Federal Student Loan Debt is a major issue that affects 43 million adult Americans. Many of them, like borrower Nicole Nelson, a native of Illinois, sought the advice of her loan servicer, Great Lakes Educational Loan Services. In a recent article by MarketWatch, the company allegedly deceived her by steering her towards repayment plans that benefit them, not her.

On June 2019, the federal appellate court unanimously decided that a loan servicer could not allegedly and deliberately misrepresent repayment options and use federal laws to shield the servicer from state rules barring deceptive business practices. The case highlights how the Education Department rarely holds servicers accountable. Due to these weak state consumer-protection laws in student-loan litigation, clients might end up with costly repayment options.

“One of the biggest things I see is that if people prepay their loans, they get $0 bills from their servicer, which means that instead of applying the excess payment to principal, the servicer is instead applying the payment to the next month’s payment, which I feel is very unethical, “ says Advisor Max Mintz of Common Interests, who focuses part of his practice on college borrowing and repayment.

When repaying Federal Student Loans, crucial advice your clients might need is how to navigate working with a loan servicer.  Loan Servicers are companies that collect payments on a loan, respond to customer service inquiries, and perform other administrative tasks associated with maintaining loans issued by the federal government. Clients should be aware of possible deceptive behavior from these servicers. Providing them with the knowledge and tools to understanding how loans and loan servicers work builds relationships and longevity with clients. A good resource is to keep up with federal laws aimed at consumer protections. Within the last few months, the law has allowed clients to “pursue state law claims against servicers for their abusive practices.” These laws provide opportunities for you and your client to assess a course of action for their particular case.

“Servicers are not required to tell people the truth nor all their options.” – Max adds.  The advantage of hiding behind law protection means servicers “ steer consumers into forbearance (which causes interest to accrue and often results in recapitalization, where the interest is added to the principal and itself starts to accrue interest) when they would otherwise be eligible for income-based repayment plans.”

To help your clients navigate this very complex issue, we’ve complied some resources and tips:

2. Make sure you and your clients read up on the ins and outs of repayment options through servicers. A few resources can be found at the following links:
   • Student Loan Borrowers Assistance guide to dealing with servicers: https://www.studentloanborrowerassistance.org/repayment/dealing-with-servicers/
   • Federal Student Aid: https://studentaid.ed.gov/sa/repay-loans
   • Non-profits are providing help with options (and not charging predatory fees), , contact a student loan counselor certified by the National Foundation for Credit Counseling: https://www.nfcc.org/who-we-help/student-loan-borrowers/
3. Make sure clients have a handle on the basics of their loan repayment terms. Print these terms out and share them with you, their Financial Advisor, as part of their overall financial health. As noted in the student repayment plan process by Federal Student Aid, the loan servicer or lender is required to provide a client with a loan repayment schedule that states:

• The deadline for the first payment.
• The frequency and number of payments.
• The amount of each payment.

If payment dates don’t work with your client’s pay period at work, these dates are negotiable and can be tailored to the client’s schedule each month.  

If a client can’t afford the repayment terms, they could change the repayment plan to Income-Based Repayment or simplify the repayment process with Direct Consolidation Loan.

5. When a client prepays, they could possibly have control over how the payment is processed by using this loan servicer letter template by The Consumer Financial Protection Bureau. However, there are cases where the servicers have ignored these letters, so make sure to follow up and verify that the instructions are being followed.
6. Lastly, if your client is a public service employee, become familiar with Forgiveness Strategy. Your client could be eligible for loan forgiveness in exchange for years of public service such as teaching or employment at a non-profit. As Max argues:

“In my view, the current Department of Education is actively hostile to student loan borrowers, so my thinking is that since loan repayment periods are longer than five years, it makes sense to pursue some of the forgiveness options that are currently under threat/not being administered properly.”

 “Any governmental job or employment at a not-for-profit 501(c)(3) employer qualifies,” explained Brandon Renfro, a finance professor at a private, not-for-profit school. His employment qualifies.

Servicers are essentially debt collectors whose obligation is to maximize the amount collected from borrowers. Financial Advisors can often be the first line of defense against deception to help your clients pay back their loans in a timely manner that works within their schedule. If you have more tips on how to navigate the world of student loan servicers, email us at marketing@vanderbiltsecurities.com.

Moira Mai Do is the Digital Marketing Specialist at Vanderbilt Financial Group. She is interested in innovations in AI, Machine Learning, and Impact Entrepreneurship, especially in business/venture that propels climate actions. She holds an BA (Honors) in Strategic Communications from Temple University.