The government is suing student loan giant Navient, claiming the servicer isn’t looking out for borrowers. Navient agrees, saying its role is to send bills, collect payments, process forbearances and manage the account. The student loan servicer acts in the lender’s interest, claims Navient – not yours.
In other words, Navient isn’t even pretending to help you. If there’s a better strategy available to manage your student loans, don’t expect your servicer to mention it.
A servicer’s role is to collect payments owed by borrowers. In that role, the servicer acts in the lender’s interest (here that lender is often the federal government itself), and there is no expectation that the servicer will act in the interest of the consumer.
To put together your best student loan strategy, it’s up to you to get the information you need. After all, you are responsible for your financial future. Your decisions will impact you for years, and make the wrong choice can cost you thousands of dollars. Why would you put your faith in a phone representative working for your creditor?
The only way to create the right strategy is to cut through the lies and understand the truth. Once you do, you’ll know what to watch out for.
Lie #1: You should put your loans into forbearance
For most borrowers, forbearance is a terrible idea.
Though you don’t make loan payments during periods of forbearance, your loan balance continues to accrue interest. At the end of the forbearance, that accrued interest will capitalize. In other words, the lender will add interest on your loan to the current principal.
Capitalization, in other words, increases the size of your loan faster.
For example, let’s say you owe $20,000 with an interest rate of 5% and go into forbearance for one year. During that time, the loan accrues $1,000 in interest. After capitalization, the lender will calculate new interest on a principal balance of $21,000.
For federal student loans, a better option is an income-dependent repayment plan (also called an IDR). Under an IDR, your monthly payment adjusts each year based on your taxable income. The unpaid balance gets discharged after a certain number of years.
Depending on your income and family size, your federal student loan payment can be as low as $0 per month. There’s no interest capitalization, and you move towards student loan forgiveness.
Lie #2: We’ll let you know when your payments change
Your servicer should notify you when forbearance ends, or the income-dependent repayment plan is up for renewal. But what if you don’t get the mail? What if your email address changes or the message goes to your spam folder?
You’re the one who gets hurt by not receiving the notice. Your loan goes past due, payments go through the roof, and your credit score may suffer.
You can get angry about it. You can file a complaint and write letters to your elected officials. None of that is going to make the problem go away.
Remember that you are in charge of your student loan. You have the power to prevent the problem in the first place, and it’s not difficult.
If your forbearance is about to end, call the servicer. Find out when your payment is due and the amount you’ll need to send.
If you’re on an IDR, you must provide updated information on your income and family size each year. Make sure you know the deadline and get in touch with the servicer a few months ahead of time.
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Lie #3: Send extra money to pay your loans faster
You can pay your student loan ahead of schedule if you’ve got the extra money. There are right ways and wrong ways to make an extra payment, so you need to be careful.
When you make an additional payment on your student loan, that money may not lower your balance due. In fact, extra payments are usually allocated first towards interest before touching the principal. This means your loan balance won’t go down as fast as you’d expect.
Each servicer has a different method for making extra payments towards the loan principal. Call your servicer and find out the steps to take so your payment provides you with the greatest benefit.
Lie #4: You should refinance your federal student loans
Refinancing is the process of paying an existing loan with a new loan. When it comes to student loans, the new loan originates from a bank or other private lender. Refinancing differs from consolidation, which is for federal student loans only.
When you refinance a federal student loan, you’re turning that federal loan into a private debt. Your new loan doesn’t come with any of the options for forbearance, deferment, forgiveness, discharge, and payment plans. The new debt may have a lower interest rate, but you’re trading away important borrower protections.
In a perfect world, you’d never need those protections. But what if you lose your job or can’t pay that private loan? Are you willing to risk the chance of default?
Don’t decide to refinance your student loan based on a sales presentation. Look at the costs associated with the new loan and calculate your potential savings. Recognize that you’re selling away some substantial rights. From there, you can make an informed choice.
Lie #5: Bankruptcy can’t help with student loans
It’s not easy to wipe out student loans in bankruptcy. That doesn’t mean it’s impossible, just that bankruptcy is the right solution for student loan borrowers under specific, limited circumstances.
Bankruptcy, however, may be useful even if it doesn’t lead to a discharge of your student loans. Wiping out other debts makes it easier to pay your student loans. Bankruptcy may also help lower your payments or stop a lawsuit until your financial position improves.
In the end, remember bankruptcy is a useful tool for some people. Deciding whether bankruptcy is the right tool, however, depends on an analysis of your financial situation and goals.
Lie #6: Student loans are good debt
Some financial professionals say student loans are good debt. A college education helps you increase your income potential and employment opportunities. You’ll make more over your life than the cost of the student debt, so it’s a no-brainer to take out a student loan.
It’s true that college graduates make more money than those who don’t graduate. In fact, a study published in 2014 by the Federal Reserve Bank of San Francisco shows that the average U.S. college graduate will earn at least $800,000 more than the average high school graduate.
Unfortunately, not all college degrees have the same economic value. Early Childhood Education majors, for example, have an average annual starting salary of $36,000, while Petroleum Engineering majors make $120,000.
Also, the same degree offers different opportunities depending on the school you attend. People who graduate with an engineering degree from MIT command an average starting salary of about $78,000. If you get the same diploma from Xavier University of Louisiana, however, your starting salary will likely be around $35,000.
A better degree from a better school makes it easier to pay your student loans. Paying your loans helps you build a strong credit record which can help you qualify for mortgages and car loans more easily. But there’s always uncertainty surrounding employment, income and your financial health. Why not do everything possible to minimize or avoid the need for a student loan?
Consider starting your higher education at a community college or state university. Seek scholarships and grants to help finance your education. Take on a part-time job if possible. If all else fails, there’s no harm in delaying your college career by a year or two so you can get a job and save enough money to afford a portion of your tuition.
Student Loans Are Too Important to Risk Being Fooled
As Ronald Reagan said, “trust, but verify.”
Ask questions about your student loan options and make sure you understand the answers you receive.
Double check that information against the US Department of Education’s website.
If need be, work with a professional who understands student loans and can help you create a strategy that meets your financial goals.
Revisit your student loan strategy each year to be sure you’re still on the right track.
Taking these crucial steps will keep you focused on your goals and arm you with the information to avoid being fooled by the lies and misinformation you hear about your student loans.