Student Loan Debt

Written By: Michael Byrne

For a financial counselor, working with a client’s federal student loan debt may seem daunting since student loans are rather unique and technical compared to other types of loan products. However, with a basic understanding of a few terms, regulations and resources, student loan issues can be easy to fix relative to other types of debt. When I encounter a client who is struggling financially due to overload of several different debts, I will first tackle the federal student loan debt because it offers the broadest array of options for finding a cure.

First let’s distinguish between Federal Student Loan Debt and Private Student Loan debt. Private student loans are more akin to other consumer loans. The lender sets the interest rate, fees and repayment terms. Methods for helping a client with private student loan debt will not be too much different than any other consumer debt. However, of the $1.4 trillion in student loan debt in the U.S., 84% is from federal student loans. Financial counselors will encounter federal student loans far more often than private student loans.

Two Programs

Federal student loans operate under two programs; Federal Direct Loan Program (FDLP), where loans are originated and held by the federal government’s Department of Education (ED) and Family Federal Education Loan Program (FFELP), where loans were once originated and held primarily by banks under a government guaranty. It is important to note that since mid-2010, all newly originated loans are under FDLP. All current FFELP debt exists in repayment only. Billing and collection for federal loans are typically outsourced to a third party servicing company.

Types of Federal Loans for Student Borrowers

• Subsidized – the federal government pays the accruing interest during in school or any other type of authorized deferment period.
• Unsubsidized – the federal government does not pay any accrued interest.
• Perkins Loan – same accrued interest benefit as Subsidized loans
• Grad PLUS – for graduate students only
• Consolidation – consolidates any or all of the above loans into one loan.
• Parent PLUS Loan – a loan parents can use for undergraduate education expenses for dependent children. This loan is in the parent’ name only and cannot be consolidated with a child’s loans or transferred to the child.

Where to Start

Borrowers often do not know what types of loans they have or if the loans are federal or private. Loan servicing companies may manage both types of loans which adds to the confusion. The best place to begin is The National Student Loan Data System (NSLDS). The client can log onto the website with their Federal Student Aid (FSA) ID. If the borrower has been out of school for a while, they may need to create an FSA ID. NSLDS will tell you most everything you need to know—loan amounts, loan types, disbursement dates, balances, interest rates and status of the loan (repayment, deferment, forbearance, delinquent, default). It will also list the loan servicing company for each loan. A borrower’s entire federal student loan history is on this website. Private loans will not be on NSLDS. So if a student believes he or she has a loan that is not included on NSLDS, it is likely a private loan.

The best way to help the client at this point is to review their budget, find out what they can afford on a monthly basis, and if need be, assist them with a phone call to the loan servicing company.

Repayment Options

If a borrower’s payments are current or have not yet started, this is a good time to explain repayment options. Depending on the amount of debt and the borrower’s discretionary income, repayment terms may range from 10 to 30 years. A borrower who cannot afford the monthly payments on the Standard plan (10 years) may be able to use other options such as Graduated Repayment, Extended Repayment, or one of the Income Driven Repayment plans. It is important to emphasize to the client that while lower monthly payments seem attractive, extending the repayment results in more interest charges paid over the life of the loan. There are also caveats related to debt amount and discretionary income that may impact whether or not a borrower may use a particular repayment plan. The loan servicing company can help determine the right plan to use. Prior to calling the servicer, you can review the repayment plans and use the online repayment calculators at either studentaid.ed.gov or finaid.org.

Delinquent versus Default

If a borrower is 30–270 days in arrears on student loan payments, the client may ask the servicer for a retroactive forbearance. In this case, the servicer will bring the loan to a current status and the borrower will start making regular monthly payments on the next due date. The borrower will be responsible for the accrued interest during the period of non-payment, which will be added into the loan amount. If a borrower has gone beyond 270 days without a payment, the loan is in default and the servicer may direct the client to a collection agency or the Department of Education Default Resolution Group.

How to Cure a Default

While the agency will first ask for payment of the entire loan amount, in almost all cases, that will not be a realistic option for the borrower. Another option is to rehabilitate the loan. The borrower will make a series of affordable monthly payments, usually nine or ten. Upon completion, the loan will be put back into good standing and returned to the servicing company. The default also will be expunged from the borrower’s credit record. However, the delinquent payments prior to the default will remain on the borrower’s credit record. Another option is for the borrower to consolidate the defaulted loan(s). The borrower can either make three payments prior to consolidation or if eligible, they can consolidate immediately by entering into an income driven repayment plan. Curing the default through consolidation will not remove the default from credit records, but it is a process that is quicker than rehabilitation.

Deferment versus Forbearance

Under some circumstances, a borrower may be entitled to defer their federal student loans. Reasons may include attending school at least half-time, unemployment, hardship, or active duty military service (during a war, military operation or national emergency). As mentioned previously, the Department of Education will pay the accruing interest on Subsidized and Perkins loans during a qualified deferment period. For other loan types, the borrower will be responsible for accruing interest. While in deferment, a borrower can opt to make principal payments on a Subsidized or Perkins loan, and/or pay accruing interest on other loan types to avoid capitalization. If a borrower is not eligible for deferment, the servicer may allow them to postpone payments utilizing a forbearance (either discretionary or mandatory). There is no Department of Education accrued interest subsidy for any loans under forbearance.

Consolidation

Loans in good standing also may be consolidated. Reasons for consolidation may vary. In today’s fixed rate environment and most loans being in FDLP, there may not be any additional benefit when it comes to interest rate reduction or convenience. However, for borrowers who may have both FDLP and FFELP loans, in addition to convenience, Public Service Loan Forgiveness (PSLF) may be a valid consideration for consolidation. A borrower may have their loan balance forgiven after working in public service for ten years and making on time payments for ten years. FFELP loans are not eligible for PSLF, so a borrower would have to consolidate to make those loans eligible.

While student loan debt can be a significant burden for many borrowers, the options available to them, along with your professional assistance, can go a long way in easing their burden.