In a recent article, I wrote about a former student who was struggling with more than $100,000 in student loan debt.
He’s not the only one.
About two hours after my article hit the wire, I received an email from a grad who’s five years out of school, working a great job in a professional field and looking forward to a bright future.
He also happens to be more than $150,000 in the hole for his undergrad and graduate schooling—a combination of $60,000 in fixed-rate federal student loans and $90,000 in adjustable-rate private debt.
Over the course of the next few days, I learned that his student loan debt-load — the monthly payments themselves consume more than 30 percent of his pretax earnings — has caused him to run up even more debt (credit card) as he struggles to cover his living expenses.
But despite his trouble, he didn’t blame his family’s limited ability to fund his college experience. Nor did he point a finger at the high school guidance counselor who neglected to tell him about potential tuition-saving resources, such as the College Level Examination Program (CLEP).
He didn’t even rail about his schools’ (undergrad and grad) failure to provide good advice regarding the level of debt he was accumulating, or how the lenders — government and private — made it so easy to draw down this funding during his deferment period.
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Instead, he wanted to focus on the steps he could take to change course. In particular, he wanted to explore the strategies for negotiating more favorable repayment terms for his government and private loans.
The federal part turned out to be surprisingly straightforward. He qualifies for the newly implemented Pay As You Earn Repayment plan (PAYER), which will help him to reduce his monthly payments.
Unfortunately, his interactions with the private loan servicing company — not the lender itself — have not been nearly as satisfying.
Short-term solution, longer-term pain
He said their customer service representatives were more interested in pitching temporary payment-eliminating or payment-reducing forbearances than they are permanent loan modifications.
Not only don’t these short-term accommodations address the underlying problem, but they also prolong the pain.
That’s because in either case, the full amount of the interest continues to be accrued on the loan, only to be added back to the balance on which even more interest is then charged (a.k.a. negative amortization).
One option I shared with him is that he can go back with a specific request to extend the duration of his loan so his payments will be reduced to a number he would then be able to afford, while preserving his right to prepay principal.
That way he’d have the benefit of a lower payment for as long as he needed without having to forgo the advantage of accelerating his repayment schedule (by adding extra principal amounts), as his cash flow permits.
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Sadly, the customer service representative from the loan servicing company stonewalled him.
The grad then asked to speak to a supervisor who, after a protracted and heated conversation, reluctantly gave him the actual lender’s number to call so that he could make his appeal on a direct basis.
The wrench in the works
As it turns out, the lender financed the loans it made with securitized debt of its own, meaning the lender had sold his debt to investors.
As many know, this was not an uncommon practice in years past and probably the reason the servicer gave him such a hard time: securitized debt is much less flexible than loans that are actually owned by the lender.
Imagine dumping tens of thousands of contracts into a financial Cuisinart where the resultant ball of dough, so to speak, is rolled out and pizza-wheeled into hundreds of thousands of really thin slices that are then sold all over the world.
As such, it would be difficult — if not impossible — to reconstitute and revise the hodgepodge that’s now owned by so many different people in so many different places, right?
So how is it that the loan servicers have the ability to offer forbearances as a matter of due course, but not a permanent modification when both involve extensions of the original loan’s duration?
Either way, the securitization investors would have to accept something less than what they originally bargained for.
Another frustrated grad
While all this was going on, I received another series of emails from a grad who sounded just as frustrated as the other one.
This time, the issue concerned government loans that had been transferred to a servicer that qualified under an obscure provision of the Affordable Healthcare Act.
The assignment itself was innocuous, but soon after it occurred, the new servicer unilaterally decided to reduce the woman’s monthly payments by $100 and extend her loan duration in the process.
When she called to question the change, the customer service representative told her they had “reevaluated” her loan and determined that she’d been charged the wrong amount.
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Despite her protests, the servicer refused to reinstate the payment she’d been remitting to that point.
So, she decided to continue paying the same amount, nonetheless, and have the added value applied against principal, which would have kept her on track for paying off her loans.
But, to her frustration, the company routinely disregards her instructions and credits the added amounts against future loan payments, which defeats the purpose.
With all this in mind, it’s hard not to think of student loans as “the gift that keeps on giving” for some, including:
- Lenders that continue to earn healthy rates of interest on the outstanding balances.
- Financial services companies that were paid a fee for the loans they originated on behalf of the government and now stand to earn additional fees for servicing the same contracts, not to mention bonuses for extracting payments from defaulting borrowers these firms may have permitted to become so delinquent in the first place.
- The schools that are these days engaging so-called default management companies in an effort to channel soon-to-be-graduates into payment modification and forbearance arrangements, all in an effort to influence the cohort default rate because of its impact on the school’s continuing eligibility for federally-supported aid.
At some point—hopefully, sooner rather than later—we’ll accept the fact that everyone plays a role in this mess: government, private lenders, schools, students and parents.
Perhaps then, we’ll resolve to commit the resources that are needed to comprehensively address all the aspects of this abominably flawed system once and for all.
Mitchell D. Weiss is an experienced financial services industry executive, entrepreneur and adjunct professor of finance at the University of Hartford. He is also the author of the recently published College Happens: A Practical Handbook for Parents and Students,Life Happens: A Practical Guide to Personal Finance from College to Career-2nd Edition, andBusiness Happens: A Practical Guide to Corporate Finance for Small Businesses and Professional Practices. Connect with me on Google+.