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.

Image: shironosov

The post 13 Confusing Student Loan Terms You Need to Know appeared first on Credit.com.

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.

Image: Jacob Ammentorp Lund

The post 7 Effective Ways to Lower Your Student Loan Payments appeared first on Credit.com.

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.

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.