Most Borrowers Don’t Think Trump Will Be So Bad for Their Student Loans

Many borrowers actually like an idea about student loan repayment Trump mentioned in a speech during his campaign.

Nearly 40% of student loan borrowers are concerned that Donald Trump’s administration will negatively impact their student loans, according to a new survey from Student Loan Hero. As the country moves into a new era of governance, some graduates are concerned that an already-difficult student debt situation will get worse.

In fact, more than one-fourth (26.6%) of survey respondents admitted they believe a Trump administration will have a “very negative” effect on their student loans. On the other hand, about 40% said they think Trump will have neither a positive nor a negative effect on their student loans, and the remaining respondents (about 20%) said they think he will have a somewhat or very positive effect on their student loans.

These figures come from a poll conducted by Google Consumer Surveys on behalf of Student Loan Hero from Jan. 6 to 9, and the results are based on a nationally representative sample of 1,001 adults with student loans living in the United States.

In the last few years, there’s been quite a lot said about the growing student loan crisis. But what can be done? Student loan borrowers have some idea of policy changes they’d like to see implemented during the Trump administration.

Borrowers Want More Student Loan Forgiveness Options

When asked which student loan changes they would like to see implemented under Trump’s administration, nearly half (44.3%) of respondents chose “federal loan forgiveness after 15 years.” In a speech during his campaign, Trump mentioned something along those lines, proposing a repayment plan in which borrowers pay 12.5% of their income for 15 years, after which any remaining balance would be forgiven. (Whether or not that’s a viable proposal is another matter.)

Currently, student loan borrowers can have their loans forgiven after 20 to 25 years of payments on a federal income-driven repayment plan. There is also a program for federal student loan forgiveness after 10 years in a qualifying public service job (only payments made after Oct. 1, 2007 count). Additionally, borrowers in certain industries can qualify for partial loan forgiveness. However, not everyone qualifies for these forgiveness programs; of those who do, not all will actually have any debt left over by the time the repayment term is up.

It’s not surprising many student loan borrowers expressed interest in a federal loan forgiveness program that discharges student debt after 15 years. According to the survey, 25% of respondents have either stopped making student loan payments or have lowered the amount they put toward repayment in the hope that the government will forgive student loan debt in the future.

Borrowers Also Want Refinancing Options

Student loan borrowers aren’t just asking for forgiveness. Close to one-third of respondents (31.4%) would like to see a program to refinance federal student loans implemented during a Trump administration.

Currently, it’s only possible to refinance through private lenders — the federal government doesn’t offer a refinancing option. The problem is that refinancing federal loans with a private lender means losing access to federal protections such as income-based repayment, deferment, forbearance and some forgiveness programs. Not to mention, borrowers are subject to credit checks and other underwriting criteria that’s at the discretion of each individual lender.

A federal refinancing program could help more borrowers gain access to refinancing options, retain their federal benefits and allow them reduce their interest charges.

How Much Debt Do Student Loan Borrowers Have?

Addressing student loan debt is likely to be on the radar for the incoming administration, especially with nearly $1.4 trillion in student loan debt outstanding.

According to the survey, more than one-third (36.4%) of student loan borrowers have more than $30,000 in debt. Nearly one-fifth (19%) have more than $50,000 in student loan debt. Interestingly, 7.5% of the survey’s respondents aren’t even aware of how much debt they have.

It’s yet to be seen how Trump or Betsy DeVos, his nominee for Secretary of Education, will handle what many consider to be a crisis, but the consensus seems to be that something needs to be done. In response to a request for elaboration on Trump’s student loan repayment proposal, a spokeswoman from his transition team said, “If confirmed, the Secretary designate looks forward to working with the President-elect, the Congress and other stakeholders to address the issues of student debt and repayment.”

No matter who is president, student loan debt can seriously impact your financial situation, including your credit score. (You can see just how much by reviewing the two free credit scores you can get through Credit.com, which are updated every 14 days.) Knowing your options when it comes to student loan repayment and refinancing will be crucial over the next four years and beyond.

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Why All Government Student Loans Are Not Created Equal

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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.

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6 Simple Steps to Avoid Student Loan Headaches

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May is the month of Pomp and Circumstance. Of graduation parties, caps thrown in the air and dreams thrown even higher. It’s also the month where many seeds of financial destruction are sown.

Student loan borrowers who are graduating have six months to figure out how to start paying back their loans — or how to avoid paying back their loans. Decisions made during this time are critical, and can really dictate many other choices during the young adult years: when to buy a car, a home, or even start a family. That’s why it’s important to think about these things even before your cap hits the ground on graduation night.

First, a quick refresher on the problem. The national student loan default rate is 11.8% for the three most recent years of graduates. But that understates the problem. Borrowers can be delinquent (late on payments) without being in default — and the student loan delinquency rate is 17%, according to the Federal Reserve Bank of St. Louis. But even THAT number understates the problem dramatically.

About 45% of recent graduates aren’t repaying their loans at all — they re-enrolled in school, and are in deferment, or they are in forbearance, for example. So, among borrowers who are actually supposed to be paying their loans, the delinquency rate is actually 27.3%. One in four have fallen behind, and at the very least, are seeing their credit scores plummet.

Don’t miss the significance of that last number. Much is made of borrowers who can’t repay their loans at all, but for every borrower who goes into default, two more are merely delinquent. Maybe you are lucky enough to not fear default…but your odds of becoming at least delinquent are shockingly high.

So we asked student loan expert Mark Kantrowitz to help us develop a checklist for soon-to-be former students that can help them avoid adding to those disastrous numbers.

1. Don’t Miss Payment No. 1

There are plenty of reasons for high late payment rates, but this one is surprisingly simple to avoid.

“About a quarter of borrowers who miss a payment are late with the very first payment,” Kantrowitz said. “Most student loans come with a six-month grace period after the student graduates before repayment begins. That’s a lot of time during which a college graduate can forget about their student loans.”

It’s easy to become distracted by finding a job, an apartment, buying a car, and suddenly, the six months is gone. Making matters worse, address changes mean loan servicer notices could get lost in the mail. Remember, “I never got a bill,” is no excuse. Proactively engage with your lender to make sure that first payment is on time.

2. Automate Your Payments

One great way to avoid problem No. 1 is to sign up for automated payments with your lender. Many servicers also give borrowers a small interest rate break for doing so. Set automated payments up early, and you’ll have less to worry about come the Fall. Sure, it can feel strange to give a lender direct access to your checking account, but unless you are a bill-paying ninja, it’s probably worth the peace of mind.

3. Select Conservative Payment Terms

Many borrowers will find themselves with options that seem to ease the immediate pain of repayment — by lowering monthly payments. These can sound seductive, but they trade a little pain today for a lot of pain tomorrow. For example, borrowers may have the option to spread payments out over 10, 20 or 30 years. Those who choose 30-year payments will cut their monthly payments nearly by half, but will pay more than triple the interest. Let’s examine a $35,000 federal student loan balance with a 6.8% interest rate. Using 10-year terms, borrowers would pay $402 per month, for a total of $48,333 over 10 years. Borrowers who pick a 30-year term would pay $228 per month, but a total of $82,146, or $47,145 in interest compared to $13,333!

“Students often choose the repayment plan with the lowest monthly payment, thinking that it ‘saves’ them money,” Kantrowitz said. “Instead, they should choose the repayment plan with the highest monthly payment they can afford.”

If the 10-month term creates monthly payments that are just too steep, borrowers can pick 20-year terms initially to ease the pain a bit…but make a promise to make extra payments as their income grows.

4. Don’t Choose Income-Based Repayment Because it ‘Feels Cheaper’

With income-based repayment, monthly loan terms are set based on a borrower’s income. This can be a great alternative to delinquency or default, but it should be a last resort, not a first choice. See the math above. Yes, income-based plans hold out the promise of loan forgiveness … but only after decades of payments.

“Most borrowers should stick with a standard 10-year repayment plan. Anything longer than that, and they will still be repaying their own student loans when their children enroll in college,” Kantrowitz said.

5. Don’t ‘Snowball’ by Consolidating

Many borrowers graduate with multiple student loans, and the attraction of pooling them together to make a single payment is understandable, but usually misguided. Consolidation only makes sense if it lowers the total cost of borrowing (by lowering the interest rate), and that’s often hard to accomplish. Simply merging federal loans gives borrowers a rate that averages across the loans. The one method that does work is waiting a few years so the borrower’s credit score improves, enabling refinancing the debt with a better interest rate.

Another mistake borrowers make when they consolidate is that they rob themselves of the chance to apply extra payments to the loan with the highest rate first, which is always the best method. Some borrowers are attracted to the so-called “snowball” method, which suggests paying down the loan with the lowest balance to score a quick win. That might make a borrower feel good, but financially, it’s not the best way to save money.

6. Don’t Ignore ‘Interest Capitalization’

Those are big words, but here’s a simple rule of thumb: You pay for both borrowing money and borrowing time. Adding time to repayment is basically the same thing as borrowing more money, so if you obtain a loan deferment or forbearance, you might avoid payments for a while, but you will not avoid added interest. In rare cases (with subsidized loans in deferment), the federal government will pay the extra interest for you. But you can’t avoid the added cost of stretching out loan terms. In most cases, added interest will be “capitalized,” meaning it increases the outstanding total balance of the loan. Again, postponing pain today merely increases pain tomorrow.

Remember, defaulting on a 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, even if forgiveness isn’t an option. 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.

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