A few weeks ago, the Department of Education announced that
as of midsummer, nearly 3.9 million federal student loan borrowers had an
income-driven repayment plan – a 56 percent increase from the same time last
year.
This was great news, as it indicates that not only are more
consumers aware that such lower payment options exist, but they are also using
them to ensure their payments are manageable. The same announcement showed a 2
percentage point drop in the proportion of federal student loan accounts that
were past due during that same period. Coincidence? We don't think so.
So now that we've got borrowers utilizing these programs, we
can stop worrying about them, right? Wrong. According to data published by the
Department of Education last year, almost 60 percent ofstudent loan borrowers
who have chosen an income-driven repayment plan fail to submit their annual
renewal applications on time. This is an especially alarming number if you
consider the consequences of submitting late.
A borrower who pays under one of the income-driven repayment
plans such as income-based repayment, income-contingent repayment or Pay As You
Earn is required to renew that plan annually. While these plans are all
slightly different, in general, failure to renew your plan on time can result
in some or all of the following consequences:
• Your monthly payment may convert to a ten-year standard
repayment plan, which can be a very significant jump from your income-driven
repayment payment.
• Any outstanding accrued interest can be added to your
principal balance.
• If applicable, there could be a ceasing of the interest
subsidy allowed on some loans during the first three years under the
income-driven repayment plan.
With such expensive consequences, why do so many borrowers
fail to renew their income-driven repayment on time? After talking to affected
consumers and participating loan holders, the Student Loan Ranger has come up
with a checklist to ensure that you don't become part of this statistic.
1. Know whom you owe: This might seem like an unnecessary
reminder, but the Student Loan Ranger gets questions almost daily from folks
who don't know who holds their student loans. If you're one of them, you can
find a list of loans, loan holders and their contact information by logging into
theNational Student Loan Data System.
2. Open your mail – all of it: The number one reason that
borrowers fail to renew their income-driven repayment plan on time is because
they don't see the reminder notices and instructions. According to the
consumers we've talked to, this is consistently because they don't open their
mail.
Many borrowers pay their student loans via automatic
payments through their bank or have a payment of zero under their income-driven
repayment plan – yes, that's possible. So when they receive emails or snail
mail from their loan holders, they assume it's a bill and toss it into the
physical or virtual trash bin.
Expect to start receiving reminders for the renewal between
two and three months before the end of your current 12-month income-driven
repayment period, with the renewal documents due up to a month before the end
of that period. It's very important to make this deadline as, in most cases, if
the loan servicer doesn't receive the documents on time, all of the
consequences we mentioned previously will kick in. It might be a good idea to
set your own reminder on your cellphone or other device.
3. Keep track of your financial situation: Many consumers
using the income-driven repayment plans don't realize that they actually don't
have to wait for the 12-month period to expire if their financial situation
changes.
If your income increases or decreases, you can contact the
loan servicer at any time to submit updated financial information, have your
payment adjusted accordingly.
On a related note, remember that if something causes you to
not be able to afford your payments at all, it's important to contact the loan
servicer right away. Especially with federal loans, there's almost always
something your loan holder can do to provide relief and help you avoid late
fees and credit hits.
4. Again, remember to open your mail: Seriously – remember that statistic we listed
earlier – almost 60 percent of borrowers don't renew their income-driven
repayment plan on time, and that's mostly due to failure to open their mail and
see the reminders. What that number doesn't show is that we see that many of
those borrowers who fail to renew on time fall past due on these loans.
Remembering to renew your income-driven repayment plan can
be a challenge, which is why organizations like ours and federal student loan
servicers are being much more proactive about reminding borrowers when it's
time to renew.
Still, it's always best to take initiative on your own. Know
your Best Education
loan servicer and how to reach them, understand your payment plan and reach
out if you get in trouble.
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