Federal student loan borrowers have almost no say in the company that manages their student loans. These federal loan servicers also have very little direct oversight from the federal government. This dangerous combination can result in a frustrating experience and numerous unnecessary issues for student loan borrowers. Today we will take a close look at one example of a completely unnecessary issue with Federal Loan Servicing at MyFedLoan.
Each year borrowers on income-driven repayment plans such as IBR, PAYE and REPAYE must submit documentation of their income so that payments can be calculated for the following year. Proper processing of these certification forms is essential to borrowers for two reasons. First, any delay could cause interest capitalization which could mean significantly higher spending on interest. Second, a delay in processing could delay student loan forgiveness programs such as Public Service Loan Forgiveness.
The process normally begins with loan servicers sending out an email explaining that income certification is due and providing a deadline. Borrowers who promptly submit their income certification see the following message on the MyFedLoan homepage:
At first glance, everything seems to be in order. The problem is that valuable time is potentially being wasted. If there is an issue, the time “on hold” could be much better spent resolving the problem.
Calling About the Issue
To the credit of MyFedLoan, the customer service representative who answered questions about this issue was both well informed and helpful. She was able to confirm that issues with an application could lead to the income certification form being rejected, which could cause the interest to compound.
When asked about why the application was put on hold, the representative explained that it was procedure and that the application could not be processed until the final bill was generated.
She was able to confirm that that application was not only submitted, but that everything came over as complete.
Ultimately, there is no way to guarantee that there will not be a processing error, nor is there a way to have the application processed before the final bill is generated. This means that even borrowers who promptly submit their income certification forms are still at risk to an error compounding their interest or delaying loan forgiveness.
Why is this processing problem allowed to exist?
If MyFedLoan were to perform a minor tweak on their income certification procedure, many borrowers could be helped. Rather than process the application after the hold, the application could be reviewed in full before the hold.
This review has to take place either way, so it costs MyFedLoan no extra time, effort, or expense. However, the change in processing order could help borrowers who checked the wrong box on an internet form or had issues uploading the correct document. Additionally, knowing new payments ahead of time could be very helpful. This would provide borrowers advanced notice for budgeting and planning under their new monthly bill.
Unfortunately, borrowers don’t get a say in their servicer and the government contracts require minimal levels of competency from the federal servicers. In short, the MyFedLoan has no incentive to help these borrowers.
The Wrong Government Incentive
Not only does MyFedLoan not have an incentive to help, but the current procedure and unnecessary delays that it creates makes the loans more profitable. When interest is compounded, forbearances are needed or forgiveness is delayed; the loan generates more income to the government.
Making things less likely to change is the fact the borrowers who end up paying more will be partially at fault because their application will have had some issue for which they can be blamed. As a result, the odds of a public outcry over this issue are also minimal.
We certainly don’t mean to suggest that this is an elaborate government scheme targeting borrowers. Rather, it is a bad look for the government because it stands to profit from its own inefficiency. Many borrowers will spend more money than what is necessary and it is easily avoidable.
Making Processing Faster and More Efficient
It is probably worth noting that this entire process could be automated. The federal government has all of our tax records, and they are the entity owed the money on the student loans. Instead of requiring borrowers to “opt-in” each year, income-driven repayment plans could have an “opt-out” process for borrowers who wanted to make larger payments. Automating the process would save borrowers time and money and it would make the job of loan servicers easier as well.
The trillion dollar student loan issue in the United States will not be going away overnight. However, taking the time to implement some common sense fixes that help all parties involved should be a priority. An easy first step would be to improve the process for yearly income certification.