Before you pause your student loan payments, consider the risks

Silhouette Portrait of a graduate in cap and gown


Yet when your payments resume, they’re often higher because your debt has swelled, thanks to interest.

The Associated Press, citing a 2017 Department of Education audit, reported this week that Navient, one of the country’s largest student loan servicing companies, steered tens of thousands of struggling borrowers into costly delays of their payments, known as “forbearances.”

Made conscious decision to focus on quality, not quantity of loans: SoFi CEO Anthony Noto   4:00 PM ET Tue, 23 Oct 2018 | 03:12

The Consumer Financial Protection Bureau alleges that Navient added more than $4 billion in interest to borrowers’ debt through the misuse of forbearances between 2010 and 2015. Navient disputes the allegations in the audit and those by the CFPB.

Despite the fact that putting off payments increases their debt, nearly 70 percent of people who began repaying their student loans in 2013 had their debt in forbearance for some period, according to an April report by the Government Accountability Office.

What else can a borrower do?

Borrowers should first ask whether a deferment is available before they opt for a forbearance, said Bruce McClary, vice president of communications at the National Foundation for Credit Counseling.

That’s because interest does not accrue on subsidized student loans during an economic hardship deferment, for example, as it does with a forbearance. There are also deferments for cancer patients now.

If your difficulty repaying your student loans is unlikely to come to an end any time soon, you might want to enroll in an income-driven repayment plan, which caps your monthly payment at a percentage of your income. Some monthly bills wind up totaling nothing.

Is a forbearance ever a good idea?

Borrowers who find themselves in a short-term difficulty, such as a medical leave or temporary unemployment, might want to consider forbearance, said Mark Kantrowitz, an expert on financial aid and publisher of

A forbearance typically lasts a year, and borrowers can use the option up to three times.

If possible, however, people should request a partial forbearance and keep up with at least their interest payments during the break.

“This will prevent your loan from growing larger during the forbearance,” Kantrowitz said.

Can I trust my lender?

Given that student loan servicers might not always provide borrowers the best information, it helps to review your options with a nonprofit such as The Institute of Student Loan Advisors, an organization that offers free advice and dispute resolution.


Beware of the True Cost of Private Student Loans

Image result for Beware of the True Cost of Private Student Loans

Most of my young clients join the ranks of the professional world with some amount of student debt. It’s this very reason that any family with a student getting ready for college or graduate studies should read on.

Recently, I took on a client who came to me with $168,000 in total student loans. To make following the story easier we will give my client a fictitious name and call her Anne. Anne obtained her degree at a private institution and graduated with a substantial amount of debt. Her level of debt isn’t unlike most young adults without wealthy parents to pay the astronomical cost of tuition. However, Anne could have saved well over $100,000 on her student loans. (For more, see: 10 Tips for Managing Your Student Loan Debt.)

Anne borrowed $97,000 of her $168,000 from private lenders Sallie Mae and Wells Fargo. Yes, Sallie Mae is a private lender. Unfortunately, too many borrowers assume Sallie Mae is a part of the federal lending program. The confusion is that up until 2014, Sallie Mae used to be the loan service provider for two federal loan programs: the William D. Ford Federal Direct Loan Program and Federal Family Education Loan (FFEL) program. On October 13, 2014, Sallie Mae split into two companies and the part that services federal loans became Navient.

Unfortunately, what I have learned from analyzing so many client student loan plans is that most borrowers do not understand the terms and conditions of their loans. Nor do they know the proper channels to follow before choosing a private lender. These are fundamental problems that result in the average person potentially finding herself getting taken to the cleaners.

Borrowing Options

For most families, borrowing might be the only option. In order to help aid in that decision process, use the following hierarchy when borrowing at the undergraduate level (best to worst):

  • Perkins Loans – $5,500/year
  • Direct Subsidized – $5,500/year
  • Direct Unsubsidized – $20,500/year (less any subsidized amount received)
  • Parent PLUS Loans
  • Private Loans – Fixed rate
  • Private Loans – Variable rate

For those looking for higher learning opportunities at the graduate level, like my client Anne, federal loans should be the first choice. The common misconception is that a grad student can only borrow $20,500 per year from the federal program, with a lifetime limit of $138,500. This is true with the direct unsubsidized program, However, the Graduate PLUS program allows a student to borrow up to the cost of attendance, minus any financial aid received. (For more, see: Student Loans: Paying Off Your Debt Faster.)

It is entirely possible to pay 100% of the cost of tuition with federal loans. In order to qualify for the Graduate PLUS program, a student must have sound creditworthiness. So for students with bad credit, they may need a parent to guarantee the loan and co-sign. Assuming that parent trusts and understands their credit is tied to their child, the federal program remains a better alternative to borrowing from a private lender.

Some parents prefer to see their kids have some skin in the game and pay for a portion or all of the cost of college – or at least make their kid think they have to pay for their education until that student has earned their degree. The bank of mom and dad is always the place to start for those who are more fortunate than others. However, that parent or grandparent should review the minimum personal loan rates published by the IRS so that they do not inadvertently get hit with a gift transfer tax.

Government Debt Forgiveness

It just so happens that Anne works for a hospital that is classified as a non-profit, 501(c)(3). Student loan borrowers working for a 501(c)(3) are currently eligible for a government debt forgiveness program called, Public Service Loan Forgiveness (PSLF). In order for a public employee’s loans to qualify for debt forgiveness, the following criteria must be met:

  • Full-time public sector job (30 hours or more)
  • Direct federal loans only
  • Loan status is repayment
  • Cumulative of 120 on-time payments
  • Payments made from an income-driven repayment plan – Income-Based Repayment (IBR), Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE)

The key criteria missing for Anne was that her federal debt only amounted to $72,000, which is still a lot. However, when compared to her annual income of $109,000 it wasn’t. Basically, the higher ratio of income-to-debt greatly reduced Anne’s level of forgiveness. In fact, she gets a marginal benefit compared to a standard 10-year payment plan. Only $350 of forgiveness was projected in our analysis.

On the other hand, had Anne borrowed everything from the Grad PLUS program, her total federal debt would have exceeded her annual income. This is when PSLF and other types of debt forgiveness offer a substantial financial benefit to the borrower. In Anne’s case, she would have benefited from a projected savings of $116,700. Instead, we had to go a more conventional route and refinance a majority of Anne’s student debt. This meant her total estimated savings was reduced to $22,600.

The impact of student debt borrowing decisions and how to pay for college, even at the beginning stages, is substantial. For my client, Anne, we are talking about a difference of $94,100. It’s why college planning is essential for families with college-bound kids. Especially when that kid wants to pursue a higher cost degree like a doctor, lawyer, veterinarian or pharmacist. Regardless, the economics of making sound choices will dramatically affect your child’s adult life. So if you are a parent or young professional and don’t know or don’t have the time to learn it, enlisting the help of an expert is worth every penny. (For more, see: Debt Forgiveness: Escape Your Student Loans.)


A teacher defaulted on $55,000 in student debt—loan rehabilitation offered hope, but now he owes $130,000

Student Loan debt

In 2014, Scott Nailor, a high school English teacher from Scarborough, Maine, went more than 270 days without making a payment on his student loans and so ended up in default. Nailor couldn’t keep up with his loan payments while balancing other kinds of debt and providing for his family so, in addition to defaulting, he and his wife filed for bankruptcy.

Nailor had struggled to keep up with his debt since 2000, when he graduated from college owing $35,000. When he stopped making payments over a decade later, his balance had swelled to $55,000, thanks to continually accruing interest.

After he defaulted, Nailor decided that rehabilitating his loans was the best way to get back on track. Federal student loans in default are eligible for rehabilitation, a process that restores loans to good standing after nine monthly payments to a collection agency contracted by the Department of Education.

Student loan rehabilitation programs are one way for borrowers to move forward with repayment after defaulting on federal student loans. But many borrowers don’t fully understand the risks, experts say. Since rehabilitation can add a significant amount of money to your balance, the drawbacks can outweigh the benefits and even put borrowers at risk of defaulting again.

Scott Nailor in his classroom. 

Scott Nailor in his classroom.

Though Nailor successfully completed rehabilitation later in 2014 and has continued to make regular payments, he now owes $130,000 because of the interest and fees for his specific combination of Federal Direct Loans and Federal Family Education Loans.

The debt feels like a problem he’ll never be able to solve. “While I’m able to keep my credit from the sewer, there’s no way to pay it off,” Nailor tells CNBC Make It.

What happens if you default on a student loan

Today, more than 44.5 million people collectively owe $1.5 trillion in student loan debt, according to the Federal Reserve. While the majority of debtors owe between $25,000 and $50,000, about 600,000 people owe more than $200,000.

In 2015, over 10 percent of borrowers in a loan repayment program defaulted within three years, according to recent data from the Department of Education. By 2023, nearly 40 percent of borrowers may default, according to the Brookings Institution. That’s thanks to “the low earnings of dropout and for-profit students, who have high rates of default even on relatively small debts,” Brookings reports. The fact that tuition has gone up while wages haven’t contributes, too.

Defaulting on a student loan damages your credit score, which can affect your ability to secure a credit card, get other loans and buy a house or car. Borrowers in default cannot take out more student loans or pick a repayment plan. The government, through the Department of Labor or the Treasury Offset Program, can also garnish wages, tax refunds and federal benefits to pay off the loan.

Nailor files paperwork every year to stay on a repayment plan that keeps monthly payments manageable and less than what he used to pay. He says he now pays about $530 a month, which does not cover the interest on his loans.



Student loan debt isn’t just a millennial problem

How to deal with college debt

As most now know, skyrocketing student debt can be particularly devastating for young adults.

But it’s not just millennials who are delaying life’s major milestones because of their loan burdens, according to a new report by the Association of Young Americans, or AYA, and AARP, an association representing the interests of Americans over age 50.

Debt from student loans is also standing in the way for Generation X and baby boomers, the report said.

“The trillion dollar student loan crisis is having a tangible impact on all Americans across all generations,” said AYA founder Ben Brown.

“Student loan debt has been a barrier in making key life decisions and planning for the future,” Brown said. AYA and AARP polled nearly 5,000 adults, including millennials, Gen Xers and boomers, between July and August.

Here’s a look at some of the long-term consequences:

Saving for retirement
Four in 10 respondents said student loan debt stopped them from saving for retirement, including 41 percent of millennials, 38 percent of Gen Xers and 31 percent of boomers.

Buying a home
About 1 in 3, or 32 percent, said college debt prevented or delayed them from buying a home, including 36 percent of millennials, 26 percent of Gen Xers and 32 percent of boomers.

Helping a family member
One-quarter of those polled said student loans stood in their way when it came to financially helping a family member, including 23 percent of millennials, 29 percent of Gen Xers and 26 percent of boomers.

Having health care
Nearly 1 in 5, or 16 percent, said their debt burden hindered them from getting the health care they need, including 17 percent of millennials, 16 percent of Gen Xers and 9 percent of boomers.

Overall student debt reached a record $1.5 trillion this year, according to the Federal Reserve. Seven in 10 seniors graduate with debt, owing about $29,650 per borrower, according to the most recent data from the Institute for College Access & Success.

To ease some of the burden, Brown recommends sending in a little more than the minimum payment each month toward principal of the loan — by even $10 or $20 — to pay off your loan faster and spend less in interest.

“The sooner you can repay your student loans, the less you have to pay,” he said.