This is the time of year when borrowers are either starting repayment or reviewing their current loan repayment options.  Student loan repayment advice is difficult to find.  As the stress repayment increases, more people are getting inappropriate advice in hope of an easy answer.  In many cases these become empty promises.

What most borrowers do not understand is that a person’s debt structure, marital status, tax filing decision, and employer are all factors in the finding the right answer.  Student loan repayment decisions can be complicated and confusing.

According to the Federal Reserve, as of the first quarter of 2018, student debt was $1.521trillion dollars.   As this crisis grows, the lack of good student loan repayment advice continues to lag.  As a matter a fact, more borrowers are the victims of improper advice than ever before.

The Consumer Financial Protection Bureau 2017 quarterly report focused on the student loan repayment and forgiveness process.   The report specifically focused on the consumer complaints of the Student Loan Servicers.  Consumer complaints are up over 325% since their last report.  In fact, the CFPB has filed a lawsuit against some of the federal loan servicers due to improper advice. The report specifically issued several key areas below that borrowers found advice lacking:

  • Consumers complain about poor information from and sloppy practices by servicers
  • Consumers complain about difficulty enrolling and staying in an income-driven repayment plan
  • Consumers report confusion about their progress toward Public Service Loan Forgiveness programs
  • Three companies with the most student loan-related complaints

Why is Student Debt happening?

There is a lack of financial literacy among the public and financial professionals regarding this student loan borrowing and repayment topic.  For many people, the financial consequence of their borrowing decisions is not known until after graduation or when the person stops going to college.  The cost of education is an intangible asset and the value is often not seen until after the degree is earned.  Most other items we borrow or finance are tangible assets, like a house or car.  This is a reason why the bankruptcy rules concerning student loans are less generous.

The college investment is one of the few purchases where the buyer does not see the total final cost.  Colleges only provide information financial information one year at time.  Financial transparency is another major cause of the student debt problem.

Student Repayment is Not Easy

Another issue is the perceptions that student loan repayment is easy.  Student loan repayment is one of the most complicated personal financial decisions that a person will make in their lifetime. Here is a list of items that need to be considered before selecting the best repayment method.

  • Types of Student loans (Federal or Private)
  • 9 different federal loan repayment methods
  • Loan forgiveness
  • Tax filing status
  • Negative amortization (Loan Balance increase)
  • Co-signer release
  • Interest rate
  • Affordable Repayable amount

As you can see by this list of items, the decision is not easy to understand.  To make things worse, if you are a married couple the decision become more confusing.  A married or engaged couple has over 126 combination of option to decide on before the best decision can be made.

Student Loan Repayment Advice is Fragmented

Due to both the complications and high loan balances, students and parents are searching for proper advice.  The solution is not easy to understand or find.  The biggest problem with finding the proper advice is it is fragmented.  The student loan servicers typically put you in the lowest payment to help people to stay current.  In most cases this is not good for your long-term financial wellness.

For married couples, how a person files their tax can have a significant impact on the couple’s payments.  The tax advisor is looking at the lowering your taxes and rarely sees the impact on the loan repayment options and amounts.  The tax filing decision should be reviewed each year when a life event happens such as: getting married, having a child, changing employers, or finishing a degree.

The last most common resource are private student loans.  For many this could be a great option if you need a more structured schedule or you can get a better interest rate.  The borrower must realize that this decision is final.  The federal loan repayment options offer the most flexibility.  Once you decided to refinance under a private lender, the borrower is no longer able to return to the federal loans with those loans.  In addition, a private consolidation early will limit the options for a married couple since only one will may have federal loans.

The other problem facing many student loan borrowers is their financial and personal life is in constant change just after college.  If the student is the traditional student, many will be changing jobs and maybe getting married.  For the non-traditional student, they may have a home or children.  All of these items impact a person’s taxes and are an important part of the student loan repayment decision process.

These are some of the reason whys we have created our Student Loan Repayer.  It gives the borrower and married couples a view of all of their options in one place.  It is objective and independent, a trusted second opinion.

Income Driven Methods Have Hidden Risks

As college cost rise more people are borrowing higher amounts.  As a result, the government has added new repayment options that are based on a person’s income.  These are called Income Drive Repayment methods or IDR.  These same plans are also used for the Public Service Loan Forgiveness plans.

The IDR methods offer a payment amount based on a borrower’s adjusted gross income.  There are various options based on the timing of the loans distribution.  What is often not explained is these loans have a financial term called negative amortization.  This means the IDR monthly payment is not covering the interest charge of the loan.  The student is staying current but the loan balance is increasing.

As this may be a good option is some situations, this is typically not a good long term solution since the student loan balance is increasing.  For many this become a surprise when they want to buy a home or a car and are unable due to their debt to income ratio.

Summary

As student debt continues to rise, a serious problem is getting worse.  People are unable to find the proper advice for a variety of reasons as stated above.  At Pay For ED, we have taken steps to improve this situation.  We have developed a training program and financial designation for financial planners and CPAs.  It is called College Funding and Student Loan Advisor or CFSLA.

These advisors offer a holistic solution to the paying for college and student loan repayment process.  In addition, the College Funding and Student Loan Advisor must act in a fiduciary manner which means they will need to act in the client’s best interest.  We hope the combination of the Advisor training program (CFSLA) and our innovative Student Loan Repayment Software will be the first steps of many to solving the student loan crisis.