12/10/2013 5:15 PM ET|
8 ways lenders make student debt harder
Lots of people have horror stories about the tactics used by private lending companies. Here are some ways they make an already contentious issue even more so.
On first glance, the comments on Regulations.gov sound like those on any other forum for disgruntled customers: “The worst company I have ever dealt with,” states Tim J. “Cold, calculated, corporate,” laments Travis H. “Clueless robots,” quips Donald, who refrains from giving even the first initial of his last name.
All three men could be talking about an unsympathetic cable company, a schedule-crippling airline, or –well, any retailer, really. But a continued scroll through the Regulations.gov comments creates a more ominous picture, one of a situation that is graver than sitting on the tarmac for an hour or two.
“Evil,” says Simone.
“THEY ARE SATAN! I wouldn’t wish them on my worst enemy,” writes Edward B.
“I feel like I would have been better off borrowing money from the MOB!” says Ryan S.
Everyone from Tim J. through Ryan S. is talking about the same thing: the private student loan industry and the lenders who ensnare student borrowers into debt that often carries higher interest rates and fewer consumer protections than federally guaranteed and direct federal loans do.
It’s no secret that student loan debt is a growing problem in the U.S. Recent data from the Consumer Financial Protection Bureau (CFPB) indicates total outstanding student loans are approaching $1.2 trillion, with $165 billion of that in the form of private, not federally backed, student loans. The Project On Student Debt estimates that two thirds of 2011 graduates had debt averaging $26,600; and that one third of graduates had private loans averaging $12,550.
If the numbers aren’t bad enough, a recent report (.pdf file) from the CFPB paints an even uglier picture. After analyzing 3,800 consumer complaints sent to the consumer organization, the CFPB found that the private student loan industry is rife with problems: borrowers reported difficulty doing everything from verifying a payment was properly applied to receiving the correct payoff balance.
The worst offender was Sallie Mae by a large margin (the bank received 49% of all complaints, a number that is roughly equivalent to its market share); also racking up complaints were big banks like Wells Fargo (with 6% of all complaints), Discover Financial Services (6%), JP Morgan Chase (5%) and Citibank (3%). In a phone interview with Forbes, Sallie Mae’s vice president for corporate communications Patricia Nash Christel noted that “more than 90% of private education loan customers are managing payments successfully.” She said that for anyone experiencing difficulty, the bank offers “customized assistance, including modifications” on more than $1.4 billion on private education loans. “We’re committed to working with regulators to continually improve our customers’ experience,” she added.
While not all of the other lenders were immediately available or willing to comment, more than one pointed to a statement put out by the Consumer Bankers Association (a bankers’ trade group), which in part read:
“What remains a continued disappointment is the CFPB has ignored that over 86 percent of student loan borrowers have federal student loans. CBA believes the Bureau should help all consumers especially when federal loan portfolios carry a 14.7 percent three-year default rate. It appears these borrowers are under great duress since federal loans, unlike private loans, are funded without determining the borrower’s ability to repay.”
To be sure, problems abound in all aspects of the student loan industry: federal or private, taking money out or paying it back. However, based on conversations with the CFPB and other student loan experts, private student loans can come with a particularly annoying set of issues that can seriously hinder a borrower’s ability to repay his or her debt, or worse. As Chris Lindstrom, the higher education director for the U.S. Public Interest Research Group (PIRG), puts it: “there are servicers and practices driving up debt” for people who are in good standing and simply trying to pay down a loan.
This is by no means a comprehensive list, but here are eight of the issues most commonly rendering student loan payback a real pain, and in some cases even costing borrowers extra money — along with some tips that may help overcome these issues.
Putting extra toward the principal, not the next month’s payment
According to the CFPB’s findings, problems can start the second a borrower wants to kick extra funds toward the principal balance in order to pay down debt faster. Borrowers who pay, say, $100 toward a loan with a $50 monthly minimum payment frequently find themselves wondering if the extra $50 went toward their original loan balance or if their lender is counting it as an “advanced payment.”
“There is significant confusion about payment policies with regard to ‘paid ahead’ or ‘advanced payment’ status,” the CFPB writes. “This raises questions for many borrowers as to whether funds have been held in order to satisfy a future payment or whether the servicer has actually applied the payment toward the principal balance.”
Tax lawyer and Forbes contributor Kelly Erb (a.k.a. Taxgirl), experienced this confusion firsthand in June, but with a twist: she was trying to make a regular monthly payment, but the corresponding bill never came in the mail that month. So, she mailed her payment without that corresponding bill. What happened next was nothing short of an Abbott and Costello act.
“I get the next [month’s] statement and it says I’m late. I called and they said they counted [the June payment] as an extra payment,” Erb said. Yep, that’s right: her lender said she didn’t pay in June, but oh look she did pay ahead — in the exact amount due in June — for July. “They referred me to a line on my statement which says, ‘you may be required to remit the full monthly amount even if your bills are paid ahead.’”
Erb eventually worked it out with the lender, but only after she wrote them a letter with the numbers of the check sent in June. As a lawyer, her advice for dealing with similar situations boils down to one thing: put everything in writing. Leave nothing to memory or hope that the lender has a good record of a phone conversation.
It also may be worth calling your lender and asking exactly how payments are applied. Nash Christel says that at Sallie Mae, the banks looks first at any fees you’ve incurred, then interest, and then the principal. “If you don’t have any outstanding late fees and you’re making your regular payments plus $100, for example, then the extra amount would go directly to the principal,” she says.
Allocating the excess funds toward the loan with the highest interest rate
The problems for people who can afford to pay extra — and attempt to do so — don’t end with the above principal/advanced payment kerfuffle. A basic tenet of personal finance and paying down debt is that paying down the debt with the highest interest rate will save a person the most money over time, so tackle the loan (or credit card) with the highest interest rate and work your way down. With private student loans, however, this can be difficult.
“A number of private student loan borrowers note significant difficulties when submitting a single payment to cover several loans associated with the same servicer. These borrowers claim that payments are generally not applied in a way that helps them to pay off their loans with the highest rates,” the CFBP reports.
Andy Josuweit, CEO of loan-organizing website Student Loan Hero (for $5 per month it helps track all of your student loans), says that he’s seen Student Loan Hero users struggle with this very issue — and in fact, it’s one of the most common issues he’s finding. “The biggest thing I’m seeing is users don’t know how to accelerate payments. If you call [the lender] and tell them you want to split your payments, they might say it’s not possible, mainly because they don’t want to do the work,” he says. Or, he allows, the person on the end of the phone might just not know how to put the extra $50 toward the loan with the 7.2% interest rate and not the loan with the 2.7% rate.
If you do want to make an extra payment toward one specific loan, Josuweit says that for most lenders, the best bet is to do it via snail mail — not online, and not over the phone. “You have to send a check in and specify in the check memo which loan you’re paying down,” he says.
Correctly timing payment processing
You know how you can submit that credit card payment online, the day it’s due, and not get charged a cent? The same cannot be said for private student loans. “Consumers submit complaints reporting that they have been charged late fees, even when they submit a payment before the due date,” the CFPB reports, noting that many consumers complained about the delay that exists between initiating a payment and when the payment is received from his or her bank account — a delay made all the more frustrating because of the myriad other payment transactions that can happen in real time. Unfortunately, the best way to handle this particular snag is to just make a note of it and make sure you’re making payments in advance of the due date.
More from Forbes.com:
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If the unpaid Policeman of the world, ie the US, stopped giving away tens of billions of taxpayer dollars to foreign countries every year, American students might have lower interest rates, or the infrastructure could be repaired without raising taxes.
"two thirds of 2011 graduates had debt averaging $26,600"
That's about the price of an average new car. As I drive past the parking lot of my local university I can't help but notice the number of students driving new cars and trucks that likely cost much more than their tuition. Is this really that much of a problem?
1. When I graduated, I had 14 loans total, both Gov and Private loans, which you cannot consolidate all together, so I had the lovely nightmare of figuring out what could be consolidated with what and where. I got it down to 4 loans, 1 I paid off in 3 months! :) That left 2 private loans and 1 with the gov., and minimum monthly payments totally nearly $600 a month, which sucks when you're working at a non-profit! One of the private loans was terrible, absolutely the worst part of this whole mess. Every 1-3 months they were changing providers and I had to create a new account and re-sign up for direct debit each time. None of my information or payment history would transfer, they changed the due dates, and would charge me late fees if I didn't have everything caught up, so even though I had been paying for 9 months, there was only a history for 1 month. Having to feel like my loan was constantly jumping around and having to give out my personal information to sketchy companies every few months was emotionally draining. Thankfully, I was able to get Wells Fargo to buy that loan and now I've been paying them back for almost 2 years. The interest rate is higher, BUT its a fixed rate, there's no penalty for paying ahead (which I currently am doing! :) , there's stability and a payment history, I can see exactly how much went to interest and how much went to principle. Its strange to say, but its actually fun to pay down this loan.
2. it wasn't until 6 month before I graduated that someone at my financial aid office asked why I didn't get a job with the school, b/c employees enjoy an 80% discount on tuition. ARE YOU EFFING KIDDING ME?? They all knew I hated my job and that all of my tuition was coming from loans, they could have saved me so many times and no one ever mentioned it??
3. I was working full time, making about 22k a year, I was an A student, I lived with family, and I filled out my FAFSA honestly. I never qualified for pell grants, but my classmates who all lived off government assistance, didn't work, lied on their forms and were happy to making Cs and Ds, all got free grants. I don't actually agree with free pell grants, but if they're going to be given out, it should be based on need AND effort, my As should have gotten me at least a little bit of help.
you can also goto collage. never get THAT JOB you dreamed about. because in real life.. your not in demand. thousands of us cant make a payment. so go get your edjumikation. just refuse payment. credit is nothing no more. you can still buy a house, car and everything else in life. just got to go....outside the box
What I found interesting is that my child does not need student loans to go to school but we applied for aid her freshman year just to see what would happen. She qualified for over $40,000 in student loans. Could you imagine if we were not educated what would happen if she had accepted those loans. I am sure she would have spent the money on more than a college education without realizing how hard it would be to repay it in the future. And this was for freshman year only. I can't imagine how much she could borrow on a yearly basis, but I'm sure it would be more than she really needs and it would be overwhelming to pay back if she accepted all that was offered.
The system is completely broken. Students who need money can't get it. Students who don't need it borrow too much. Administration is lacking and there is no financial education given to these kids. Thank goodness we are in a position that we are not in this mess. But it is not the students creating it, it is most definitely the lenders.
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