Since taking her post as Trump’s education secretary, Betsy DeVos has worked to roll back some protections for student loan borrowers. In an April 11 letter to the Federal Student Aid office, DeVos withdrew three policy memos issued under the Obama administration. Each intended to protect borrowers and hold debt collectors and loan servicers accountable. One directive, for example, mandated that loan servicers respond to borrowers in a timely fashion and keep track of requests for assistance.
What’s more, this month 21 state attorneys general sent a letter to DeVos criticizing these moves that, they claim, “imperil millions of student loan borrowers and families.”
Forty-four million Americans carry student loan debt; the total amount of outstanding student debt is now $1.4 trillion. The average 2016 college graduate owes more than $37,000, up 6% from last year.
Whatever the Education Department does in terms of keeping or stripping consumer protections for student loan borrowers, they should know their options when it comes paying back their debts.
In a 2015 report, the US Government Accountability Office found that many eligible borrowers aren’t participating in repayment plans. The reason? They don’t know such options exist. The authors argue that the Department of Education needs to do a better job at raising awareness and educating eligible borrowers on the repayment plans available.
The Consumer Financial Protection Bureau offers a handy interactive tool that walks you through your options on a personalized basis. You can figure out if you qualify for loan forgiveness, military benefits, and others. Other good resources include government websites like studentloans.gov and studentaid.ed.gov as well as consumerfed.org.
“Once you leave school, you need to be vigilant in handling your loans. Keep good records of your payment history and other important documents about loan repayment,” Suzanne Martindale, staff attorney at Consumers Union, the policy and action division of Consumer Reports, told Yahoo Finance.
Data from the Consumer Federation of America showed that in 2016 alone, more than 1.1 million federal student loans were in default. This is, of course, something you should try to avoid. If you do default, the federal government has the right to garnish your wages. (Depending on other factors, the Department of Education may require employers to deduct 15% of borrowers’ disposable pay toward repayment of their debt.)
More than 3,000 student borrowers default every day and most of these could be avoided, says Rohit Chopra, senior fellow at the Consumer Federation of America.
“The government will get your money one way or another. It costs you more to have them garnish your wages than to be in an income-driven repayment plan. Why would you choose to pay more than you have to?” says Mark Kantrowitz, publisher of Cappex.com, a site about college admissions and financial aid.
FIND THE PLAN THAT’S RIGHT FOR YOU
There are a wide variety of payment plans and they can get confusing. The good thing is, if you pick one and it ends up not being right for you, you can change it at any time, for free.
Student loan servicers, the companies that collect payments, are responsible for enrolling borrowers in repayment plans to help them avoid default. But one major loan servicer, Navient, is facing several lawsuits, one of which claims the company gave unclear information to borrowers on enrolling in repayment plans. Navient has called the allegations made in the CFPB lawsuit false.
In all, there are eight federal student loan repayment plans, including four that are based on your income, and pros and cons to each. We break down two income-driven repayment plans — monthly payment amounts are based on what you can afford rather than the total amount you owe.
An income-driven plan sets your monthly payments at a level meant to be affordable given your income. Under this program, your monthly payments will be 10% or 15% of your discretionary income (the difference between your income and 150% of the poverty level for your family size and state of residence).
“If you have federal loans and struggling to repay, you have the right to an income-driven repayment plan. This caps your payment at a reasonable percentage of your income, so that you can stay afloat,” says Chopra.
Kantrowitz says the best plan is the pay as you earn repayment plan. There’s one catch — you must be a new borrower on or after Oct. 1, 2007, and you must have received a loan on or after Oct. 1, 2011. If you do qualify, it’s a good option, because any outstanding balance on your loan will be forgiven if you haven’t repaid it in full after 20 years.
Borrowers should know that if you reduce the amount you’re paying every month, you can see it as a short-term money saver, but you’ll end up paying more in interest because you’re extending the life of the loan.
In other words, pay the maximum amount possible without forcing too much of a strain on you and your family.
These repayment plans are specifically for federal loans. Private loans don’t have the same flexible options.
“You should still reach out to your loan servicer if you are struggling to make payments. They may have alternative plans that extend your repayment term, or at least short-term options that suspend your payments for a while until you can catch up with your monthly bills,” says Martindale.
SPEAK TO YOUR LOAN SERVICER DIRECTLY
While it might seem like a no-brainer, if you don’t have a basic grasp of your situation, it will be that much more overwhelming to understand how to get out from under your debt. “If you have problems, you must speak to your loan servicer. If you don’t reach out, you’re just shooting yourself in the foot,” says Kantrowitz.
When you do call, have a set of questions prepared to ask your loan servicer, Kantrowitz says, adding that often servicers “don’t want to stay on the phone for a very long time.” You can even ditch the phone and send an email to your loan provider – different from your loan servicer – instead.
“You’ll get a proof-positive written response. Telephone calls always have room for misinterpretation. And you don’t know if the servicer’s perspective,” he says.
Getting in touch with your servicer may, however, be easier said than done, given that 64% of student loan-related complaints to the CFPB involve trouble dealing with your servicers.
Melody Hahm is a writer at Yahoo Finance, covering entrepreneurship, technology and real estate. Follow her on Twitter @melodyhahm.
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