As taxpayers, we would like to think that the federal government looks out for our needs.
As student loan borrowers, we would expect that the federal government would treat us fairly and ethically when it comes to student loan repayment.
Unfortunately, there are a number of different ways that federal loan servicers can make errors that mean more money for the government and for the loans servicer. Borrowers of federal student loans should understand these issues so that they can manage their debt as efficiently as possible and avoid potential pitfalls.
Lousy Service Costs Less than Good Service
This concept is pretty simple. Good training costs money. Top employees cost money. Adequate staffing costs money.
Federal loan servicers all have contracts with the government. The less they spend fulfilling their contractual obligations, the more profit they make.
While there are federal loan servicing employees who are both very knowledgeable and helpful, borrowers need to know that this is not always the case. Sometimes customer service representatives don’t know the answer and this can be very frustrating. Things get really ugly when a loan servicer gives out inaccurate information. Borrowers have little to no remedy when they get bad information and rely upon it. Thus, they need to check and double-check everything that they are told and rely upon.
Bad Information Means More Income
I’ve heard from many borrowers who mistakenly believed they were on the proper repayment plan to be eligible for public service student loan forgiveness. These borrowers were told by their servicers they were on the way to forgiveness. In these cases, after years of payments, borrowers learned the hard way that their payments did not count towards forgiveness.
This is one of those circumstances where “I’m sorry” just doesn’t cut it. These misled borrowers made payments relying upon the accuracy of the information they were given. Because the information was wrong, years of payments, and thousands of dollars do not count towards student loan forgiveness.
The Temporary Expanded Public Service Loan Forgiveness addresses this particular issue, but only temporarily. The borrowers who were mistakenly told their loans were eligible still have no help.
Processing Time Equals Profit
When the Revised Pay As You Earn Plan was first created, many borrowers faced extended delays getting enrolled.
While the plan was a huge asset to many borrowers, the implantation left much to be desired.
I personally saw firsthand how one servicer did not meet processing deadlines and instead placed borrowers in “administrative forbearances” that were never requested.
As a result of these forbearances, the government makes extra money in two ways. First, by not requiring payments for a particular month or two, interest continues to accrue and the balance is larger than what it was at the beginning of the forbearance. Secondly, for borrowers working towards any of the forgiveness programs, these months don’t count towards forgiveness and extend the amount of time the borrower is in debt to the government.
Federal student loans servicers play by a set of rules that are not to the benefit of borrowers.
Until borrowers can consistently get accurate information and quality service, the federal government will continue to generate student loan profits directly attributable to their incompetence.