For many borrowers, repayment of federal student loans is a scary proposition.
Massive balances and unaffordable monthly bills scare some into thinking they will never pay off their student loans.
To the government’s credit, help is often available for struggling borrowers. Unfortunately, helpful programs like income-driven repayment and student loan forgiveness are plagued by complications. Each time the government proposes a fix, they add more complexity to the system.
Moving forward, the President, Congress, and the Department of Education should make a concerted effort to simplify federal student loan repayment.
Repayment Complications from the Beginning
After finishing school, one of the first letters many former students receive is a Notice of Unpaid Interest.
This document confuses many borrowers. What is capitalized interest? Is it a good idea to make this large interest payment?
Because the Notice of Unpaid interest says that it is not a bill, many students ignore it and wait for the first real bill.
Things don’t get any less complicated when the first student loan bill arrives. Because the default repayment plan for most borrowers is the 10-year repayment plan, that first bill is often unaffordable.
Some borrowers seek out help to afford their first student loan bills. Others make large payments they can’t afford and drain their savings before seeking help. Sadly, many other borrowers dismiss the bill as unpayable, so they ignore the debt until they are in default.
Income-Driven Repayment Confusion
At this point, explaining the various income-driven repayment plans requires a history lesson to make sense of each option.
IDR plan eligibility and strategy depends upon loan type, when you borrowed the money, marital status, and a litany of other factors. The Department of Education is currently discussing a new plan that would only apply to undergraduate borrowers.
If you are a borrower who has been in repayment for years, it is still a challenge to figure out which repayment plan is the best option. For recent graduates or less sophisticated borrowers, it’s nearly impossible.
Loan Servicers Can’t Help
Loan servicers receive massive government contracts to help borrowers navigate federal student loan repayment. In theory, borrowers should be able to call their loan servicer to receive the guidance they need.
In reality, loan servicers sometimes further complicate things. There are numerous cases of loan servicers giving borrowers objectively bad information. Loan servicers are also slow to respond to student loan changes made by the Department of Education.
The brave souls working for federal servicers are often underpaid, poorly trained, and stressed. They face angry borrowers all day long and are graded based on how quickly they resolve calls. Offering comprehensive advice or analysis isn’t remotely possible.
Confusion Opens the Door for Scammers
Student loan scams are a significant issue, and it is easy to see why.
When borrowers are confused and desperate, they are easy marks for scammers. Scammers promise forgiveness and affordable payments. They benefit from a student loan system that overwhelms and scares borrowers.
Simplifying Federal Student Loan Repayment
Ideally, the government creates one single income-driven repayment plan and does a better job of holding servicers accountable.
More realistically, some minor tweaks could make a major difference for borrowers. For example, rather than sending out a Notice of Unpaid Interest or a bill based upon a 10-Year repayment plan, servicers should first inform borrowers of the repayment plans available. Let the borrower pick the plan before the bill and scare fewer borrowers away from repayment.
Moving forward, policymakers need to focus on simplicity. Complexity breeds confusion.
Given the federal resources currently available to borrowers, the default rate is far too high. Making things a little easier and a little more borrower-friendly could help millions of borrowers without costing the government much money.