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The largest student loan servicer in America — with a portfolio of billions and money owed by millions — is under fire for saying it has no duty to give consumers good advice. And the now the lawsuits are flying. We look at the industry and get advice from experts on how to dig yourself out of student debt.
- Shahien Nasiripour Reporter covering student debt for Bloomberg.
- Michelle Singletary Syndicated columnist of "The Color of Money" for The Washington Post.
- Jason Delisle Resident fellow at the American Enterprise Institute, specializing in higher education finance and student loans; former senior analyst on the Republican staff of the U.S. Senate Budget Committee, where he played a key role in developing education legislation.
Student Debt Advice From Michelle Singletary, Rohit Chopra And Mark Kantrowitz
With $1.3 trillion in student loans, lots of people have questions about their education debt. After the show, Michelle Singletary took on some of the most-asked questions, plus a few we didn’t have time get to on air. She got help from two student loan experts, Rohit Chopra, former student loan ombudsman at the Consumer Financial Protection Bureau and Senior Fellow at the Consumer Federation of America, and Mark Kantrowitz, publisher and vice president of Strategy of Cappex.com, a free web site about college admissions and financial aid.
Q: My daughter married someone with a large student loan. He has the income-based payment. Is her income included (in calculating) what he has to pay?
Kantrowitz: If they file their federal income tax returns as married filing separately, the monthly payment under income-based repayment (IBR) is based just on the borrower’s income. If they file a joint return, the monthly payment will be based on their joint income. Note that the monthly payment under the Revised Pay-As-You-Earn Repayment (REPAYER) plan is based on the combined income, regardless of the tax filing status.
Chopra: If you decide to file separately to exclude a spouse’s income, realize you may be aversely impacting your tax situation. In certain cases, filing separately allows borrowers to exclude their spouse’s income, though there are other tax considerations to factor in.
Q: I have held off marriage because I am afraid to tack my student loan debt to my partner. Advice?
Singletary: You’re right you debt will affect your household finances. The loans might impact a number of things including your ability to buy a home or when you start a family. But I don’t think you should be afraid to marry someone because of the debt. Marriage is a partnership. Instead, be upfront about the how much you owe and, if you get married, together develop a plan to pay it off as a team.
Q: The income-based repayment plans are paid off after 20 years? I was told this was a bubble plan where the amount increases?
Kantrowitz: There are four income-driven repayment plans: income-contingent repayment (ICR), income-based repayment (IBR), pay-as-you-earn repayment (PAYER) and revised pay-as-you-earn repayment (REPAYER). ICR and IBR cancel the remaining debt after 300 monthly payments (equivalent of 25 years). PAYER cancels the remaining debt after 240 monthly payments (equivalent of 20 years). REPAYER cancels the remaining debt after 240 monthly payments (20 years) if the borrower has only undergraduate student loans and 300 monthly payments (25 years) if the borrower has any graduate school loans.
Borrowers can be negatively amortized under the four income-driven repayment plans, when the monthly payment is less than the new interest that accrues. This will cause the loan balance to increase.
Chopra: If you’re making a very low income, you’ll be making a small payment, and your balance may grow, given high interest rates on many student loans. If you earn more, you’ll pay more, and you’ll see your balance go down. But after 20 years, you’re done.
Singletary: I think it’s great that there are repayment programs that can ease the burden of student loans as borrowers start off in life. But just because you can qualify doesn’t mean you should carry this debt for 20 years. Don’t let the low payment lure you into complacency about paying off the loans. Don’t keep this debt around like it’s a pet. If you can, pay it off as soon as you can.
Q: What about public service loan forgiveness? Please talk about the recent message from the DOE that eligibility for this program is likely to change in the near future.
Chopra: Public service loan forgiveness allows you to get rid of your student loans after ten years. There’s a lot of catches. First, you need to have a Direct Loan – the word “Direct” will be in the name of it. Second, you need to be on an eligible repayment plan. To get forgiveness, enrolling in an income-driven repayment plan is your best bet. Finally, you need to have the right job. For those who work for a government entity or for a non-profit organization that is a 501(c)(3), you’re in good shape. Some other public service jobs are also eligible.
I recommend that you complete an employer certification form every year so you can keep tabs on how close you are to forgiveness.
Q: I was eligible for loan forgiveness after working in a low income school for five years. However, I consolidated my loans, and then found out, I was no longer eligible for loan forgiveness. I had no idea that consolidation would have this consequence.
Kantrowitz: The Federal Perkins Loan program has numerous loan forgiveness options. However, including Federal Perkins Loans in a Federal Consolidation Loan or Federal Direct Consolidation Loan will cause the loans to lose several benefits, including the loan forgiveness options. Unfortunately, there is nothing that can be done to restore forgiveness if Federal Perkins Loans have been consolidated. Unlike the Federal Perkins Loan, Federal Stafford Loans preserve eligibility for Teacher Loan Forgiveness when consolidated.
Chopra: For many borrowers, the student loan system feels like it was designed for student loan companies to profit, not for borrowers to succeed. If you qualify for loan forgiveness programs under the Perkins Loan program, you will give that up if you consolidate into a Direct Loan. I’m concerned that borrower forgiveness is getting irreversibly stripped away from so many.
Q: Student loan debts are never “forgiven.” It becomes taxable income in 20 years!
Kantrowitz: The student loan debt is forgiven, but federal law treats cancelled debt as though it were income to the borrower, resulting in a tax liability. The 20 or 25-year forgiveness in the income-driven repayment plans therefore yields a tax liability based on the amount of forgiven debt. This tax liability is lower than the student loan debt. However, it will still be challenging for the borrowers to repay.
Singletary: The statement/question seems a bit ungrateful to me. So, are you upset that the forgiven debt is taxable? But you’ve been forgiven debt that was legally yours to pay. Think about it. You received the money and the benefit – ability to go to school – and then are able to get out of paying fully what you owe. Still I understand this may come as a surprise to many. So if you are in one of the repayment programs and you plan to keep the debt for 20 or 25 years, planning accordingly for the tax obligation.
How The Student Debt Crisis Started
Michelle Singletary: Well we know that the entry into middle-class status in America begins with a Bachelor’s degree from college. You have to get a degree, to get a job, to get into the middle class. Secondly, we started to define student loan debt as ‘good debt’ and so, people, parents, and students were like ‘I can borrow as much as I need because this is good debt, it’s going to pay off down the road.’ But then we forgot that those loans have to be paid back, and people weren’t making the income to service that debt.
There is a huge delay from the time you take out the loan to when you have to pay it — anywhere from four to five years, and even after that you get a six-month window where you don’t have to pay. So when you don’t have to pay, and you year after year take it and it’s on the backburner, you don’t remember that you’re taking out all of these loans. If you ask many students, they can’t tell you — many of them have a ballpark idea on what they owe, but they don’t really know what they owe.
Jason Delisle: More people went to college. When they pursued degrees, that’s a big contribution to the increase and the stock of debt. On the one hand, this is good. People went college, they pursued a degree and they borrowed to do so, so this is sort of the system working. The loans are there to allow people to access a higher education. Another little-discussed reason why the amount of debt got so high so quickly is graduate school. A lot more people went to graduate school, and that’s where they accumulated the big debts.
On The Lawsuits Against Navient By The States Of Washington And Illinois
Shahien Nasiripour: There are basically two components to the lawsuit: On one hand, the states are alleging that Navient in its previous incarnation as Sallie Mae, from which it split off from Sallie Mae in 2014, it basically engaged in widespread predatory lending,”
They made loans to students, knowing full well that those students would likely default. That is the definition of predatory lending. Letting people borrow money that you know they can’t possibly repay, is against the law. The states of Illinois and Washington allege that Sallie Mae engaged in that kind of activity on a wide scale for over a decade.
The separate part of the lawsuit, this is the one which the Consumer Financial Protection Bureau also sued for, is that Navient as student loan servicer — that’s the company that collects your monthly payments, helps you figure out your best repayment options, basically collects your bills and tries to help you pay off your debt. Instead of helping folks manage their obligation in terms of guiding them to the best repayment plan, giving them good advice, what Navient did is basically take a bunch of shortcuts. What it amounted to was folks getting bad advice, getting wrong information, and getting billions of dollars tacked on to their balances while Navient profited because when folks would call in they’d get off the phone in a few minutes, so Navient would save time and in terms of expenses associated with servicing these loans. We’ve never seen anything like this in the student loan world.
On Income-Based Repayment Plans
Michelle Singletery: Your payments are based on your income and family size. So the less you make, the larger your family, your payments are very low. For some folks, they could actually have no obligation every month on income-based repayment plans. Many people don’t recognize this is an option. That is part of the lawsuit as well, that Navient didn’t explain it to borrowers that they had an option other than either defaulting or going into some kind of forbearance.
On Regulating Student Lenders
Shahien Nasiripour: The Consumer Financial Protection Bureau has oversight over the industry. They’re developing new rules, they’re checking up on all these companies, getting into their operations, visiting their sites, trying to figure out what’s going on, they’re collecting complaints for consumers and investigating them, looking for trends. On Capitol Hill, you’ve got folks who are trying to simplify the repayment program and simplify the whole process. The Obama administration started to go down that road, but it’s a big complicated piece of legislation that touches literally every aspect of higher education. There’s not that much will to tackle it right now.
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