College can make you feel smart. But dealing with the byzantine world of student loan repayment can make you feel—whatever the opposite of smart is.
Young people were already being crushed by student loan debt before Covid-19 hit. Americans were bogged down by $1.5 trillion in debt by the end of 2020, with an average debt load of more than $37,000 per borrower. The CARES Act paused both student loan repayments and interest rates to help beat the student loan monster back down some during the pandemic.
The repayment pause was good news overall for people struggling with unemployment and other Covid-related fallout, but it has also caused extra confusion for people making long-term financial plans with their massive debt burdens, and some financial advisors say that borrowers are getting bad information from their loan servicers about their repayments. “The system is corrupt,” says Jake Northrup, a Rhode Island advisor. “I’ve seen so many mistakes of loan servicers capitalizing interest or telling people they need to certify income when they don’t actually need to.”
Northrup and other advisors stress that loan servicers are not fiduciaries but collection agents. They may or may not give you the best information for your situation, and in some cases their advice might show a brazen conflict of interest.
That was the idea behind the Consumer Financial Protection Bureau’s lawsuit against Navient (the former Sallie Mae) in 2017. The bureau accused the company of steering borrowers to higher payments; misallocating the payments to the wrong loans; hiding critical deadline information for things like income certification; pushing borrowers away from income-driven repayment plans; and pushing borrowers to forbearance, which can spark higher interest payments.
Navient, which settled one class action suit, albeit without direct monetary payments to borrowers who sued, says on its website about the ongoing CFPB suit: “The CFPB’s assertion that Navient steered borrowers away from IDR plans and toward forbearance is plainly false. Indeed, after nearly seven years of investigations and false claims, the CFPB has not been able to identify even one borrower who was ‘steered’ away from an income-driven repayment plan into forbearance, and that is because we do not do this.”
Northrup launched his own firm, Experience Your Wealth, specifically to work with clients his own age, and quickly discovered that student loans were among their biggest struggles. He says nothing in his previous training or work with the wealthy (even his CFP training) had prepared him to deal with the complexity of the student loan world, and he got the certified student loan professional designation to handle college loan issues for the young families that would be his new focus.
Mistakes in loan repayment can mean hundreds of thousands of dollars can get lost, he says. This is especially germane to those clients on loan forgiveness tracks (available to some government or nonprofit organization employees, including teachers and doctors). Aggressive repayment schedules can harm those borrowers, because much of the money—feeding a needlessly aggressive repayment schedule—might have stayed in the borrower’s pocket if the loan were to be forgiven in 10 years, Northrup says.
Many things can throw this gentle ballet among income, taxes, employment, and forgiveness out of whack, and the Covid confusion is increasing the chance of mistakes, say advisors.
Covid-19 Relief
The repayment relief program has been extended three times and now goes until September 30, 2021.
It was a gift to borrowers, but also a bane when dealing with loan servicers. Some of those companies didn’t get the memo on certain U.S. Department of Education stipulations, Northrup says. That includes the department pausing the recertification of income that would push borrowers into higher repayment schedules.
Income-driven loan repayment plans require borrowers to certify their income every year, but the Department of Education said during the Covid-19 pause that borrowers did not have to recertify. The ensuing confusion caused a nasty confrontation between one of Northrup’s clients and a loan servicing agent, who told the client she would indeed have to recertify. That would have sent her loan repayments through the roof.