Your Money Adviser: A Student Debt Payment Plan That Saves Now, Yet Costs More Later


The report analyzed data on federal loans that entered repayment from fiscal years 2009 through 2013, and focused on nine companies that offer default prevention services, out of about four dozen such companies. (The nine served about 1,300 colleges, and accounted for about 1.5 million borrowers who entered repayment in 2013.)

Of the nine, five encouraged forbearance over other options, and four sometimes provided “inaccurate or incomplete” information to borrowers, the G.A.O. found. In one case, a consultant mailed forbearance applications to past-due borrowers, along with a letter incorrectly stating that they could lose federal benefits like food assistance if they defaulted on their student loans.

The report did not identify the consultants or the colleges that had hired them. Abby Shafroth, a lawyer with the National Consumer Law Center, said such consultants may often be retained by for-profit colleges, which tend to rely heavily on federal student aid programs for revenue.

Some companies that promote default prevention services on their websites focus on two-year community colleges, although some include testimonials from traditional, four-year colleges.

Here are some questions and answers about forbearances:

Does a forbearance ever make sense?

Forbearance may be a helpful tool for short-term financial setbacks — say, an unexpected medical bill — that you can resolve in a few months to perhaps a year, loan experts say. But they are a bad idea if you simply can’t afford your loan payments and you don’t expect the situation to change anytime soon. In that case, flexible plans that tie monthly payment amounts to your income may make more sense, said Diane Cheng, associate research director at the Institute for College Access and Success.

What should I do if I’m contacted by a default prevention consultant?

If a consultant suggests forbearance, it’s wise to call your loan servicer on your own and explore alternatives, including plans that offer affordable payments tied to your income. A servicer is the company that officially manages your loan, handling tasks like sending you statements, collecting payments and processing changes in your repayment plan. (In some cases, the consultant may even be an affiliate of the servicer, Ms. Cheng said, but it’s the servicer that actually makes the changes.) “Borrowers,” she said, “should know they have options beyond forbearance.”

Several plans are available that adjust monthly payments to reflect your income and family size. Depending on how low your monthly payment is, your debt could actually grow over time, in some cases. But any loan balance remaining after 20 or 25 years (depending on the plan) is forgiven, so there is light at the end of the tunnel. Still, there is a downside to consider: You’ll pay income taxes on the amount forgiven.


Please enter your comment!
Please enter your name here