6 tips for avoiding the worst student loan repayment traps

Ron Lieber

Whether or not you believe the allegations, the jaw-dropping dossier of sins that the Consumer Financial Protection Bureau accuses the nation's largest student loan servicer of committing is useful for two crucial reasons.

First, it's a reminder of just how much can go wrong when we force inexperienced young adults, especially, to navigate a complex financial services offering. We shouldn't be surprised, but we should be ashamed: Elected representatives cut support for higher education; sticker prices rose; teenagers and others applied for admission, signed up for debt and, in many cases, finished their degrees. Then came the bombardment of confusing loan and repayment options.

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Nobody stitched this crazy quilt on purpose, but most clear-thinking humans who approach the system for the first time conclude that we are insane for allowing it to evolve this way.

Second, the bureau's complaint offers a road map of sorts. For every major infraction that it accuses Navient, the servicer in question, of committing, there is at least one defensive move that borrowers can make to sniff out problems or keep them from happening in the first place.

Let's take them in order:

Know your loans

Staying out of trouble with a student loan servicer starts with two questions: How much do you owe, and to whom? Answering those questions is confusing to newcomers for a couple of reasons. First, the servicer of the loan — the entity that collects payments and takes requests for any adjustments — is often not the original lender.

You can usually answer both questions at once for federal loans (those that come from the Education Department) through the National Student Loan Data System, where you'll need to set up an online account.

Sorting out your private loans (those that come from banks and other similar entities) can be harder. Check copies of your credit report from the three major credit bureaus via if you think you may have lost track of a loan, as lenders will almost always report the existence of the loan to the bureaus.

Income-driven payments

If you've got federal loans, you may be eligible for a payment plan that allows you to submit information on your income and family size and then reduce monthly payments to amounts that are affordable. Sometimes you don't have to make any payments at all.

Not everyone knows that these programs exist. Savvy lawyers with big loans often do, but plenty of destitute people do not. And, the consumer bureau argues, Navient didn't do a good enough job of explaining to borrowers that they might be eligible.

So all borrowers ought to educate themselves on the topic, just in case. And parents may want to check in with their college seniors and recent graduates, too. The Education Department's repayment estimator tool can tell you whether you're eligible. Elsewhere on the department's website is a list of all the income-driven plans and some frequently asked questions.

You'll need your loan servicer's cooperation to enroll in an income-driven plan, and you may have questions for that servicer before you start. Here, Rohit Chopra offers a true pro tip: Don't call. Instead, send your questions through your servicer's messaging system.

"This gives you a paper trail," said Mr. Chopra, who was the student loan ombudsman for the consumer agency before leaving for the Education Department and, later, the Consumer Federation of America, where he is now a senior fellow. Servicers often evaluate call center employees by how quickly they can get borrowers off the phone. When customers send messages, however, they often get standardized responses that are accurate because someone senior has vetted them.

The US Department of Education building in Washington, DC
Saul Loeb | Getty Images

Stay enrolled

Signing up for an income-driven plan isn't enough. You have to requalify each year with updated financial information, and the consumer bureau accused Navient of not properly informing borrowers of this fact or of the deadlines. As a result, many borrowers saw their payments jump, leading to budget chaos and a cascade of late payments and additional interest.

Don't count on your servicer to inform you in large capital letters that THIS DEADLINE WILL COME EVERY YEAR. And don't count on yourself to remember, either. Put it on your calendar for the month before your deadline and the week before your deadline, and on your spouse's calendar, too, if you're married. Tim Ranzetta, a financial literacy educator and advocate who once ran a business analyzing student lending data, also suggests using the FutureMe site to send yourself reminder emails that will arrive on the right days.

Yes, this should all be automated. There is bipartisan support for making it more so. So cross your fingers, but set up a flurry of redundant reminders in the meantime.

No forbearance (if possible)

If you run into trouble repaying your loan and you call your servicer to beg for help, it may offer you something called forbearance, which allows you to reduce or eliminate payments for a period of time. The interest, however, keeps adding up.

The consumer agency charged Navient with steering borrowers into forbearance when they may have had other, better options, including income-driven repayment plans. Why would it do that? Mr. Ranzetta believes that it may have something to do with how lenders pay servicers and whether the right incentives were in place to give the very best advice. He blogged about it in 2009 and 2010.

The bureau, which also nodded to that possibility in its complaint — and noted how much more time it can take to service borrowers who need hand-holding for income-driven repayment plans — believes that Navient may have cost consumers up to $4 billion in interest after putting people in multiple consecutive forbearances.

In a statement on its website, Navient said that it collects 60 percent less in compensation for borrowers it services who are in forbearance. It also disputed many other aspects of the bureau's complaint.

If you have a private loan, your servicer probably doesn't have any income-driven plans. But there still may be other options short of forbearance, like extending the term of a loan to lower payments. Here again, Mr. Chopra believes that you'll have more success getting a list of all available possibilities if you make your inquiry in writing. Back when he was still at the consumer bureau, he posted a sample letter on its site for consumers to use.

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Dropping a co-signer

Perhaps you had an older, more creditworthy relative co-sign your loan to qualify for a lower interest rate. And maybe you're earning more as you get older, so you want to release that person from the legal obligation of repaying the loan if you can't do it yourself. Servicers will often allow this if you make on-time payments for a certain number of consecutive months.

But, according to the consumer agency, Navient punished borrowers who had prepaid their loans and then skipped payments in subsequent months (with the company's permission) by resetting the clock to zero on their consecutive monthly payment count. "It's appalling," said Lauren Asher, president of the nonprofit Institute for College Access & Success.

This gets to a larger, pervasive challenge that exists across lending land: How can you be absolutely sure that a bank or a servicer is crediting your payments exactly as you intend? Mr. Chopra suggests using the servicer's own online interface, preferably with auto-debit if you're sure you won't bounce payments for lack of bank funds. That way, you can set things as you wish, check that it's working for a few months and not have to write checks or push buttons in later months. You may get an interest rate discount for using auto-debit, too.

Don't use your bank's bill pay system, Mr. Chopra added, since the servicer may ignore any instructions you write on the check or in an attached memo. And if you just send a check through the mail yourself with nothing else in the envelope, beware. He said that in some big processing facilities, envelopes end up on conveyors that weigh them. If they sense there is nothing inside but a check, the envelope may undergo automatic processing where your instructions will be, you guessed it, ignored.

Check your credit (again)

You can get a free copy of your credit report each year from the three major credit bureaus. One way to check up on your servicer is to grab a report every four months and then look for any late payments or other signs that things are amiss. The consumer bureau also accused Navient of potentially tarnishing the credit of disabled veterans and others who had received legal discharges of their loans.

If this all feels like yet another multi-item checklist for your checklist of multi-item checklists from all over your financial life, well, it is. I'm sorry. And the financial services industry isn't, for the most part.

Any of the consumer bureau's complaints sound familiar? If so, file a complaint with the bureau. Do it while you still can, since there's a chance that our newly empowered elected officials will attempt to fire the bureau's director, or strip the bureau of its power at the very least. "This is a reminder why it is so important that there is an independent consumer watchdog in Washington," Ms. Asher said.

This piece originally appeared in The New York Times. 

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