Feds seek to make it easier to restructure student loan payments

Government to help borrowers better understand their repayment options.
MAY 12, 2016
The government offers lots of programs to help student borrowers repay their federal loans on time, yet one in four people with student debts due are currently in default or teetering on the edge. In an effort to keep people on track with their student debt repayment, Uncle Sam is developing personalized guides that would illustrate how each of its payment options might work for the borrower. “Millions of consumers needlessly fall behind on their student loan debt, despite their right under federal law to a payment they can afford,” said Richard Cordray, director of the Consumer Financial Protection Board. Most borrowers must begin paying back their federal student loans six months after graduating from school or after dropping to less than half-time status. High fees and bad credit are among the woeful repercussions of not paying student loans back on time. About 70% of federal student loan borrowers who are in default earn incomes that are low enough to qualify for income-driven repayment plans that would cut the amount they owe each month, a Government Accountability Office report last August found. The “Payback Playback,” unveiled by the Education Department and the CFPB on Thursday, was created to make sure those entities servicing student loans offer information that's tailored to the borrower's individual circumstances. The CFPB is accepting comments on its prototype through June 12. It was designed to be included in borrowers' monthly bills, in email communications from their loan servicer, or to be examined by the borrower when they log into their student loan accounts. Student loan servicers manage borrowers' accounts, process monthly payments, and are the entity they go through to participate in the government's alternative repayment programs. Often times the servicer is different than the lender. The new government resource also would pester borrowers when they are falling behind on payments. “This will help these borrowers take action, stay on track and steer clear of financial distress,” Mr. Cordray said. (More: Fidelity offers to help employees pay off student loans) REFINANCING OPTION? A sample "Payback Playback" shows two alternatives that someone paying $271.54 per month for 112 payments would qualify for if they're earning just over $29,000 a year. Under the Graduated Repayment program the borrower would begin paying $152 per month and see that amount gradually increase over the 112 payments. The Pay as You Earn program would require $45 a month from borrowers for up to 232 payments. Any debt remaining after that 20-year period would be forgiven. Samantha Gorelick, an adviser with Heron Financial Group, recommends clients who are struggling with student loan debt investigate whether they qualify for — or might ever qualify for — any of the federal student loan repayment programs. The government options are preferable to refinancing with a private company and the federal repayment programs are off limits to borrowers if they have refinanced, she said. Also, if student loans are carrying a 5.5% rate or less, it's probably not worth looking into refinancing, Ms. Gorelick said.

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