Considering a Student Loan? Follow These Tips to Avoid the Worst Repayment Traps

Taking these steps can help borrowers prevent problems with their loans

Considering a Student Loan? Follow These Tips to Avoid the Worst Repayment Traps
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January 20, 2017

The Consumer Financial Protection Bureau's (CFPB) recent accusations against Navient, the largest student loan servicer in the U.S., provide consumers with an excellent reason to re-examine their own loans and the path they're following to pay those loans off.

Many things can go wrong when inexperienced young people have to navigate the complex seas of student loans. Here are some ways in which they can navigate those waters more safely.

Know Your Loans.

Keeping out of trouble with student loan servicers starts when consumers ask two questions: How much do I owe, and to whom do I owe it? Finding answers to these questions can be confusing to the inexperienced for a number of reasons. One is that the loan servicer—that is, the entity that collects the payments and takes requests for adjustments to the loans—is frequently not the original lender.

The National student loan Data System can usually help you answer these two questions regarding federal loans, the loans provided by the Education Department. You'll need to set up an online account with the System to use it.

It can be more difficult to figure out your private loans, the ones that came from banks and similar entities. If you think you might have lost track of a loan, check your credit reports through Lenders almost always report the existence of a loan to the three major credit reporting companies, which by law provides free copies of credit reports to consumers through this website.

Income-Driven Payments.

If you have taken out a federal loan, you might be eligible for a payment plan that will let you submit information about your income and family size and then reduce the amount of your monthly payments to affordable amounts. In some instances, you don't have to make any payments at all.

Unfortunately, not everyone knows that there are such programs as these. According to the CFPB, Navient did not explain borrower eligibility to their customers well enough. For this reason, all borrowers need to learn as much as it as they can. Parents should check with their college seniors and recent grads to make sure they know about it. The Education Department has a repayment estimator tool that can let you know whether or not you're eligible as well as a list of all income-driven payment plans and frequently asked questions.

Your loan servicer must be willing to cooperate with you if you want to enroll in one of these plans, and you might have questions for the servicer before you try. Consumer Federation of American Senior Fellow Rohit Chopra offers this pro tip: Do not call. Instead, send questions through the servicer's messaging system.

"This gives you a paper trail," said Chopra, who used to work as the student loan ombudsman for the CFPB. Servicers often evaluate employees in their call centers by how fast they are able to get a borrower off the phone. When a borrower sends a message, on the other hand, they often receive a standardized response that is correct because a senior employee has vetted the message.

Stay Enrolled.

It isn't enough to sign up for an income-driven payment plan. Borrowers have to re-qualify every year with updated financial information. And do not depend on your servicer to tell you that the deadline for re-qualifying will come up again every single year. Do not depend on yourself to remember it, either. Automate reminders by putting the deadline on your calendar for the month before the deadline as well as the week before, and if you're married, put it on your spouse's calendar also.

Avoid Forbearance Whenever Possible.

If you start to have trouble repaying your loan and call your servicer for help, the servicer may offer something called forbearance. Forbearance lets you either reduce or eliminate payments for a certain period of time. However, the interest on the loan will continue to add up.

Servicers of private loans likely do not have any income-driven payment plans. However, borrowers may still have other options short of forbearance, such as extending the term of a loan in order to lessen payment amounts. Chopra recommends making your inquiry in writing for this too.

Drop a Co-Signer.

When you signed up for your loan, maybe you had an older, more creditworthy relative co-sign so you would qualify for a lower interest rate. As you get older, maybe you're earning more, and now you want to release your co-signer from the legal obligation of repaying the loan in the event that you can't pay it off yourself. Servicers frequently allow this if you make payments on time for a certain number of consecutive months.

Re-Check Your Credit.

By law, the three major credit reporting companies are required to give you a free copy of your credit report every year when you request it. If you want to check up on your loan servicer, request one copy of your report every four months and check for any late payments or other errors.