Given the multitude of repayment options available for federal loans, you’d think borrowers could at least get help from the serving companies that collect payments and provide customer service.
Unfortunately, you’d be wrong. A report last week from the Education Department’s Office of Inspector General accused the Federal Student Aid program of being asleep at the wheel when it comes to managing those firms.
Among the findings: Servicers routinely failing to notify borrowers of all their repayment options or steering cash-strapped borrowers into forbearance instead of lower-cost alternatives.
“It’s always been a broken system,” says Jan Miller, CEO of Portland, Oregon-based Miller Student Loan Consulting.
So it’s important to do some basic research on student loans instead of relying on servicing companies to point you in the right direction. In the interest of making sure you don’t fall deeper into the red, here are some common mistakes to avoid when repaying your student loans.
1. Being careless with your repayment options
In recent years, the Department of Education has expanded the number of repayment plans to eight; there are now fixed and “graduated” plans as well as four income-driven options. That gives borrowers a lot of flexibility, but also adds complexity to the decision-making process.
Unfortunately, graduates don’t give it the appropriate amount of thought, according to Taunya Kennedy, a student loan advisor with the nonprofit credit counseling agency Money Management International. “They’re choosing payment plans haphazardly,” she says.
Doing a little homework can help you figure out which plans you’re eligible to use and what the long-term interest costs will be.
2. Consolidating when you don’t need to
Combining two or more federal loans makes it easier to manage your student loan debt, but it can also increase your borrowing costs.
When you consolidate, your new interest rate is the weighted average of the rate on your existing loans, rounded up to the nearest one-eighth of a percent. So if you’re weighted average is 6.3 percent, you’ll now pay 6.375 percent.
That doesn’t sound like much, but over the long run it can make a big difference, says Miller. So use caution when deciding whether or not to consolidate.
3. Over-trusting your loan servicer
With more repayment plans than ever before, you’d think loan servicers would increase their employee training to keep up. In fact, some have moved in the other direction, according to Miller.
The bottom line: Don’t expect the person you speak with to be a fount of knowledge. Miller recommends calling multiple times until you get someone with whom you’re comfortable.
He says it’s always a bad sign when the service rep doesn’t perform a full evaluation of your needs. If, for example, they neglect to ask whether your spouse has loans, it’s a red herring. Try to get someone else on the line.
4. Using forbearance unwisely
For borrowers facing a financial hardship, forbearance often represents welcome relief. But it’s important to understand the long-term repercussions. Your monthly payments will be temporarily suspended, but the interest continues to accrue, which adds to the total cost of your loan.
The Inspector General’s recent report suggests that too many servicing reps push their clients toward forbearance without exploring other options. Kennedy says it’s really intended to be a tool for short-term budget problems. “If your hardship is longer than a year, income-driven repayment plans may be a better option,” she adds.
Forbearance might also make sense if you use your federal loan reprieve as an opportunity to knock out higher-cost forms of debt, like credit cards, or to build an emergency fund. But it’s important to know the pros and cons.
“Forbearance is not a four-letter word,” says Miller. “It can be a sound financial strategy.”
Time isn’t always on your side when it comes to student loans. Failing to talk with your servicer when you fall on hard times, for example, can lead to late payments and negative marks on your credit report.
Sometimes, says Kennedy, you may never hear from the servicing company when you fall behind. Don’t take that as a sign that everything’s okay with your loan. The more proactive you are in working with the loan servicer, the better off you’ll be.
6. Ignoring loan forgiveness options
Forget winning the lottery. Most borrowers would be on cloud nine if they could have their student loans wiped out one day.
For many of us, it’s not a pipe dream. The Federal Public Service Loan Forgiveness program, for example, erases your loan balances if you work full-time for a 501(c)(3) nonprofit or a government entity and make 120 qualifying payments. Your specific job doesn’t matter.
Kennedy says a number of states have their own loan forgiveness programs, which tend to be targeted toward public-sector employees or those who work in hard-to-fill service positions.
A growing number of private companies also offer loan repayment assistance as part of their benefits package. So if you’re carrying a sizable loan balance, it’s something to keep in mind during your job search.
7. Going it alone
Choosing the wrong prepayment plan can cost you thousands, or even tens of thousands, of dollars over the long haul. So working with a reputable student loan expert can be a smart investment indeed.
The cost of a counseling may be lower than you think. Nonprofit agencies like Money Management International rely on government grants to help pay the bills, so they tend to keep fees pretty affordable. Kennedy says borrowers can typically expect to pay anywhere from $50 to $200 for a session at a nonprofit agency.
For-profit firms, like the one Miller operates, are another option. His organization offers a free introductory consultation, which is all that many of his clients need. Borrowers with more complex needs can pay for a consultation with Miller that runs $90 for a half hour or $175 for an hour. He also offers membership plans for ongoing support and unlimited calls.
For a little extra peace of mind that you’re not overpaying on your student loans, that may be money well spent.