Life Kit - Braving Your Student Loan Payments

Episode Date: August 20, 2020

The student loan system is confusing. Sometimes it can seem designed to make borrowers fail. But if you know how to navigate it, you're more likely to save money in the long run.Learn more about sponsor message choices: podcastchoices.com/adchoicesNPR Privacy Policy

This is NPR's Life Kit and day four of your personal finance tune-up. Good evening, everyone. Thank you for coming. You know it's a Monday afterwards. On a beautiful spring night in Washington, D.C., dozens of people file into this dimly lit room in a government building. It's a little bleak. This was in 2019 where you could actually be gathering indoors together safely with no masks. Anyways, these people are from all different backgrounds and ages, ranging from right out of college to nearing retirement. And they're all here because they have one thing in common. I want to just start by saying that you're not alone.

I too am still trying to pay back my loans. Technically, this is a student loan debt clinic, but it almost feels like a support group, too. I'm a little confused. This all sounds quite complicated. I've been paying loans since 1918. I'm looking at this money build up and it's scaring me. Because often when you're dealing with student loan debt, you can feel like just this one little person, right,

facing this complicated mess of loan servicing companies and payment programs and choices you have to make, but you aren't sure you really understand. Then there's the scammy sounding outfits that send you junk mail. You have all these agencies calling you to be qualified for loan forgiveness, so you don't know who is legitimate or not. You are not alone. 45 million people are in the same boat and trying not to sink. And we are here to help. This episode of Life Kit is student loan debt. I'm Chris Arnold. I cover personal finance and consumer protection. And we're going to give you six important tips that you need to know to help you deal with student loans in a smart way. Because look, I mean, this can be tricky.

There's a lot of bad information out there, pitfalls to avoid, but there are also great ways to get a payment that you can really afford. And if you qualify for loan forgiveness, you might get tens of thousands of dollars of debt just wiped out eventually. We're going to put you on the right path to pay off these loans. Okay, dealing with student loans is not a lot of fun because you end up with questions like this one. Can I submit the ECF form now, or do I submit that when I actually start the payments? Yeah, so a couple notes about loan repayment. Okay, so this is pretty deadly,

awful, cryptic questions. I mean, it just gets so complicated. And the person bravely answering questions here at this clinic is Bonnie Littrell. She's a director at the nonprofit Student Borrower Protection Center. And Bonnie is great because she could demystify this stuff in a way that you can easily get your head around because Bonnie is basically like a super ninja expert on student loans. She trains other coaches on how to run clinics like this. She worked at the Consumer Financial Protection Bureau studying problems that people are running into. And there are so many problems. All right. So here's just one big one. There are eight and a half million people in default on their federal student loans.

But Bonnie says. Theoretically, there should be zero borrowers with a federal student loan who are in default. There are so many protections available. It should be a zero percent default rate. Bonnie says that's because some of these protections guarantee that you can always get a payment that you can afford no matter how little money you make. You can even sometimes qualify for a payment of $0. So that in itself is just really important to understand. But let's also just like zoom out for a second.

If millions of people are in defaults, getting their credit messed up. Debt collectors are calling. They're getting fees. And they really don't have to be in default. That means that there is something broken with this system. A lot of this stuff really should work better for student loan borrowers. But this is the world in which we are operating in at the moment, for better or for worse. The thing is, you just have to be really careful and make sure that you're making the right choices and you get the right information. So knowing all that, how do we get started? First and foremost, take a deep breath. The best first step you can do is evaluate the situation in terms of, do you have private student loans or federal student loans?

Do you have both? Okay. So this is our first takeaway. Tip number one, survey your student loan landscape and figure out what kinds of loans you have and then get set up in the best repayment plan for you. All right, a quick note here. We're going to be talking more about federal student loans. There's a lot of protections there that you need to know about. And if you have private loans from like a regular bank, some of this will apply to you too. So hang in here with us.

But if you're having trouble with private loans, you're having trouble paying, that's often more of like a case by case situation. You just got to call the bank, see what the options are. But most people do have federal loans and often people have a whole bunch of different federal loans. So if you do, you can look at those all in one place by going to the National Student Loan Data System. You just Google it, look it up. Bonnie says it's a great place to start. I'm going to say it one more time.

National Student Loan Data System. You go there, you get all your loans, you can see them, you know what you're dealing with. Then Bonnie says it's time to choose a repayment plan. If we just look at federal student loans, very broadly, there are four types of repayment plans. The first is really simple. It's called standard. And your loan servicing company divides up the total amount that you owe into monthly payments. You pay that same amount for 10 years and then your loans are paid off. If you can comfortably do that, boom, you are done in 10 years. Simple. And that's the default one. If you don't do

anything at all and you leave your grace period, that's what you're going to be put into. The next is extended. This is where you pay a lower amount over a longer period of time. You ultimately end up paying more interest, but it makes your payments more affordable. Then there's what's called graduated repayment. It's kind of like the standard plan. You pay off your debt in 10 years but the payments start out being lower. And so this is kind of like,

I like to think of like a staircase. So you start off with a low payment and it goes up every two years. And so it'll eventually go above what your standard payment is. So that can be good if you're, say, a doctor or an architect. You want to make much for a few years and then you'll start making a lot more money down the road. But if you're not a doctor or a lawyer and you don't make that much money, this last option, this is like the holy grail for a lot of people struggling with student loan debt.

The last repayment plan that I think has the broadest appeal for people is an income-driven repayment plan. It's called IDR for income-driven repayment. And that means it's not about how much you owe. It's about how much money you make and what you can afford to pay. So that your payments are always affordable. And then after 20 or 25 years of payment, depending on the plan and the type of loan, your loans are forgiven if anything is not paid off yet.

That loan forgiveness part is one big advantage to these income-driven repayment plans. If you qualify for what's called public service loan forgiveness, that happens after 10 years of payments. Outside of that, like Bonnie said, your loans are forgiven after 20 or 25 years. Exactly. And yes, it's a bummer to be paying that long, but it's also the payments are designed to always be affordable. And so that's why they're tied to your income, not your loan balance with the idea being you should never pay more than X percentage of your

discretionary income. But here's the thing. Once you get into an IDR plan, you want to stay in that plan because there are a lot of ways to fall out of it. And a lot of people fall out of these plans. First of all, you have to certify your income every year by filing paperwork. And if you don't do that, you can get kicked out. Bonnie says, another thing that happens is that people have trouble making their payments, but instead of getting into an income-driven repayment plan, they end up in what's called forbearance. And this brings us to our next big takeaway, tip number two, beware of forbearance. So, all right, forbearance is a way to skip a few loan payments when you're tight on cash,

and that can sound like a good thing. What we've seen kind of across the board, regardless of your servicer, is that if you have federal student loans and you're struggling, the Department of Education tells you to call your servicer and ask about your options. So you do that. And the servicer says, oh, no problem. We'll stick you in forbearance. We'll just have you stop making payments for three months. And the borrower thinks, great, that was quick and easy. But Bonnie says three months can turn into 12 months or even two years. And she says this probably happens because it's less paperwork for your loan servicer to deal with. If they just stick you in forbearance, it's easier for them. But Bonnie says forbearance is almost always worse for you.

Nine times out of 10, income driven repayment is going to be a way better option. Forbearance puts on hold any progress towards debt forgiveness that you're trying to make. It can mean higher payments when you come out of forbearance. It can mean paying more in interest. So basically it can be like getting stuck in quicksand. And you're tired and you're trying to get out. And so forbearance, fine, you're pressing pause.

But while you're pressing pause, you're still sinking deeper and deeper. So you're getting deeper into that hole. A way to remember this is forbearance is quicksand. An IDR, income driven repayment plan. That's a safety rope that's thrown to you to start pulling yourself out of debt. So Bonnie says if you're having trouble affording your loan payments. I wouldn't even call my servicer.

I would just go online to studentloans.gov and do the IDR application there. Okay, quick note here. Since we've interviewed Bonnie, the website is actually studentaid.gov. They've changed it just to confuse everybody. But don't worry, if you type in studentloans.gov, it'll redirect you to the right place. And Bonnie says if you're already in an IDR plan and you lose your job or something like that happens, you can basically do the same thing at studentaid.gov, get a lower payment, sometimes even $0,

so you can stay out of forbearance and hang onto that IDR safety rope, right? I mean, Bonnie says you just don't wanna let go of that. Stay in your IDR plan. Okay, now all of this relates to our next takeaway, tip number three. Bonnie says, sadly, and it really would be nice if this wasn't true. But the fact is, you cannot trust your loan servicing company.

That's the company that you mail your checks to or you call up when you have questions about your student loans. You have to be your own advocate and advisor on student loans. My recommendation is, yes, your servicer should be a point of contact, but do your own research. Make sure you're going to them informed. Make sure you know what you want to do and what your options are. And Bonnie says, tell your loan servicer what you want and push back. If they suggest forbearance and you listen to this episode and you're like,

no, I want an IDR plan. So say that and then ask for confirmation in writing that you are in the plan that you want to be in and that you're on track. Maybe the most dramatic example of how you can get hurt if you don't get things in writing is a loan program called Public Service Loan Forgiveness, or PSLF for short. Now, this program is designed to encourage public service. So police officers, government workers, teachers, people who work for nonprofits, if you make payments for 10 years, you can get the remainder of your federal student loan debt forgiven.

So that sounds like a really great deal. I was like, oh, this is perfect. So I called, you know, I'm interested in the public service loan forgiveness. That's Jessica St. Paul, who works for a nonprofit that provides services to foster children. She heard about PSLF nine years ago, and she says over the years, she called the company servicing her loans and checked in. Just want to make sure, you know, I'm on track. I want to start doing foster care use. OK, no problem. The conversation was quick. I mean, I'll tell you, they were so kind. But Jessica says she was getting bad information. She says she found this out just last year at a

conference. It was an information session on loan forgiveness. And she went and she was told she was in the wrong kind of loan and the wrong payment plan. And so she couldn't qualify. And she says lots of other people were finding out the same thing right there at the conference. People were like, no, that can't be true. And people were, I went on my phone, people were on their phones, their laptops, checking their loan, what type of loan they were in. We were all sitting there like just frantic, like, what loan am I in? Wait, wait, wait, let me pull this up. Let me see. But Jessica says it was true. If nine years ago, her loan servicer had just told her to take a few simple steps to convert to the right loan and the right payment plan, everything would have been okay.

Instead, she says she feels like somebody stole tens of thousands of dollars from her. happened to me. It was kind of heartbreaking for me to talk with her because it just sounds like, I mean, you can imagine thinking you're okay and then realizing what the hell just happened, you know? It is heartbreaking. It's absolutely devastating. And I think the worst part of it is that as I was listening to that, I could tell you exactly what she was going to say, because I have heard that same story thousands of times. Jessica is actually a plaintiff in one of many lawsuits by advocacy groups and regulators. And basically, this is just a giant mess. This is why I say don't don't trust your servicer. Don't trust them when they say you're on track. Don't trust anything unless you have it in writing. But Bonnie also says don't give up.

This mess with PSLF is starting to get cleaned up. There are some fixes being put into place. So you can research that, find out what you need to do. And Bonnie says this PSLF program, Public Service Loan Forgiveness, can forgive a lot of money and loans for people. She says you just have to make sure that you're really on track with it. So the best thing borrowers can do if they are pursuing PSLF is submit an employer certification form. What that does is it triggers to the Department of Education and to your servicer that you are intending to pursue PSLF. And so if you are not on track or you're doing anything

wrong, they're going to send you a letter back telling you that. And my recommendation is that borrowers submit an ECF, an employer certification form, at least every year and every time they change jobs. And Bonnie says more generally, for anybody with student loans, it is really important to keep all your contact information current. So if your loan servicer is trying to tell you something important that you actually get the message. So, all right, staying on top of all these moving parts of student loans is super important. And actually, this kind of annoying paperwork stuff that we don't want to deal with, but we have to deal with, this has a name and it's called Life Admin. So Life Admin is all the invisible office work that steals our time. It's the kind of work that we all do for free in our own lives.

That's Elizabeth Emmons. She's a Columbia Law School professor who wrote a book called Life Admin. And it's all about this invisible labor because she says it's really easy to procrastinate with stuff like researching the best student loan payment plan to be in. The first step is to make it visible, to see it, to recognize that it counts for something. Most of us think we can sort of manage it by taking a few texts or emails on the side while we're doing other things. But especially any kind of sustained project like dealing with loans takes real time and deserves our full attention when we're doing it and deserves credit as work.

So, you know, you can make a day of it. Take a personal day if you can and make a nice hot cup of coffee. Just dive in and give yourself a little reward for getting started. Research shows that that can actually help motivate you to do stuff. And this is our next takeaway tip number four, create the space that you need to deal with the life admin of student loans. And Elizabeth says, one thing is to let yourself feel good about getting this done. I mean, remember, you have this debt because you've gotten education and you're listening to this podcast right now. This is all something to feel good about.

And you're already starting to take action here. So that painful moment where you peel open the folder that you put together and you look at it, that feels like the memory of the fact that you wished you'd done it earlier, you wished you'd done it differently. That's actually the moment where you've started to face it. That's the beginning of something better. It's like Chinese philosophy, like the journey of a thousand miles starts from beneath your feet. And with that first step, you know, like you are on the path. Right. That's the most painful part. But it's actually also the part where you're turning it now into a new and better direction. And, you know, this might sound kind of quaint.

I mean, you've got a big pile of student loans and we're talking about Chinese philosophy here. But the point is, you really do need to take this seriously because if you don't, you can get hurt really badly. I mean, remember Jessica, that huge pile of money that's not going to get forgiven now. I've reported on other programs too. This Teach Grant program that Corey Turner, who we reported on this together, and we saw people hurt ending up owing an extra, say, $24,000 just because a teacher filed a piece of paper one day late with their servicer. In that case, the program ended up getting reformed and stuff's getting fixed.

But you just have to stay on top of this paperwork stuff. The system is not always fair. And Elizabeth says some of what's going to work depends on your personality. So if you're more of a social person, she says you can make what she calls an admin study hall date with a friend. So I recently did this with a friend. We both realized we needed to deal with making wills. We had been putting it off. And so we just thought, look, let's just make a study hall date. And even knowing it was on the calendar got us both to do some prep work. And then once we were there, we were kind of stuck. We'd pre-committed ourselves.

And so we used that time to do it. Okay. I know we're covering a lot of stuff here. We're going to recap the most important points at the end. So hang in there. That's going to help you remember all this. But first, we are going to go back in time, back in history, to a time before meetings on Outlook calendars and complicated student loan forms.

Picture this 200 years ago on the Atlantic Ocean, the waves pitching. Lord Nelson, the famous British Navy admiral, coined a saying. He said, never mind the maneuvers, go straight at them, meaning the French ships that he was fighting. And this is very exciting, right? And it can also apply to student loans. And this is our next tip, tip number five, consider a full frontal assault on your student loans. And we're not talking about cannons and stuff, but if you can live cheap with five roommates or your parents for a few years, we heard from some of you have

been very successful at just paying off your student loans very quickly and aggressively. We talked to a listener, Krista Breyers, and these days she's a physical therapist. But back when Krista was first getting out of school. I went to physical therapy school at the University of Iowa. I had $70,000 in student loan debt. $70,000. That was more than Krista was making a year as a physical therapist. And Lord Nelson himself would have been proud because Krista attacked her loans straight on. She sold her car after college to save money, lived with a roommate in a pretty cheap apartment. They hardly ever ate out at a schedule for who was cooking dinner what night. She got a second job.

I worked at a nursing home down the street from me, worked every Saturday morning, you know, into afternoon, about six hours a day. And I did that almost every Saturday for two and a half, three years. Her tax refund went straight to her student loans. And doing all of that, Krista paid off her loans in three years. So now, you know, I'm 35. I just had my third baby and I work about 25 hours a week and being able to have that quality time with my kids and I'm off each Thursday where I take them to do fun things. I'm happy. If I was strapped with paying back $800, $900 a month, I don't know if I would be able to do those things. We should note too that while Krista did this, she also managed to put money into her 401k type

retirement plan at her job. And that is really important because Bonnie says student loans can get in the way of our other financial goals in life. And we've got episodes on saving and investing and how to prioritize that while paying off debts. There's a ton of really high value information there. So definitely check that out too. Okay, this next thing is like a bright, shiny object that you might want to touch, but you got to be careful of because Bonnie says sometimes you've got four or five or 10 different student loans, all at different interest rates. Who wants to deal with that?

And this is tip number six, all at different interest rates. Who wants to deal with that? And this is tip number six, loan consolidation and refinancing. This can sometimes be good, but it can sometimes be very, very bad. And you have to be careful. Consolidation is when you take a bunch of different federal loans and roll them up into one federal loan. Okay, that's consolidation. Rolling everything up into one federal loan and refinancing is kind of the same thing, but the key difference is you're rolling everything up not into a federal loan, but into a loan from a private lender,

like a regular bank, hopefully at a lower interest rate. But when you do that, you're going to lose out on all of the federal protections like PSLF, like IDR. Okay, so sort of one big blinking red light is if you are trying to get public service loan forgiveness, you do not ever, ever, ever want to refinance your loans because it might seem like a good idea, but no, no, no, no. Very bad idea. Yeah. I know how appealing

the idea of having one simple payment is, but be very, very careful. If you're one of those borrowers that wants to go all in and wants to sell their car and put every extra penny towards their loan, sometimes refinancing into a private student loan to get the lower interest rate makes sense. But for the vast majority of borrowers, losing out on those protections that come with federal student loans is not worth it. Bonnie says also you have to be careful about consolidating even into a federal loan because that can also screw up any loan forgiveness plan you're in.

So again, just make sure you do the research and you understand what's going to happen when you do this. You know, if I was younger times before today and trying to figure out what to do about my student loans, I'd want to go to an event and find someone like Bonnie who really gets this stuff and say, Bonnie, help. I mean, look, here's my folder. Here's all the information. What do I do with this? Bonnie says, first, you got to watch out for scams. There's a bunch of them out there. Some of the scammers try to get you to send your loan payments to them. And they tell you like, oh, yeah, we're going to send

in your loan payments. It's all going to work out. And then it doesn't work out. They just steal your money. So, OK, don't do that. Bonnie says the best piece of advice is just never, ever pay someone to help you with your loans. But some good places to go for free help. Bonnie says there are many state AG's offices that have helplines you can call. Legal aid services in your area can be a good resource. Also, more states are setting up student loan ombudsman offices. You can try calling them. And then call your school's financial aid office. Just because you've graduated or just because you left school doesn't mean you can't get help.

Oh, really? So you can call back your college or graduate school and say, hey, look, everything's screwed up. I'm a little confused. I'm not sure I'm getting the right information. I need help. And there may be one of the same counselors who sits down with students could sit down and help you untangle some of this stuff. Yeah. What a lot of people don't know is that your school actually still has access to your federal

loan records. Because if you default, that actually looks bad on the school and they have to report that. And so it's in their interest to make sure you're on track. It's good for their metrics. And so take advantage of that. You should call them. They have financial services offices there to help you. Bonnie says, too, you can go to her nonprofit's website at protectborrowers.org slash help. And there's a big list of resources there, too. I'm going to give you this again, protectborrowers.org slash help.

Okay, well, there you have it. The most important stuff you need to know about dealing with your student loan debt and how to get some one-on-one help to boot. Now, we covered a lot of ground here. This stuff gets pretty complicated. So here's Bonnie with our biggest takeaways. You need to pick a repayment plan that makes the most sense for your financial situation. Their standard, graduated, extended, or income-driven repayment. And remember, income-driven repayment, if you're not making much money, that one may be the most affordable. But download that list of all the federal loans you have from the National Student Loan Data System and figure out the best payment plan for you. Okay, number two.

Beware of forbearance. Interest adds up. Forbearance is quicksand. An income-driven repayment plan is your safety rope. And remember, stay in that income-driven plan. Hang on to that rope. All right, number three. Don't trust your servicer. Don't trust them when they say you're on track. Don't trust anything unless you have it in writing. Bonnie's not saying don't ever talk to your loan servicer. You need to sometimes, but when you call them up, know what the best options are for you and get it in writing that you are in the right payment plan and that you are on track.

Number four, life admin. Elizabeth says, create the space that you need to do the research and the paperwork to tackle those student loans. You have to carve out the time for it. And one great way that works for a lot of people is to actually find a buddy, another person who's willing to do this with you in a study hall. You can do it in a cafe or you can just do it at home. But make the time and you both show up and you commit yourselves.

OK, number five, consider a full frontal assault Lord Nelson style on your student loans. Sell your car, live cheap with roommates, get that second job, make Lord Nelson proud. And finally, tip number six, loan consolidation or refinancing. That might be a good option or it might wreck everything. Just be very careful, figure out what your goals are, and then decide if it makes the most sense for you. Remember, if you are on track for any kind of loan forgiveness, that's one time consolidating or refinancing

can be a disaster for you. So again, be careful, understand what's going to happen if you do this. For more NPR Life Kit, check out our other episodes. We've got one on how to find scholarship money and save for college on the front end. And another with tips on surviving college if you end up paying for it all by yourself. You can find those at npr.org slash life kit. And if you love Life Kit and you want more, subscribe to our newsletter at npr.org slash life kit newsletter.

And here with a completely random tip is LifeKit listener Leslie Stone. If you have a light scratch on your wood furniture or cabinets, try rubbing a walnut on the scratch and it will most likely disappear. If you've got a good tip or you want to suggest a topic, email us at Lifekit at npr.org. You can also leave us a voicemail at 202-216-9823, or you can email us a voice memo at lifekit at npr.org. This episode was produced by Sylvie Douglas. Megan Cain is the managing producer. Beth Donovan is our fabulous senior editor. Our digital editor is Beck Harlan and our editorial assistant is Claire Schneider. I'm Chris Arnold. Thanks for listening.

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