Struggling with student debt? Here are 6 things you should know

Allegations by U.S. financial regulators that Navient, the nation’s largest student loan servicing company, misapplied payments and steered graduates into higher-cost repayment plans, underscores the complexity -- and risks -- of paying off college debt. 

The suit comes at a time when the nation’s graduates are more indebted than ever. Some $1.3 trillion in student debt remains outstanding, and a whopping 11 percent of these loans -- held by some 3.9 million borrowers -- are in default. 

The government’s consumer protection arm maintains that both lenders and schools have misled student loan borrowers, contributing to a nagging debt crisis that has ensnared not only 44 million younger graduates, but also a record number of retirees. The Navient suit, filed Wednesday, is just the latest salvo in a continuing effort by the federal Consumer Financial Protection Bureau to help graduates and their families, many of whom are buried in debt.

Navient denies wrongdoing and claims the suit is politically motivated. Until the dispute is settled -- in our out of court -- the company’s borrowers have little recourse but to complain about alleged past transgressions, said Persis Yu, director of the National Consumer Law Center’s Student Loan Borrower Assistance Project.

However, it behooves all students and graduates to understand how loan repayment options have changed and what their current options are. If you have a federally guaranteed student loan, there should be no need to default no matter your income, experts maintain. 

Here are six things you should know about repaying student loans.

1. You have the right to choose an income-based repayment plan. If you have a federal student loan, you have a wealth of repayment options to choose from, from standard repayment, which amortizes your loan over a 10-year span, to the “PAYE” (Pay As You Earn) plan that sets your monthly payment based on what you can afford. Generally speaking, the Standard repayment plan is likely to cost the least in interest for those who can afford the monthly payments. 

However, stretched-out repayment and income-sensitive repayment plans are likely to be the better option for graduates on a tight budget. The income-based repayment plans set monthly payments at a percentage of the borrower’s discretionary income. If you have no discretionary income, the PAYE and REPAYE programs could set your payment amount at zero.

2. If you can’t afford your payments, you have multiple options. If you lose your job, go back to school or become temporarily disabled, you can have your payments put on hiatus through deferral or loan forbearance programs

But you can also simply switch to an income-based repayment plan that would set your payments at zero. The benefit of choosing income-based repayment in this situation is that these programs forgive any remaining loan balance after 20 to 25 years, depending on the program. And, under these programs, you get credit for making on-time monthly loan payments, even when your payment amount is set at $0.

3. If your school went out of business or misled you, you may be able to get your loan discharged. If you attended one of several failed schools, including recently closed Corinthian Colleges and ITT Technical Institutes, you may qualify for a complete discharge of your federal student loans. Discharge erases your balance, without any negative credit repercussions and may even allow you to recover any payments you previously made on that loan. 

Discharges, however, are only allowable if you were attending the school within 120 days of its closure and were unable to transfer your units to another institution. Loan discharge is also likely to boost your eligibility for future federal student loans, if you choose to restart your college career elsewhere.

4. There are loan forgiveness plans for teachers and public servants. There are two broad loan forgiveness programs – one for teachers that can eliminate up to $17,500 in debt, and one for public servants that can eliminate any outstanding debt that remains after 10 years of repayment. The public servants who qualify for the later program include Peace Corps and VISTA volunteers; police and correction officers; child and family service workers; nurses and medical technicians; members of the armed services; and others. For qualification standards and more information, check out the government’s loan cancellation website.

5. Private student loans and federal student loans are different. If you hold private loans, rather than federally guaranteed student loans, you have fewer repayment options and rights. Where borrowers have the right to sign up for income-sensitive repayment plans when they are in the federal student loan program, for instance, the repayment plans you have access to when you have a private loan depend on the lender. 

This is a particularly important distinction for graduates who are considering consolidating and/or refinancing their loans. If you consolidate or refinance with a private lender, you may be able to secure a lower interest rate (if your credit is good), but you are likely to lose your right to repay based on your income. You would also lose the ability to discharge debt through the previously mentioned loan forgiveness programs. Don’t convert federal loans to private loans without carefully examining all the consequences.

6. Student loan repayment is complex, but help is available. Although the vast array of repayment options, which all result in different payment terms and costs, can feel overwhelming, there are many places to go for good advice. In addition to the Department of Education site, where borrowers can track their loan balances and compare their monthly payments based on different repayment options, the National Consumer Law Center’s borrower assistance site provides help, advice and advocacy for graduates. 

In addition, borrowers who believe they’ve been misled or improperly steered into a higher-cost repayment plan, can complain to the CFPB. Though no option may appear perfect when you’re struggling with student loan repayment, the worst option is default. Default triggers a host of additional fees and charges, which can haunt you for life and often can’t even be discharged in bankruptcy.