With the many flexible income-based repayment options now available for student loans, I continue to scratch my head why defaults have continued to increase.
Students Are Not Being Told About More Flexible Payback Options
While it may be true that most people don’t know about these payback options wouldn’t you think their loan servicing companies would at least mention them as a way to help their customers avoid default? Apparently, these loan servicers prefer to keep their customers in the dark. Unless students ask for one of these payback options, they are simply not offered to them. Complaints from borrowers have shown that refinancing and loan modifications are virtually non-existent. I suspect that these income-contingent payback options are simply not profitable enough for the loan servicing companies.
It’s All About Maximizing Profits
Loan servicing companies are focused on maximizing their profits, not servicing their customers. Complaints show they are using practices long banned in other consumer debt industries. They even ignore requests by borrowers to apply excess payments to their most expensive debt. While we are waiting for Washington to fix the problem, my advice to parents is that unless their students in engineering or some other high paying job, to make sure their students request that their loan be paid back under the “Pay-As-You Earn” program. Then, by simply reporting their income each year, they can never default on their debt. What’s more, the loan will be completely forgiven in ten years if they end up working for the government or for a nonprofit. Even teachers who work in an underserved areas can be eligible for loan forgiveness. Now that loan servicers (Sallie Mae, Great Lakes Educational Loan Services, Nelnet Servicing and several others) have finally gotten the full attention of the Consumer Finance Protection Bureau (CFPB), these abuses will be resolved. It’s about time!