Skip to content

Eight Suggestions for Counseling Student Loan Borrowers

June 19, 2014

The cost of higher education is on the rise and so is student loan debt.  Students look toward their financial aid counselors to educate and guide them through this important part of their higher learning process. The following article, written by Mark Mielke, an advisor and Money Wise Aggie Coordinator, Scholarships and Financial Aid at Texas A&M University, serves as an excellent resource for those wanting to continue to improve their counseling practices. Our very own Regional Director Lou Murray was excited to share some insight from Nelnet’s perspective with Mark as he wrote this piece. The article was originally published in The Association for Financial Counseling & Planning Education’s (AFPCE) publication, The Standard (2nd Quarter 2014, Vol. 32 #2).

Eight Suggestions for Counseling Student Loan Borrowers

By Mark Mielke, MPA, CFP®

As the total amount of student loan debt continues to increase, so does the need for well informed financial advisors to counsel students and former students with substantial amounts of student loan debt. Offering information to student loan borrowers on both their repayment responsibilities and options will be extremely useful to them as they prepare a repayment strategy.

Providing sound financial guidance to students will also benefit your college. Colleges are being held responsible for the default rate of their former students. High default rates can bring institutional penalties. Penalties range from delays of selected current financial aid distributions for colleges with moderately high default rates, to possible loss of federal financial aid funding for colleges with default rates deemed exorbitant by the Department of Education (ED).

While financial advisors may not consider themselves experts on the subject of federal student loan repayment, their general advice will be extremely valuable in preparing borrowers to work with those who are servicing the loans. Here are eight suggestions to help you counsel student loan borrowers:

  1. Be prepared. It is important that advisors become knowledgeable about student loan repayment to ensure accurate and pertinent information will be conveyed to borrowers. One of the most useful websites on the subject of repaying student loans is http://www.studentaid.gov. ED sponsors this website to assist students on a wide variety of topics about preparing and paying for college. There is a “Repay Your Loans” section on the ED website designed to help student loan borrowers. Advisors can use this information to begin guiding borrowers who won’t access the information for themselves due to their lack of even an elementary understanding of the loan repayment process. Through advisor workshops and individual counseling to provide basic information, borrowers can then be better prepared to research desired topics on their own.
  2. Review loan details. A good way to begin a counseling session is to view the specifics of the borrower’s federal loans at http://www.nslds.ed.gov. This website contains federal student loan information including loan amounts, interest rates and loan servicer contact information. Many financial aid advisors have access to student loan information on this website because they need it to ensure loan amounts meet federal laws. These financial aid advisors are able to independently view the status of students’ loans. Those financial advisors who do not have access can walk borrowers through the website login process so loan information can be viewed together. While the importance of the principal and interest rates is obvious, the loan servicer contact information is also very important. The loan servicers’ main job is to educate borrowers and help them create repayment strategies. Servicers speak with many borrowers during a typical week and are well versed on loan repayment. Advisors should emphasize to borrowers to never hesitate to contact loan servicers for assistance with questions about their student loans or to discuss changes in their financial status. Servicers are paid to help, not hassle, borrowers and are also an extremely useful resource for advisors to clarify specific questions about the repayment process. It may be worthwhile for the borrower, advisor and servicer to be on a conference call together to discuss advantages and disadvantages of different repayment options.
  3. Emphasize that the federal government will collect. Borrowers who plan to simply ignore the monthly repayment statements until the government forgets about the loan are making a mistake. The federal government is very serious about collecting the full amount of student loan debt owed. Once a borrower starts missing payments, the loan goes into delinquency status. During the delinquency period, the borrower is still able to work with the loan servicer to devise a repayment plan. After 270days of loan delinquency, the loan transfers into default status. Once the borrower defaults on the loan, the loan servicer is replaced by a loan collector. While the main goal of the servicer is to educate borrowers and help them find repayment solutions, the main goal of the collector is to collect the money. The government has the authority to collect money owed by garnishing wages and withholding tax refunds, and they will do so. Defaulting on student loans severely lowers borrowers’ credit scores and will increase the amount that the student will eventually be required to pay back due to increased interest charges and possible collection fees. You will be providing sage counsel if you convey to borrowers that their chances of outwaiting the government until it gives up collecting the amount owed are miniscule.
  4. Determine amount available for repayment. If the borrower has a job or job offer, the salary or wages can be placed into a net pay calculator to ascertain “take home” pay. Having this figure enables the financial advisor to work with the borrower to prepare a preliminary budget for determining an approximate amount that will be available for monthly loan payments. The preliminary budget will enable the advisor to discuss the various loan payment options based on the borrower’s ability to pay. For borrowers who do not have jobs or any other incomes necessary to repay their loans, they should call their loan servicers to tell them of their unemployed status. The servicers will be able to explain options. A good option for unemployed borrowers may be to apply for an unemployment deferment. Just as when the borrower was enrolled at least halftime in a degree seeking program that qualified for an in-school deferment, the unemployment deferment status temporarily delays loan repayment. An excellent feature of a deferment is that the government pays the interest on subsidized loans. There are other deferments available, such as economic hardship and military deployment. Interested borrowers should speak with their servicers to learn the specific requirements to qualify and for procedures to apply Forbearance is another option that enables borrowers to postpone their monthly payments or reduce the amount of their monthly payments for up to 12 months to help avoid default. The disadvantage of forbearance is that during the postponement period, all interest, including for subsidized loans, accrues to the borrower. The advantage of forbearance is that the approval process is much easier; the loan servicer may be able to grant a forbearance over the phone.
  5. Discuss standard payment. Borrowers about to begin their repayment will be placed in the standard payment plan unless they select another option. The standard payment plan is usually the best option for borrowers who have secured a job with sufficient income to afford their monthly payments. Federal loans are typically amortized over 10 years and payments begin after the loan grace period. The grace period for federal student loans is normally six months, although the Perkins Loan has a nine month grace period. If the monthly payment due is less than$50, the amount due will be increased to the $50 minimum. Explaining the standard payment option often provides the opportunity to discuss automatic monthly withdrawals from the borrower’s checking account to make the student loan payment. Establishing automatic payments is usually a wise choice for borrowers about to begin their repayments for three reasons: (1) payments are not missed due to neglect or forgetfulness; (2)there is an easily accessed record of payments on the same date each month in case there is a dispute between the borrower and servicer regarding payment history; and (3)terms of some federal loans allow servicers to reduce the loan interest rate by twenty-five basis points as an incentive for borrowers to establish automatic payments. Some borrowers want to pay off their loans as quickly as possible. Those borrowers should be advised that they are allowed to prepay their federal loans at any time no matter if they are still students, in the grace period or making their monthly payments. Those that want to make payments in addition to the normal monthly payments should make sure to clearly indicate that their payment is to be “applied to principal” so that the servicer does not mistakenly believe that borrower is making an early monthly payment.
  6. Review graduated and extended payment options. There are other options for borrowers to consider. The graduated payment option has the same 10-year repayment period as the standard payment, but enables the borrower to start with lower initial payments which will increase usually every two years. The final two years of payments typically are about triple the amount of the initial payments. This may work well for borrowers who anticipate increases in income over the next few years, but increases risk if their income escalation plans don’t come to fruition. The extended payment option simply enables borrowers with large amounts of loans to extend the repayment period from 10 years up to a maximum of 25years. Increasing the repayment period decreases the amount of the monthly payments but increases the amount of total interest to be paid. There is also an extended graduated option that both extends the repayment period and starts with lower repayment amounts that gradually increase over time. This option usually has the highest total interest charges for the borrower if repaid through the full repayment period.
  7. Examine income-driven repayment plans. There are three repayment plans that determine the amount of required payments based on borrowers’ annual incomes: Income-Based Repayment (IBR), Pay As You Earn (PAYE) and Income Contingent Repayment (ICR).Borrowers’ repayment amounts for all three plans are based on such factors as the adjusted gross income, amount of the loan, state of residency and number in family. While there is not enough space to explain each of these programs in detail, advisors should be aware of the following: (1)there has been increased interest over the past few years as borrowers are searching for affordable ways to make their payments (2) they all have forgiveness provisions after meeting their respective requirements for on time payments; and (3) debtors with low or moderate income may be required to make little or no payment during a year and still qualify for having successfully completed payment for that year.
  8. Consider consolidation. When meeting with borrowers who have multiple loans, the topic of consolidation will invariably arise. The federal government consolidates federal student loans through their Direct Consolidation Loan program which enables borrowers to combine two or more loans into one loan with one monthly payment. The resulting interest rate on the new loan will be the weighted average of rates of the loans being consolidated rounded up to the nearest one-eighth of 1%. Although the borrower must have at least one of their federal student loans in the grace period or in repayment to begin the consolidation process, the research on whether consolidation is a wise decision based on individual borrower circumstances can begin much sooner. While the main advantage of the new Direct Consolidated Loan will be to reduce the multiple payments to one, there may be additional advantages. Consolidating Direct Loans with older federal loans may enable the new Direct Consolidated Loan to be eligible for one of the income-driven plans in which the older federal loan would not by itself be eligible. Similarly, the new Consolidated Direct Loan amount may become eligible for extended payment that would not have been the case before consolidation. Although loan consolidation may help simplify the monthly repayment process, borrowers should not enter into consolidation without careful consideration. Borrowers should keep in mind that the original loans that are consolidated are replaced by the consolidated loan. Any benefits of the original loans such as loan forgiveness may be lost. Also, extending the repayment period due to consolidation will reduce monthly payments but will increase the total amount of interest paid over the life of the loan.

Providing effective financial guidance to your school’s federal student loan borrowers who will soon begin repaying their loans will benefit the borrowers and your school. Using these eight suggestions, obtaining additional information from http://www.studentaid.gov and verifying information with loan servicers will provide the information needed for you to become a valuable resource for students and former students seeking help.

Mark Mielke, MPA, CFP®, is an advisor and Money Wise Aggie Coordinator, Scholarships &Financial Aid at Texas A&M University. He can be reached at (979) 458-5325 or visit https://moneywise.tamu.edu for more information.

Again, thank you to Mark and the AFCPE for allowing us to share this outstanding resource!

 

Nycci Jones, Learning Engineer, Nelnet Partner Solutions

Nycci Jones, Learning Engineer, Nelnet Partner Solutions

 

No comments yet

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: