At the beginning of March, I authored an opinion piece in which I proposed radical changes to the higher education business model. I also put forth a plan to address the nation’s staggering student loan crisis that would hold those who helped cause the debacle economically accountable for its resolution.
I started receiving emails in response to the story from former students with some pretty terrible tales to tell. They wrote about debt loads that are crowding out the things my contemporaries and I took for granted when we were their age: settling down, having kids, buying houses and cars.
I wrote about two of them a couple of weeks later, which inspired even more people to contact me. I heard from people like the young mother who said she was unemployed with “three degrees, two children, a mortgage and a husband,” as well as $160,000 in federally-sponsored student loan debt.
A Common Theme
When we spoke, she told me how she had attempted to contact the government to talk about her predicament. Instead, she found herself engaged in a conversation with a customer-service representative for the company that was contracted by the feds to collect her loan payments.
The rep listened to her story and promptly recommended a six-month forbearance arrangement. However, he neglected to fully explain how making no payments for that time would result in negative amortization, which adds the unpaid interest to the loan balance. Even more egregiously, the rep never told the woman about the various relief programs the government had put into place to deal with situations like hers.
And then there was the email from a young man whose story was sadly familiar. As he’d progressed through high school, his teachers realized he had a natural ability for math and science, so they encouraged him to apply to a top-rated state university. Once accepted, he and his immigrant parents grappled with the task of arranging enough financing to cover the difference between the cost of the school’s tuition and the aid he was granted — a daunting undertaking given the language barrier and the family’s collective unfamiliarity with all things financial.
And yet, the high school guidance counselor didn’t take any of that into account. As the reader put it, “They were more interested in getting me into a school than they were in helping me figure out how to pay for it.” What’s more, the university compounded the blunder by neglecting to direct the family to the Federal Direct Loan Program.
So, left to fend for themselves, they arranged for most of the borrowing through the state’s public/private financing authority, which they erroneously presumed was a conduit for the government program. Two years later, the young man is $70,000 in debt, living at home and struggling with monthly payments that consume half his pay.
When he attempted to contact the financing authority, he too was connected with a private loan-servicing company’s customer service representative who, after listening to his story, plugged him into a graduated forbearance. In this case, the loan payments were cut by 75% for several months. However, just as it was for the young mother, the consequences weren’t fully explained and the negative amortization that ensued was added to his already high loan balance.
Once the forbearance period ended, he found that his payments had become even higher than before. So he called the loan servicing company again. However, this time it refused to do anything more.
To be clear, neither of these recent grads was asking for a reduction in rate or principal. Rather, all they needed was to have their loan durations extended in order to make the payments more affordable.
What’s Going On?
The more stories I hear, the more convinced I am that loan-servicing companies are worsening an already miserable situation. These folks are handing out forbearances as if they were T-shirts at a rock concert. Instead, they should be taking the time to put into place longer-lasting solutions that give borrowers a fighting chance.
As a former lender, I can think of only four reasons why a creditor might be unwilling to work with a borrower under these circumstances.
- The lender’s systems can’t accommodate payment changes. In this technologically sophisticated day and age, I can’t imagine that to be the case.
- The lender is concerned about setting a precedent that opens it up to tens of thousands of copycat requests. Although that may be possible, this thinking is incredibly short-sighted. It doesn’t take all that much effort to determine whether the borrower truly needs help, especially when the alternative is a payment default where everyone loses.
- The lender no longer controls the loan. In my previous article, I wrote about the consequences of securitization for borrowers who need loan restructures or modifications after the fact. If the lender no longer owns the loan, it may not have the authority to restructure it. However, that’s not to say it can’t be done. Having securitized loan portfolios in the past, I can tell you my companies were always able to build into our deals the right to accommodate customer requests of this type.
- The lender is concerned about downgrading the quality of the loan. I recently read an article in which one of the largest student lenders suggested that the bank regulators stood in the way of student loan modifications because, as he put it, “In some cases … official accounting guidance recommends lenders charge off modified loans.” While there may be an element of truth to that — which I’ll explain in a moment — it’s a fundamentally absurd argument nonetheless because lenders are ultimately responsible for the loans they make. They approved the application, agreed to the amount, set the rate and established the terms. Therefore, when a deal heads south the lender should be forced to write it off (or write it down to the value of the underlying collateral).
But that’s not what we’re talking about here.
As I said before, these students aren’t asking for a reduction in rate or amount owed. Rather, they’re requesting an extension of duration that should not pose a problem unless the loan is already past due or the borrower is unable to prove he or she earns enough to cover the newly reduced payments — all the more reason for the lenders to be proactive about this. Besides, even if the loan were to be declared impaired and written off, its restructured version could be reinstated at a later date, once the borrower has demonstrated his or her ability to make the payments in full and on time.
Make the Lender Work With You
So, with all this in mind, here’s what I recommend:
Threaten to call the cops.
Start by telling the loan-servicing company that before you file a complaint with the Consumer Financial Protection Bureau, you want to speak directly to the lender. Then, tell the lender you want to repay your debt but cannot live with the arrangement that’s currently in place. In fact, if you’re on the verge of default, then tell them so — and don’t let them sell you on forbearance. You want an arrangement that doesn’t make matters worse.
Say what you need.
Determine the amount you can afford to pay each month (which should also not exceed 10%-12% of your pre-tax monthly income). Just be sure to keep the repayment period to less than 20 years. There are free online tools to help you with the math. I like this calculator, courtesy of Bankrate, and this one, courtesy of Zenwealth.
Protect your options.
As you convince your lenders to lengthen the duration of your loan to make the payments more affordable, don’t forget to safeguard your right to accelerate your repayments without penalty. And, find out how to ensure that those extra principal payments will indeed be applied toward the loan balance and not against future payments. It’s the only way you’ll save on interest as you reduce the term. (The Bankrate calculator will help you see the value of adding $10 or $20 to each of your monthly payments.)
Refuse to take no for an answer.
Be persistent and forceful when you encounter resistance. Demand to speak to a supervisor with the authority to grant your request. Remember, it’s your money and your life, and if your creditors want to get paid, they’re going to have to do more than they have thus far.
If you’re concerned about how student loan debt may be impacting your credit, check out Credit.com’s free Credit Report Card for an easy-to-understand overview of your credit history, including your scores, and how you compare to others in your state and the country.