Tompor: Student loan defaults may get pricier
College grads and others who are unable to make payments on certain student loans could find it even tougher to dig out of debt now that it's possible to be hit with double-digit collection fees.
The fees — which could be as high as 16% — started creating buzz in mid-March after a policy revision was issued by the U.S. Department of Education. It's yet another reminder of why borrowers should do all that's possible to avoid defaulting on student loans.
Ever since July 2015, agencies that collect on defaulted debt were forbidden by the Obama administration from tacking on a hefty fee if students began repaying within 60 days of a default. Those who defaulted and rehabilitated after 60 days were still subject to the fee.
But under the Trump administrations' revised policy, even students who begin repaying loans quickly after a default could be charged the fee.
"With more than 3,000 Americans defaulting on a student loan every day, this just adds insult to injury," said Rohit Chopra, senior fellow at the Consumer Federation of America and the former student loan ombudsman at the federal Consumer Financial Protection Bureau.
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The Consumer Federation of America's research indicates that 42.4 million consumers owed $1.3 trillion in federal student loans at the end of 2016. About $137.4 billion was in default — a 14% increase from 2015 — including federal loans that defaulted in previous years.
The collection fee applies to loans taken out from banks and other institutions under the Federal Family Education Loan Program, which has not issued new loans since July 2010.
The fee does not apply to Federal Direct Loans.
"This change by the Trump administration financially benefits guarantee agencies, while hurting defaulted student loan borrowers," said Mark Kantrowitz, publisher and vice president of strategy for Cappex.com.
The National Council of Higher Education Resources, which represents some guarantee agencies, declined comment on how the extra fee might be applied.
Better options exist than default
There are legitimate reasons for why some students struggle making their student loan payments. But dragging your feet is not the way to go. If you default, you will be subject to collection charges, wage garnishment and the government can seize your income tax refund. You will also put a dent in your credit score. Some better options exist, including income-driven repayment plans where you avoid default.
A default is not something that happens in a split second. For the Federal Family Education Loan Program it takes a minimum of nine months — or 270 days — of nonpayment for a borrower to face default. After that time, lenders have up to 90 days to file such a claim and most lenders will wait until the end of the claim period, Kantrowitz said.
In the Federal Direct Loan program, a loan is in default after 360 days.
"A single payment is all it takes to prevent the loans from going into default," Kantrowitz said. "That avoids the need to rehabilitate the loans and be subject to the collection charges."
Some in the industry question the process of how that fee was banned in the first place. The 2015 action was in response to a lawsuit from a borrower who defaulted but started repaying the loans and then was hit by collection fees.
In January, the former loan guarantor USA Funds agreed to pay $23 million to settle the class-action lawsuit that challenged the right of such agencies to collect fees if borrowers started repaying soon after default as part of a loan rehabilitation effort. No wrongdoing was admitted. If approved by the court, the settlement would apply to about 35,000 borrowers — after legal fees and other costs.
Don't ignore your obligations
The No. 1 goal of student borrowers should be avoiding a default.
Many students borrow money, don't finish college and find they cannot afford paying the loans. Some students don't keep track of their loans or pay attention to what loans they have and then fall behind on payments.
Yet many borrowers can obtain more affordable monthly payments for federal student loans by seeking an income-driven repayment plan. See StudentLoans.gov.
To be sure, another hurdle now is making it more cumbersome to apply for federal student loans and those income-driven repayment plans. In early March, the Internal Revenue Service took down its IRS Data Retrieval Tool at Fafsa.gov and StudentLoans.gov.
The IRS notes online that it temporarily suspended the tool after concerns that identity thieves could tap into the tool to access information that could be used to file fake tax returns and steal federal tax refund cash from the U.S. Treasury. The retrieval tool makes it easy to shift income-tax data onto a federal form for student aid and applications for the income-driven repayment plan. The tool won't be available for several weeks, the IRS said.
So those who are applying for student loans or seeking an income-driven repayment plan will need to manually provide their tax return information. Yet this hassle should not stop borrowers who need income-driven repayment plans from taking the appropriate steps.
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A federal income-driven repayment plan will reduce your monthly payment to take into account your income and family size. You'll stretch out 20 years or 25 years, depending on the plan.
"Ignoring your student loans will not make the problem go away," Kantrowitz said.
It's important to talk to a lender as soon as you run into financial problems. Short-term options, such as deferment and forbearance plans, exist under certain circumstances to temporarily postpone making payments or reduce payments. You might be able to apply for a deferment, for example, if you are jobless or unable to find full-time employment.
Many people do not find it easy to juggle college debt in the first few years after graduating — or quitting school. But defaulting only hurts your financial future even more.
Contact Susan Tompor: stompor@freepress.com or 313-222-8876. Follow Susan on Twitter @Tompor.