Student loan servicing companies, the firms that collect college loan repayments, have long been part of the college debt problem. They haven't been fully informing borrowers of their options to lower payments.
Under a new set of rules recently released by the federal Consumer Financial Protection Bureau (CFPB), borrowers will not only have more protection, they will be better able to reduce their monthly payments -- and it's high time.
A staggering 70 percent of college loan borrowers qualify for lower federal loan payments, the CFPB found, although servicers may not have been relaying this information.
"For some student loan borrowers, high-quality servicing can be the difference between getting by and going broke," stated CFPB Director Richard Cordray on July 20. "But for too many consumers, this level of service has proved elusive."
Last year, in surveying more than 30,000 borrowers, the CFPB uncovered myriad abuses involving loan servicers. They ranged from lost paperwork to failing to tell graduates how to consolidate loans and change repayment plans.
New CFPB rules governing servicers will illuminate the "the rights of student loan borrowers to receive high-quality service and to expect clear, consistent and personalized information about repayment plans," the CFPB states.
Although most students repay their loans on time, one of the contributing reasons for defaults is that they don't know -- least when it comes to federal loans -- that they have nine different repayment options. That's right: nine different options.
Complicating the often poor service borrowers receive is that the U.S. Department of Education (DOE) has farmed out servicing to private firms that bid on contracts that contain economic incentives. This privatized model may be over- or under-paying servicing companies. To date, though, the DOE has not done a comprehensive audit of these contracts.
Last year, the DOE released a "review" of servicers, although it didn't find significant problems. The report was heavily criticized by Sen. Elizabeth Warren and others, who called upon the department's Inspector General to perform a detailed audit.
The idea of paying bonuses to servicing companies to do right by borrowers is troubling as well.
Why doesn't the DE take over servicing? After all, Congress made the federal department a direct college lender in 2010 and reduced overall costs by taking the business away from banks. Some $61 billion is projected to be saved over a decade.
Yet as it stands now, repayment information is spread out over several government web pages. Servicers may or may not be telling borrowers how to navigate the repayment process. It's an inefficient and frustrating model that doesn't allow borrowers to easily find the most suitable plan.
Ideally, a more efficient loan servicing system would allow you to go to one portal to see your loan balances and determine in seconds if you qualify for a lower-cost repayment plan. A "best repayment plan" phone app/calculator would be even better.
Although massive reform of the federal loan process should be tackled by the next Congress and president, the CFPB reforms are a move in the right direction.
"Whether or not these policies are properly implemented by the loan servicers remains to be seen," says Andrew Weber, a certified student loan counselor who regularly works with borrowers. "But this time, the policy recommendations have teeth: loan servicers can lose loan allocations and performance bonuses if they don't comply. Now it's up to the [DOE] and the private student loan servicing companies to act on these recommendations and do their part to streamline the system."
In the interim, you're on your own to find the best repayment plan and you will have to deal with the dense pack of information on the DOE websites.
First you need to find out which repayment options you qualify for, so start with where you are at now.
Are you still in school? Are you planning to go to graduate school? Are you in the military or public service profession? If working, will your salary be adequate to cover loan payments and living expenses?
If your income drops or you go back to school, for example, you can get a break on repayments under the federal system. And if your salary increases over time, you can ratchet up payments to pay off your loans sooner.
Here's another little-known truth of the federal loan program: Most of those leaving school don't know that they're usually placed into a generic "standard" repayment plan, which may not be the best deal.
You can do better, but loan servicers have not been doing a good job telling borrowers that they can choose "income-based" plans if their salaries can't cover loan repayments.
Note: When it comes to private loans issued by banks, your options are fewer, although you can try to re-negotiate terms or find a third-party to refinance or consolidate your debt.
Whatever route you choose to lower your repayments, keep in mind that you have a right to correct any inaccurate information in your loan record and receive guidance on alternative repayment plans.
You also need to be aware that there are still myriad scams out there that will fleece you for loan repayment changes. Whenever you plug in college loans or repayment, for example, most search engines will pull up deceptive sites that offer "the Obama forgiveness plan." There is no such thing and you're likely to get directed to a service that charges a fee for filling out free federal forms.
Everything you need to do regarding federal forms can be done directly through the Department of Education sites or through your loan servicer. Although these sites are cumbersome and undergoing a gradual overhaul, they are always good places to start to lower your payments.