Buzz
Repayment plans promoted by colleges may cause borrowers to owe twice or even three times their original debt, as stated in a CNBC report.
The Government Accountability Office reports that $149 billion of the nearly $1.4 trillion federal student loan debt was in default by September 2017. However, when too many students from a particular school default within three years of graduation, that school loses access to federal financial aid programs. To avoid this, consultants hired by schools often encourage students to enter forbearance instead of defaulting. CNBC notes that nearly 70% of student loan borrowers from 2013 had been in forbearance at some point.
Mark Kantrowitz, a student loan expert, explained to CNBC that 'A forbearance is detrimental because the interest continues to accrue and gets capitalized, making the borrower’s situation worse.'
Since students are often unaware of their options, they tend to rely on their schools to act in their best interests. This trust results in interest continuously adding up, benefiting the school. According to the GAO, 'Borrowers in long-term forbearance defaulted more often in the fourth year of repayment, when schools are not held accountable for defaults, indicating it might delay, but not prevent, default.'
Rehabilitation also increases the amount borrowers have to repay. This process happens when borrowers attempt to exit default, requiring a new loan agreement with additional collection costs, which can be as much as 16% of the unpaid principal and accrued interest. This leads to higher loan balances than expected, and the Consumer Financial Protection Bureau reports that more than 40% of those who rehabilitate their loans fall back into default.
A more favorable choice for students is enrolling in an income-driven repayment plan, if available. There are four different types, explained here. (Note: These are not the same as the Public Service Loan Forgiveness program, but you must be in an income-based plan to qualify for PSLF.) While the monthly payments may not be the lowest, the remaining loan balance is forgiven after 20-25 years.
Most importantly, make sure you fully understand all your options and how each one affects your payments.
