private-sector experts who can use their bona fide operational experience to guard the henhouse.

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:

Image: iStock

The post The Wrong People Are Managing Your Student Loan Debt appeared first on Credit.com.