The number of people with student debt has almost doubled since 2006 and the total amount of student debt has doubled since 2009. 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 just released their quarterly report that 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.
Things are not much better on the private student loan help side either. According to a recent NerdWallet article, over 130 private student loan companies have significant complaints regarding their business practices. With the problem, getting bigger, students and parents cannot find the proper advice to make the best decisions.
Student Debt – Why is it Happening?
There is a lack of financial literacy among the public and financial professionals regarding this student loan borrowing 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 bancuptcy rules concerning student loans are less generous.
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 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.
Student Loan Repayment – Shortcoming of Current Advice
Due to both the complications and high loan balances, students and parents are searching for proper advice. Based on the CFPB and NerdWallet reports, the solution is not easy to understand or find. The biggest problem with finding the proper advice is most groups are unable to answer all of a customer’s questions. To find the best repayment method, the advice needs to include some personal financial advice, such as taxes. The federal loan servicers and most private loan service companies cannot legally provide this advice.
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.
Another shortcoming of the advice given is a push for the borrower to select the lowest payment option. Due to the student loan default rate problem, most of the servicers recommend the lowest monthly payment. This is where the borrower needs to understand all of the repayment methods available to them. The lowest payment may not be the best advice for long-term financial wellness.
The Income Drive Methods offer a payment amount based on a student 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 monthly payment is not covering the interest charge of the loan. The student is staying current but the loan balance is increasing.
Many people are searching for the simple silver bullet and depending on the type of loans, job situation, and marital status the answer can be complex. Some companies take advantage of this situation since the loan repayment process is so painful. The lack of planning, understanding of the final impact of repayment and debt amount creates this great need for financial relief. The consequences of default to a person’s financial future are severe and are another reason why proper advice is needed. The same problem of incurred debt could be multiplied if a second error in the repayment decision occurs due to the borrowers getting the wrong advice on their repayment method.
Don’t Rush to Private Consolidation
In most refinancing decisions, getting a lower interest rate is normally a good decision. Student loan refinancing is probably one of the exceptions. The federal loan repayment process offers a variety of repayment options that can help a person stay current. This is especially true if you have a change in your financial situation. Once a borrower consolidates their loans to a private consolidated student loan, they cannot return to the federal loan repayment process. This comparison is overlooked in the decision process and not explained.
A private loan consolidation could be a great benefit in some cases but the borrower needs to compare the entire process and not just a slightly lower payment.
As student debt continue to rise, a serious problem is getting worse. People are unable to find the proper advice for a variety of reasons. At College Affordability LLC, we have taken steps to improve this situation. We have just developed a College Funding and Student Loan Advisor training program and financial designation for financial planners and CPAs. It is called College Funding and Student Loan Advisor or CFSLA. We are just starting to enroll advisors in the program. The advantage to this approach is these advisors will offer a holistic solution to the process. In addition, they will need to act in the client’s best interest.
We hope the combination of the training program and our innovative EFC PLUS software will be the first steps of many to solving the student loan crisis.