Federal Student Loans
Many of my clients are often shocked at the outstanding balance of their student loans. After I have an opportunity to review essential information, I can explain why.
Performance of a student loan is when the loan is in good standing and normal payments are being made on a monthly basis, in full and on time. These payments may very well be $0 per month depending on what repayment plan the borrower is in. But the loan is still performing.
When the loans are not performing, they are in default, forbearance or deferment. There are some exceptions to this.
When the loans are in a nonperformance status, the interest continues to grow because of interest capitalization. This means the interest that remains unpaid and accumulated is added to the principal of the loan, and the interest then begins to accumulate on the new balance. This is ugly.
This is why a student loan with a relatively small balance and low interest rate can balloon to a very large balance if the loan has been in a nonperforming status for a long time.
Just a Little Bit Behind
The loans are still performing, but the monthly payments were not made on time, not paid in full or a combination of both. If this occurs for several months and continues, the loans may then become nonperforming.
More Than a Bit Behind
Federal student loans are considered in default after they have been delinquent for more than 270 days. Once this happens, the status becomes nonperforming, any IDR payment program is terminated and a host of nasty collection activities can take place, including:
- The issuance of an Administrative Wage Garnishment (AWG)
- The interception of a tax refund
- The offset Social Security benefits or other federal benefits
- The initiation of a collections lawsuit
At this juncture, nothing may happen. The loan could sit in default status for a long time, accumulating unpaid interest and racking up costs and fees for the default. See The Woodstock Effect.
Based on the current state of affairs within the U.S. Department of Education, and under its current policies, there are several different repayment options for federal student loans. Please be aware these programs could be eliminated at any time.
My experience has clearly indicated that federal student loan servicers do a terrible job of explaining options to student loan borrowers. This leads to a tremendous amount of frustration and confusion. The key to the performance and management of student loans is to get the loans in the right place, in the right program, and make their management in line with household finances. Once the total student loan picture is clear, options can be explained without pressure and deception from the collector or servicer.
The current Balance-Based Repayment Plans available to federal student loan borrowers are as follows:
- Standard Repayment
- Graduated Repayment
- Extended Repayment
- Graduated, Extended Repayment
The current Income-Driven Repayment (IDR) Plans available to federal student loan borrowers are as follows:
- Income-Based Repayment (IBR)
- Revised Pay-As-You-Earn (REPAY)
- Pay-As-You-Earn (PAY)
- Income-Contingent Repayment (ICR)