As college costs have skyrocketed, many students and their families have had to borrow money for college. When students graduate, good jobs are not always available. As a result, many borrowers report difficulty paying back their student loans, and loan servicers and debt collectors are not always easy to work with. In some cases, family members have helped loved ones by taking out parental loans or co-signing student loans, and lenders turn to them for repayment when the students can’t pay directly. The Attorney General’s Office has published this bulletin to provide basic answers and resources for student loan borrowers and co-signers.
If you are having trouble paying back a loan, the first thing you should do is determine what kind of loan you have, because this will affect your rights. There are two main types of loans: federal student loans—which are guaranteed or issued by the federal government—and private student loans, which are issued by private lenders or by schools themselves.
Federal Student Loans
The largest provider of student loans is the U.S. Government.
Prior to 2010, there were two loan programs—Direct Loans and Federal Family Education Loans (FFEL). The federal government guaranteed FFEL loans but used private lenders as "middlemen" to issue the loans. About 30 different "guarantee associations," which are generally nonprofit corporations, guaranteed the loans. Today, federal student loans are issued directly by the U.S. Department of Education, Federal Direct Loan Program, without private lenders acting as the "middlemen."
Types of Federal Loans
Four major kinds of student loans are now offered as part of the Federal Direct Loan Program:
- Direct Subsidized Loan.
This loan is available to undergraduate students who demonstrate financial need. The school determines the amount that the student can borrow. This is a low interest loan for which the government pays interest while you are in school, during grace periods, and during periods of deferment.
- Direct Unsubsidized Loan.
This loan is available to undergraduate and graduate students. A student does not need to demonstrate financial need to qualify. The school determines the amount a student can borrow. The student is responsible to pay the interest during all periods.
- Direct PLUS Loan.
This is a low interest loan available to parents of undergraduate dependent students and to graduate or professional degree students. PLUS loans assess a loan fee that is proportionately deducted from each loan disbursement. Interest is charged during all periods and loans require a credit check.
- Direct Consolidation Loan.
All eligible federal loans can be consolidated into one loan after the borrower leaves school. Private loans and parental loans cannot be consolidated. A consolidated loan provides several repayment plan options that will be discussed in more detail below.
How to figure out what loan you have.
If you don’t know what type of federal student loan you have, you should contact the National Student Loan Data Center. The Center is the U.S. Department of Education’s central database for federal student aid records, and tracks your loans from the time you apply to the time you complete repayment. All federal loans can be found through this database. You may contact the Center as follows:
If you can’t locate your loan through the Center, you probably have a private loan.
Complaints about loan servicers.
After your federal loan is disbursed, the U.S. Department of Education assigns it to a loan servicer. A loan servicer is a private company that is hired by the federal government to collect payments on and “service” your loan. At present, 11 different loan servicers have been hired by the U.S. Department of Education to service Direct Loans, and FFEL Loans.
Many borrowers report that loan servicers sometimes lose their paperwork, don’t return their phone calls, or don’t give them the right information in a timely fashion. You should let the U.S. Department of Education know about these problems. The Department has authority over all servicers of federal student loans. If your servicer has treated you unfairly, you should report your concerns to the Secretary of the Department of Education as follows:
United States Secretary of Education
U.S. Department of Education
400 Maryland Avenue Southwest
Washington, DC 20202
Repayment of Your Loan.
Your monthly loan payment may be comprised of several items. First, the loan’s principal balance is the total amount you borrowed. Second, interest is calculated as a percentage of the unpaid principal balance. Interest rates are fixed for the life of loan and are determined by federal law. Rates will vary depending on the type of federal loan you have. Third, if you get behind on your monthly payments, the servicer may add late charges to your payment. Late charges may be assessed each month a payment is not made by its due date. Monthly payments are generally first applied to accrued late charges, to outstanding interest, and then to the principal balance.
Repayment generally begins after your grace period expires, which is the set period of time after graduation before you must begin repayment. The grace period allows borrowers time to choose a repayment plan. PLUS loans do not have a grace period and repayment begins immediately after the loan is disbursed. If you have multiple federal loans, you can consolidate them into one single Direct Consolidation Loan. You may apply for a Direct Consolidation Loan at studentloans.gov.
The U.S. Department of Education offers several repayment plan choices. The current federal repayment options include:
- Income Based Repayment Plan (IBR)
this plan helps borrowers keep their loan payments affordable with payment caps based on income and family size. Borrowers must demonstrate a partial financial hardship. For most eligible borrowers, IBR loan payments will be less than 15% of their discretionary income. The payment amount changes as your income changes. IBR will also forgive the remaining debt after 25 years of qualifying payments.
- Income Contingent Repayment Plan (ICR)
this plan assists borrowers to keep their loan payments affordable by basing monthly payments on income, family size, and total amount borrowed. Most eligible borrowers will either pay 20% of their discretionary income or a fixed payment over 12 years. The payment amount changes as your income changes. ICR will also forgive the remaining debt after 25 years of qualifying payments.
- Pay As You Earn
this plan aids borrowers who have a financial hardship. To qualify for this plan, the borrower’s monthly payment must be lower than it would be under a standard repayment plan. This requirement is generally met if the student loan debt is higher than the borrower’s annual discretionary income. Monthly payments are approximately 10% of your discretionary income. The payment amount changes as your income changes. Pay as you earn will also forgive the remaining debt after 20 years of qualifying payments.
- Standard Repayment Plan
this plan locks in your payment amount for ten years with monthly payments at a fixed amount of at least $50 per month. Monthly payments may be higher than other repayment plans, but you will pay less interest over the life of the loan.
- Graduated Repayment Plan
this plan maintains a ten year plan with lower monthly payments at first which increase over time, presumably as you earn more money at your job. Payment increases generally occur every two years.
What if You Can’t Repay Your Loan.
Sometimes circumstances may arise that may make repayment difficult. If this happens to you, it is best to speak with your servicer and ask if any alternative repayment programs are available. Your options will be different depending on if your hardship is short-term or long-term. More information about federal student loan repayment plans and what to do if you have difficulty repaying your federal student loans is available through the U.S. Department of Education website, http://www2.ed.gov/ or by calling it at (800) 872-5327.
Short Term Hardship
If you are able to pay something each month, you may be experiencing a short-term hardship. You should speak with your servicer about forbearance options. A forbearance may reduce or postpone your monthly payments for up to 12 months.
Long Term Hardship
If you are unable to make a monthly payment, you may wish to speak with your servicer about a deferment. A deferment may postpone monthly payments of both principal and interest. Interest will continue to accrue during the deferment period. Depending on your loan type, either you or the government is responsible to pay the interest during a deferment. For example, the government will pay interest on Direct Subsidized Loans, but not on Direct Unsubsidized Loans. Many deferment options have a specified period of time that a loan may be deferred.
Under certain circumstances, you may be eligible to have all or part of your loan cancelled. Contact your loan servicer to determine your eligibility. Examples include:
- Total and Permanent Disability.
Your loan may be cancelled for total and permanent disability if you are unable to work and the condition has lasted or is expected to last for a continuous period of not less than 60 months. Veterans may submit documentation from the U.S. Department of Veterans Affairs (VA) that shows the VA has determined that you are unemployable due to a service-connected disability.
- Loan Forgiveness for Teachers.
If you are a teacher, a new borrower (you do not have an outstanding Direct Loan balance on or after October 1, 1998), and have taught full-time for five consecutive years in a low-income elementary, or secondary school, or educational service agency, you may be able to have as much as $17,500 of your subsidized or unsubsidized loan cancelled. Note that if you have a Perkins Loan, cancellation requirements may be different.
- Public Service Loan Forgiveness.
Public Service Loan Forgiveness is a relatively new program for federal student loan borrowers who work in certain kinds of public service jobs. Eligible jobs include employment by federal, state, local, or tribal government, nonprofit tax-exempt organizations, and full-time service in AmeriCorps or Peace Corps positions. The U.S. Department of Education will forgive the remaining debt after 10 years of eligible employment and qualifying loan payments. Only federal Direct Loans are eligible for this program.
If Your Loan Defaults.
Your loan will be considered in “default” if you do not make a payment for 270 days. If your loan enters default, contact your loan servicer immediately and ask what options may be available to you. The lender may propose loan rehabilitation. To rehabilitate a Direct or FFEL loan, you must make nine monthly payments within 20 days of the due date for ten consecutive months. After the required payments are made, the loan is rehabilitated, removed from default status, and a new loan exists. You may also consider consolidating a defaulted loan. To do this, you must make a satisfactory repayment agreement, usually consisting of three consecutive monthly payments. If you choose to rehabilitate or consolidate your defaulted loan, you will be assessed some amount of collection fees.
Once a loan is considered in default, you may be asked to immediately pay the unpaid principal balance and interest. Your wages may be garnished, your tax refunds may be seized, and you may be denied future requests for federal financial aid. Collection costs will also be added to your loan. Collection actions can include:
The federal government may pursue an administrative wage garnishment, which permits it to take 15% of your disposable pay without first obtaining a court judgment. It must notify you before it can garnish your wages. Within 30 days of receiving the garnishment notice, you may request a hearing to dispute the garnishment.
- Tax Return Offset
The federal government may also “offset” or take from your state or federal tax refund. In most default situations, your loan will be assessed collection fees, but not if the lender offsets your tax refund.
- Federal Benefit Offset
The government may also “offset” or deduct from various federal benefits, including Social Security benefits to repay the loan. No more than 15% of your Social Security benefits can be taken.
Dealing With Debt Collectors.
The U.S. Department of Education has hired over 20 companies to help it collect federal student loan debts. The Department has authority over these debt collectors. If you have trouble with a debt collector or believe it has treated you unfairly, report the matter to the U.S. Department of Education using the contact information listed above.
If a debt collector gets involved in collecting your federal student loan, it will generally add to your loan collection costs, which can be expensive. As a result, it is best if you can work with your servicer to prevent your loan from being placed in default.
In Minnesota, debt collection agencies are licensed by the Minnesota Department of Commerce, which has the authority to suspend or cancel a debt collector’s license if it violates the law. The Federal Trade Commission also has authority over debt collection practices. If you believe a debt collector acted improperly, you should file a complaint with these agencies as follows:
Minnesota Department of Commerce
85 East Seventh Place, Suite 500
Saint Paul, MN 55101
(651) 539-1600 or (800) 657-3602
Federal Trade Commission
Consumer Response Center
600 Pennsylvania Avenue NW
Washington, D.C. 20580
The National Consumer Law Center also has a website, available at http://www.nclc.org/, which also has more information for borrowers who are having difficulty repaying a federal student loan.
Other Government Student Loans
There are some other student loans available through government agencies. Two that are offered to Minnesota students are:
- Perkins Loan.
This low interest loan is available to undergraduate and graduate students who demonstrate exceptional financial need. The federal government provides funds to individual colleges, which in turn act as the lender to the students. If you have a Perkins Loan, contact the U.S. Department of Education at (800) 872-5327 for more information.
- Minnesota State Loan (SELF Loan).
The Minnesota Student Educational Loan Fund (SELF) program is a long-term, low-interest educational loan available from the Minnesota Office of Higher Education (OHE). The program is only for Minnesota borrowers. If you have a SELF Loan, contact OHE for more information as follows:
Minnesota Office of Higher Education
1450 Energy Park Drive, Suite 350
St. Paul, MN 55108
(651) 642-0567 or (800) 657-3866
There are two main types of private loans: those offered by private lenders or those offered directly by schools. Private loans are generally more expensive than federal student loans, and eligibility often depends on your credit history. Many private lenders may require a cosigner. The interest on private loans may be variable, meaning that the interest rate you pay to repay your loan may go up as interest rates rise.
Some private lenders collect loan payments from you directly, while others use loan servicers to service and collect payments on your loan. Your original lender may sell your loan, which may be packaged together with other loans into student loan asset-backed securities.
Your lender or loan servicer will be your primary point of contact about your loan. A private loan servicer may transfer your loan to a different servicer. As with federal loans, it is generally best to work with your lender or servicer at the first sign that you may have difficulty repaying your loan. This may prevent your loan from going into default or being referred to a collection agency, which may increase your costs.
Private loans offer fewer repayment options and fewer default protections. Private lenders often do not have standard repayment plans to offer borrowers when repayment begins. Some lenders may offer flexible repayment options similar to the federal programs, but they are not required. You should contact your lender to determine what options are available to you. Some private lenders will approve multiple forbearances for borrowers in severe financial hardship. Borrowers should be wary about prolonged forbearance periods, however, because interest continues to accrue throughout the forbearance period.
If You Believe A Lender Treated You Unfairly.
Private lenders are licensed by different regulatory agencies, depending on the type of lender. You should report any concerns that a lender treated you unfairly to the proper regulatory agency as follows:
- For loans issued by national banks:
Office of the Comptroller of the Currency (“OCC”)
- For loans issued by state banks:
Minnesota Department of Commerce
- For loans issued by federal credit unions:
National Credit Union Administration
- For loans issued by state credit unions:
Minnesota Department of Commerce
- For all private loans:
Consumer Financial Protection Bureau
If You Believe a Debt Collector Treated You Improperly.
Private lenders hire debt collectors to assist them to collect money owed under private student loans. The Fair Debt Collection Practices Act specifies rights that consumers have when dealing with collection agencies. For more information, review the Attorney General Office publication entitled Debt Collection Fact Sheet or the Federal Trade Commission publication entitled Debt Collection. Report problems with debt collectors to the Minnesota Department of Commerce and the Federal Trade Commission using the contact information listed above.
Cosigning a Loan
Banks require another person to cosign a loan because they do not have confidence that the individual borrower can repay it. There are, however, significant legal implications for a cosigner.
Scholarship and Financial Aid Scams
As college costs continue to rise, students increasingly find themselves searching for scholarships and financial aid. Through high pressure sales seminars and other methods, some unscrupulous companies purport to guarantee or promise scholarships, grants, and other financial aid for a fee, but deliver little or none of the promised assistance.
Student Loan Assistance Scams
Student loan assistance scams try to hide the fact that they charge thousands of dollars for something borrowers can do for free, often claiming to have “inside information” or special relationships with the U.S. Department of Education to dupe borrowers into paying.