1. Recertifying is Essential
Income-Driven plans are a great option for individuals faced with a high debt-to-income ratio, because they typically drastically lower the monthly payment.
Your family size and income will be evaluated to determine the appropriate monthly payment for you, typically 10-15% of your discretionary income, depending on which Income-Driven plan you choose.
Each year, however, you must recertify your family size and income, and your monthly payment may increase or decreased based on any change in circumstances.
Your loan servicer is supposed to send you a reminder each year to recertify your income and family size to maintain eligibility for your Income-Driven plan.
If they don’t tell you, and if recertifying slips your mind, you could see a substantial increase in your monthly payment obligation or even be kicked out of your Income-Driven plan.
2. Forbearance May Not be the Best Option
Borrowers struggling with making their monthly payment have the option of enrolling in an Income-Driven repayment plan in order to lower their monthly payment and ease the burden of a big student loan balance.
For borrowers living on a very meager salary with no disposable income, a monthly loan payment won’t even be required. When enrolled in federal Income-Driven plan, some or all of the unpaid interest on your loans may be waived, particularly if you have need-based subsidized loans.
Contrast this to forbearance, where your loans will still accrue interest that you will eventually have to repay.
While forbearance can be a useful tool for borrowers who have a drastic change in circumstances, such as loss of a job, it’s best to at least discuss the option of an Income-Driven plan before allowing your servicer to steer you into forbearance.
3. Paying More Than the Minimum Might Not Result in Early Pay-Off
Paying more than your minimum monthly payment will allow you to pay off your total student loan obligation fast, which can save you thousands in interest in the long run.
However, student loan servicers may not credit these “pre-payments” against your loan principle, and instead may extend your loan term or grant you “payment holidays.”
Not only does this hurt your overall goal of paying off your loans early, but it also may have consequences if you have a co-signer on your student loans.
Many private student loan lenders require the borrower to have a co-signer to qualify for student loans.
After a successful repayment period of consecutive payments for anywhere between 12 to 48 months, many private lenders allow borrowers to apply for co-signer relief, thus relieving the co-signer of any obligation should you default on the loans later down the road.
However, if you have been paying more than the minimum and are told you don’t have to pay for a few months, you may then have difficulty releasing your co-signer and have to start the process all over again.
4. Partial Payments Sometimes Result in Late Fees
Individuals with multiple student loans typically pay them down through one combined account with one loan servicer. Your servicer will send you a statement each month detailing all of your outstanding loans and the minimum payment due for the month.
If you can’t pay the total minimum payment, however, and opt for a partial payment, they will likely allocate it evenly across all loans.
Then, every single one of your loans will be delinquent, and you may potentially get hit with a late fee on each one of them, depending on whether your loans are privately or publicly serviced.
Instead of allocating a partial payment across all of your loans, a better strategy may be to pay the entirety of what is owed on your loans with the highest interest rates to keep them current.
That way, you will only be charged a late fee on the loans with the lowest interest rates, ultimately saving you money.
Regardless of the method you choose, your loan servicer is obligated to tell you how they are directing your partial payments and the potential consequences of their allocations.
5. Even if You Pay in Full, You Might Have a Small Balance Remaining
Say you are able to pay off your loans in full with one lump sum. Amazing, right?
However, there’s a chance you aren’t up-to-date on the full amount owed, and your lump sum payment comes up a bit short, even by just a few dollars.
According to the Consumer Finance Protection Bureau (“CFPB”), many student loan servicers will not inform the borrower of the shortfall in their payment, because the borrower is current on all payments for the foreseeable future.
You are left in the dark, while your loan servicer continues to rack up interest, which even on a small leftover balance, can result in a large balance if left to accrue for years.
To avoid a nightmare situation like this, it is best to request written confirmation from your loan servicer confirming that all of your loans have been paid off in full.
6. The Shortest Repayment Period is Best
While Income-Driven plans are a great option for individuals who can’t afford to make monthly payments under the Standard or Graduated 10-year repayment plans, opting for an Income-Driven plan results in paying more in interest over the life of your student loan repayment period, thus making your loan servicer more money.
If you can afford it, sticking with the Standard 10-year repayment plan will cost you the least amount of money in the long run, despite the high monthly payments. Paying more each month can save you potentially thousands in interest over your repayment period, so it’s best to pay them off as fast as you can.
7. You Can Complain About Your Servicer
While dealing with your student loan servicer can at times be frustrating and confusing, be aware that you have the option file a complaint with the CFPB, who will then track and forward the complaint to your loan servicer for their response.
In cases of egregious lending practices, the CFPB may even launch an investigation on their own.
Further, if you have loans through the Department of Education, you may submit a complaint through, and seek guidance from the Department to learn more about your rights as a student loan borrower.
8. Auto-Pay May Lead to More Interest
Virtually all loan servicers allow you to make automatic payments that are deducted from your bank account on the same day each month, making it impossible for you to miss a payment.
While this is great for avoiding any missed payments on your end, there could be mix-ups with your servicer where they take the money out of your bank account earlier than the scheduled day, potentially resulting in an overdraft fee if there are insufficient funds in your account.
Further, if your payment is scheduled to be made on a day when the bank is closed (i.e., a weekend or a holiday), it often will not be processed until the next business day.
Some loan servicers charge extra interest for the day or two before your payment is actually applied, even though you likely thought the payment had already been made.
9. They Can’t Charge Late Fees
If your loan servicer threatens you with late fees for missed or late payments on loans held by the Department of Education, this is false.
While Department of Education loans do allow for the charging of late fees, the federal Government does not at this time charge late fees on its loans, and instructs its loan servicers not to do so.
If you have any questions about your current payment plan, or you are wondering about how you can lower your payments, call My Financial Solutions today for a free loan assessment at 760-542-6202.
We’ll go over your loans with you and give you all the information you need to make an informed decision about which repayment plan might be suitable for you.