For more than three years, no one has had to make a payment on their federal student loans. That came to an end this month. Students (and parents with Parent Plus loans) are being asked to begin repaying their loans.
Sadly, the level of confusion surrounding repayment options has reached an all-time high — not only for the borrowers but also for the loan servicing companies. Prior to the “pandemic pause,” loan servicers were known to make mistakes on the monthly payments. And incorrect payment calculations took weeks or months to be corrected. Fast forward to today, and we’re about to see an avalanche of mistakes unfold.
Whether or not your clients with recent graduates in the family (perhaps even themselves) are asking you about the restart of federal student loan repayments, take the opportunity to convey to them that the new income-driven repayment plans are good but fraught with landmines.
We can really help our clients by insisting they proceed with caution and let the dust settle before enrolling in an automated approach to loan repayment.
Systems haven’t digested all the changes
Many borrowers will follow the headline instructions to apply for the new SAVE repayment plan — the income-driven repayment (IDR) plan that caps the borrower’s monthly payment at 5% of their income. But if the borrower just blindly hits the button that automatically connects their student loan account to the IRS for income certification, they may not like the outcome.
If the automated certification process pulls in a joint tax return and the taxpayer should now be filing separately (to qualify for significantly lower monthly payments) this is a big deal. The fact is, the servicing company software systems and frontline personnel haven’t digested all the changes that have been made and they will not necessarily do what’s in your best interest. Instead, they will likely default to the old way of doing things and set many taxpayers up for heartache and overpayment.
That borrower could see their monthly loan payments double or triple.
Good luck
This is such a critical time for loan repayment strategies and our clients need our help more than ever.
The customer service folks our clients talk to at the loan servicing companies are not trained in the intricacies of these choices and are not paid to ferret out important details related to each caller’s personal financial circumstances. They are trying to get each caller enrolled in the SAVE repayment plan as quickly as possible and move on to the next caller.
Last week, one of my clients waited on the phone for more than 140 minutes to connect with a real person. So many borrowers are trying to talk to so few customer service reps who are not up to speed on the new rules.
It’s a mess.
Family affair
Parents and grandparents willing to help graduates repay these loans have a vested interest in ensuring their children or grandchildren can correctly navigate this tricky terrain. Those willing to help borrowers retire this debt should understand that taking their time in the short run to set up the “new normal” could give them the opportunity to take advantage of what could be a very beneficial repayment option in the long run.
And it’s also a great time to remind generous parents and grandparents that they should be very intentional about how much monthly cash flow or annual gifting they are willing to commit to the student’s repayment plan. We can help parents and grandparents avoid allowing repayment of student loan debt to jeopardize their retirements. Their financial preservation should come first. Our clients need to channel the flight attendant’s instructions: “Should an emergency situation occur, put on your oxygen mask first before attempting to help those around you.”
Get them up to speed
So, what should we be telling our clients while this gets sorted? They should only call the loan servicing company for the following reasons:
- To double consolidate a Parent PLUS loan onto the SAVE or PAYE plan. Ask immediately for a supervisor to sign up for the SAVE plan.
- To correct a monthly payment that’s obviously wrong. In most cases, the servicing company’s program hasn’t been reset yet to reflect the new payment calculations. Call to disconnect your autopay for now until this gets sorted out.
- Enroll in an official forbearance program. If clients qualify to not make payments for a while (for example, because they’ve wanted to wait until they’ve submitted a married filing separate tax return), have them call their service company and ask for a formal forbearance to be put in place.
As student loan repayments ramp up, advisors should tell their clients to be patient and treat these like medical bills: Wait. Then wait a little longer. Wait until the dust settles and everyone agrees on the rules of engagement before setting up any type of autopay program. There’s no benefit to being early or “on top of it” and there’s potentially negative consequences for getting set up incorrectly in this system early on.
Beth V. Walker is a wealth advisor with Carson Wealth Management and founder of Center for College Solutions, which is based in Colorado Springs, Colo. She is also a member of the SFC Consortium, a group of professionals which helps match families with colleges. She can be reached at bwalker@carsonwealth.com or 719-522-2278.
