Most student loan borrowers view dealing with their loan servicers in the same regard as an IRS audit or a root canal. Yes, it is serious business, but it is a pain.
The biggest mistake that many recent graduates make is to follow the advice of the loan servicers blindly. The job of loan servicers is to guide borrowers in repayment but these loan servicers have a terrible track record.
It is easy to see why so many borrowers follow lousy advice from servicers. Someone fresh out of college knows little to nothing about student loan repayment. The customer service representatives should be experts on student loans. After all, they work on this stuff every single day. They are trained to answer these questions.
Loan Servicer Goals vs. the Goals of a Borrower
The problem is that the interests of the student loan servicer and the borrower are very different. A borrower is looking for information and possibly some advice. The loan servicer is trying to get through the phone call as soon as possible.
It may sound harsh to suggest that the priority of the loan servicer is to get the call over as soon as possible, but the logic is clear. Loan servicers are paid based upon the number of borrowers they service. The faster they get through the calls, the less customer service representatives they have to employ. The less money they spend per borrower, the more profit they generate. It is simple economics.
This issue was recently brought to light when author Michael Lewis exposed Navient’s Seven Minute Rule. Call center representatives risked being penalized by Navient if they failed to conclude borrower calls within seven minutes.
Putting such a strict timeline in place leaves little room for insight, discussion, or borrower education.
These circumstances have resulted in many borrower issues; one of the most common is the ill-advised deferment.
Deferments can be a Mistake
Borrowers who receive their first student loan bill often panic. That bill is large and typically based upon a 10-year repayment plan — the one with the highest monthly payments. Borrowers new to repayment may not be making much money, and the student loan bill is larger than they expected. They call the loan servicer asking for help, and the customer service representative suggests a deferment.
On the surface, this seems like a great idea. An unemployed or underemployed recent graduate can go up to a year without having to make payments on their federal loans. The proverbial can gets kicked down the road in the hopes that next year brings better financial circumstances.
The problem is that income-driven repayment plans are a much better option for the vast majority of borrowers. Opting for an income-driven repayment plan usually means $0 per month payments for many borrowers. Borrowers who opt for the Revised Pay As You Earn (REPAYE) plan end up generating less interest than they would on a deferment. Best of all, time on an income-driven repayment plan counts towards student loan forgiveness programs such as PSLF.
Income-Driven Repayment Calculations:Borrowers do not have to have a job to sign up for income-driven repayment plans. Calculations are usually made based upon a borrower’s most recent tax return. Recent graduates typically start with $0 monthly payments because they did not earn much during school. The Department of Education’s Student Loan Repayment Estimator is a great tool for reviewing different repayment plan options and expected payments.
Deferments and Forbearances vs. Income-Driven Repayment
If income-driven repayment is such a better option, than why are servicers first pointing borrowers in the direction of a deferment?
The issue goes back to the incentives for quick phone calls.
Signing up for a deferment takes less time. Enrollment in an income-driven repayment plan, though relatively simple, is a bit more time consuming than a deferment or a forbearance.
Additionally, discussion of income-driven repayment plans can lead to a discussion on student loan forgiveness, repayment plan options, and income documentation. This critical conversation should take more than seven minutes.
Because servicers kept pushing borrowers to the easy solution rather than the best solution, the Consumer Financial Protection Bureau filed a lawsuit against Navient. (This issue was one of many raised in the lawsuit.)
Where to go for student loan help?
Even though there are many reasons not to trust loan servicers, they remain an essential part of student loan repayment.
Unfortunately, this means borrowers need to try to answer as many questions as possible before ever calling. Rather than asking for help generally, borrowers should have specific questions based upon their research. Borrowers should also realize that not all customer service people are the same. Some are excellent, and some are terrible. The trick is finding the best representatives when faced with serious student loan questions.
For borrowers who have no idea where to start, we created the student loan toolbox. It has links to the various federal resources and explanations on various student loan programs as well as strategy. The idea isn’t to provide all the answers. Instead, it is a helpful starting point for education and research.