I am a Member of Generation Debt

I am a member of Generation Debt. The loans I took out for my bachelor’s and master’s combined equate to exactly $62,799 of federal loan debt.  Over my postsecondary career, I’ve taken out nine different federal loans and have consolidated five times. With many interest rates at historic lows, the congressionally mandated rates on my loans range from 3.75 to 7.9 percent.  And while I am ready, willing, and able to pay my loans back, I’ve found the process more difficult than I thought it would be. Now that I’ve gone through the repayment process, I believe there has to be an easier way. Here at Education Sector, my colleagues have envisioned just what this better option would be—an automatic income-contingent repayment policy. This would simplify and streamline a repayment process that currently baffles even those, like me, with a high amount of financial literacy.

I don’t think it would be an exaggeration to say I was far more prepared than the average borrower entering repayment. While earning my master’s degree, I worked as an advisor at TERI College Planning Center where I counseled students about loans and financial aid, often encouraging them to take on a modest amount of debt.  This hands-on experience was combined with coursework and research on financial aid policy and student debt.  Suffice it to say, I thought I had the knowledge required to make entering repayment and choosing a plan straightforward.

When I graduated this past May, I vowed to be organized and paid attention to my mandatory exit counseling.  I looked up my loan information using the National Student Loan Data System. I tracked down all my paperwork to figure out each loan’s interest rate.  I checked out each loan’s website to determine both my standard monthly and graduated repayment options, and what it would mean for paying down my interest and my principal.

Ultimately, I realized it was in my best interest to consolidate a majority of my loans to simplify repayment and get some of my higher interest rates a bit lower. Using the government’s consolidation calculator which provides a drop down menu of a veritable alphabet soup of federal student loans, I calculated my weighted interest rate and repayment options. When it finally came time to apply, I had to input the information of all lenders (even from the loans I wasn’t consolidating), including their addresses, how much I owed, and the different interest rates.  I chose Income Based Repayment (IBR) and I signed my Master Promissory Note.

After I applied, I found out that as an added incentive to choosing IBR, if my monthly payments don’t cover the interest on my subsidized Stafford loans, then the government will pay or waive it for three years. I wanted to make sure that by consolidating multiple loans together, I didn’t disqualify myself from this provision.  I contacted Federal Student Aid to ask, and was put on hold and transferred three times.  Ultimately, I was given the number to contact Direct Loan Consolidation where I was transferred two more times before I got an answer. In case anyone is wondering, a direct consolidated loan does qualify for this interest provision. Meanwhile, my application is still processing as all the information I input needs to be re-verified by the Department of Education.

I find entering repayment to be baffling, scary, frustrating, and stressful. This is a process I started in May and I’m still waiting to hear if my consolidation went through. If the whole process has been confusing for me, I’m sure it has been worse for other borrowers who lack the financial literacy required. Not surprisingly, those students who hold both a Federal Family Educational Loan (FFEL) and a Direct Loan are at a much greater risk of defaulting.  Furthermore, only about 450,000 students have signed up for IBR, a program that is meant to help students with a large debt-to-income ratio.  Perhaps the default rate for these students wouldn’t be so high if the repayment process was easier to navigate. Most end up on the standard repayment plan, because that’s what automatically happens when the loans come due and it takes a lot of information and know-how to do otherwise. A standard ten-year repayment can equate to huge monthly payments. For me, that was about $800. IBR is reducing my payment, and as a result, I don’t feel stretched thin.  Maybe I won’t have to delay those important life decisions that economists are worried about like buying a house.

Last week, President Obama basically implemented a more generous version of IBR with some incentives for students to consolidate their FFEL loans into a Direct Loan. But giving more generous terms to an already bad repayment policy does nothing to address the borrowers who are falling behind on loan repayment because they don’t know how to navigate the current repayment system or that they can even change the terms of their loans.

It doesn’t have to be this confusing.  Australia and the United Kingdom have implemented an automatic income-contingent loan policy that is much more consumer-friendly. In the UK, 98 percent of borrowers are meeting their repayment obligations. Similar to IBR, income-contingent loans are based on a percentage of a borrower’s discretionary income. Yet unlike IBR, these loans would be offered at a single interest rate and would be automatically withheld from borrowers’ paychecks once they entered repayment. Instead of having to sign up for IBR every year and write multiple checks every month, all borrowers would be enrolled in the income contingent plan managed by the IRS and would have their loans paid through payroll deduction.

With student loan debt outpacing credit card debt, and defaults on the rise, policymakers can stick with modifying the current process, which I can attest is a mess. Or instead explore a Plan B—something that would lead to systemic change. A move to an income-contingent repayment policy would do just that.

Tagged as: Federal Student Loans, FFEL, Generation Debt, Income-Based Repayment, income-contingent loans, Loan consolidation, NSLDS, Perkins Loans, PLUS Loans, stafford loans, Student Loan Debt, Student Loan Repayments, Student Loans