Defaulting on college loans is always a bad idea. It not only triggers a harsh debt-collection process, it can also savage your credit rating and make borrowing difficult and more expensive.
And now, a move by the Trump administration will make student loan defaults even more expensive. The Department of Education (DE) is getting behind an onerous 16 percent surcharge on Federal Family Education Loans in default. (The measure doesn’t apply to federal “Direct” loans the DE itself offers or holds.)
If you have loans from the Family Education program and are in default status, that’s a big wallop. The DE is reversing an earlier action that would have given borrowers a break on that fee.
“The administration’s first move on the student loan default crisis will do nothing to stop the tidal wave of defaults that’s sweeping across the nation,” said Rohit Chopra, senior fellow at the Consumer Federation of America (CFA) and the former student loan ombudsman at the Consumer Financial Protection Bureau (CFPB).
“With more than 3,000 Americans defaulting on a student loan every day,” said Chopra, “this just adds insult to injury.”
So instead of making it easier for borrowers to refinance, consolidate or even discharge their loans, the Trump administration gave loan collectors a way to charge even more money.
The DE’s move seems likely to exacerbate the student loan crisis. According to the CFA, college loan debt is paralyzing millions of borrowers who find themselves unable to enjoy the fruits of prosperity. Saddled with debt, they find it difficult to buy homes or cars, or start families.
“Federal loans typically enter a default status when borrowers are 270 days late on their payments,” noted the CFA. “Due to servicing mistakes, many borrowers may be learning about problems with their loan for the first time. These agencies are entitled to ‘reasonable’ collection costs under existing law, but hefty fees were considered inappropriate for borrowers who promptly seek to address their default.”
That’s right. You go to college and take out loans. Even if you start paying them back -- and the loan servicer messes up your paperwork -- you can get nailed with these fees if you’re in the Family Loan program.
To pour salt in the wound, the biggest loan servicing companies have long been inadequate in educating borrowers about repayment options to lower monthly costs. It doesn’t have to be that way: In the federal program, you have nine options that can lower your payments.
Loan servicing companies should also tell you which repayment option is best for you, but again, they often fall down on the job. That’s why so many borrowers are slipping into the netherworld of default. All told, more than $137 billion in federal loans are in default, reports the CFA. That’s two-and-a-half times the amount President Trump is seeking to add to the Pentagon’s budget.
“The extra couple months borrowers had to avoid the hefty default fee on federal loans are now gone,” noted Andrew Weber, a certified student loan counselor, “and the fees will hit immediately at the time of default (270 days) instead of several months after the default.”
Weber added that this removes the opportunity to get back on track before default fees hit, and that “borrowers will likely have to contend with a much larger balance that now literally grows overnight when they default on federal loans.”
With 42 million Americans owing more than $1.3 trillion in student loans, the CFA estimates the current morass translates into “more than 3,000 preventable loan defaults every day.” More than 1 million defaults were tallied last year alone.
If you’re eyeing college offers now, do whatever you can to avoid loans. Ask colleges to replace them with grants or at least give you a tuition discount. Ask for merit aid if you don’t quality for financial aid. You also should consider saving a bundle by attending commuter or community colleges, which don’t require room and board.
What if you’re deep in debt and need some guidance on student loans? You can find a certified debt counselor or work through a repayment plan on your own. The CFPB has a student debt repayment tool that’s fairly easy to use.
In either case, do your homework ahead of time to avoid debt by using a combination of saving, planning and seeking out reasonably priced degrees. That way, you can dodge the default bullet well in advance.