People Who Hold Federal Loans Deserve to Know All Their Options

October 21, 2013

With all the recent hand-wringing over how much students are having to borrow to pay for higher education, here's what ought to be an easy fix: Give federal-loan holders the information they need to best manage their repayment options.

Student debt in America exceeds $1-trillion. Much of it is held by millennials like me who owe large sums in the form of federal loans. Near the beginning of the year, in order to do some basic financial planning and with an eye toward assessing my options, I attempted to compare the payments I would be required to make on my current 25-year income-based repayment plan with those of other plans.

My own and other income-driven plans—which include income-contingent repayment and Pay as You Earn—cap a borrower's required monthly payment in accordance with his income. The amount one pays is determined by three variables: debt, income, and family size. The monthly payments are adjusted annually based on changes in these variables.

To understand my other options, I called my loan provider, Sallie Mae, the largest servicer of federal loans. I wanted to understand for each option what the cost to me would be, on a monthly basis and over the lifetime of the loan.

To my astonishment, my servicer could not give me this information. I was told that it would be available to me when I selected a new plan and made my initial repayment after the expiration of my grace period. But because I am on an income-driven plan—as are millions of others—my servicer could not give me repayment amounts for other plans for which I might qualify unless I first switched away from my plan.

What's the problem? Switching plans would have resulted in capitalizing my then $9,000 of outstanding interest, thus expanding my principal balance. To learn of my repayment options, I would have to expand my loan balance. I didn't see why I should have to do that. Instead, I wanted to know why this problem exists and how it could be resolved.

I started with the Ombudsman Group at the Department of Education, which was not able to resolve the problem. I then went to the department's general counsel's office to see if there was a regulation driving this absurdity, and if so, how it could be changed. After a long back and forth with a government lawyer, I was told, in essence, "Thank you for making us aware of this problem, but there is nothing that can be done to fix it at present."

I got the sense that this simply was not a priority. I also discovered from the lawyer I spoke with that the problem is not driven by a regulation, but rather by a stupefying technical glitch: The calculator used by the loan servicers isn't able to perform these calculations.

Perplexingly, the calculators are able to make the same calculations—using debt, income, and family size to figure out monthly payments—when a borrower is choosing plans for the first time, or if a borrower is switching from a non-income-driven plan to an income-driven plan. But the calculators are not available for those already on an income-driven plan.

I then decided to try to get one government agency to take on another. I went to the Consumer Financial Protection Bureau, whose self-proclaimed goal is to ensure "consumers get the information they need to make the financial decisions they believe are best for themselves and their families." But, to my surprise and dismay, I was told that when it comes to resolving complaints over student loans, the bureau has jurisdiction over only private loans, not federal ones. When I asked for ways I might resolve my dilemma, they unhelpfully suggested that I contact the Department of Education's Ombudsman Group.

My only hope was that with time, the problem would be solved, but such hopes have been dashed. Although the Department of Education now has a calculator that allows borrowers to get estimates of their repayment options, it has two major flaws. The first is that it assumes all borrowers are eligible for all plans, which is not the case. For example, I am not eligible for one of the newest programs, Pay as You Earn, because I did not take out a loan on or after October 2011. Thus, I might be shown an attractive option for which I do not qualify.

The second flaw is that the calculator tells borrowers to check repayment-plan eligibility with their servicers, but that is only half the information borrowers need. When I called my servicer to inquire about what my monthly payments would be, I was told, once again, that the calculator wouldn't permit it unless I first switched away from IBR.

This technical deficiency raises several problematic questions. How can students and graduates make prudent decisions about their financial future if they don't have access to all their financial information? Why should they have to increase their loan debt simply to understand other repayment options? And why does this affect only those on income-based plans? The fact that the calculators can tell a borrower about all his options when initially entering repayment suggests that the tools already exist. So why not make them available?

Finally, why doesn't the government, in these deficit-laden times, want to collect as much money as possible, and therefore encourage those who can afford to switch off an income-based plan to do so? Increasing one's loan debt simply to learn of other repayment-plan options, however, acts as an obvious deterrent.

There are certainly many problems with the federal loan system that Congress and the country must debate. But those of us who hold federal student loans should have the ability to know what our repayment options are. To make good on President Obama's recent promise to "help more borrowers learn about their repayment options," the Department of Education must come up with a prompt solution.

Chris Fletcher is a lawyer based in Washington.