Creating Consistency in Educational Finance: A Training Curriculum

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Module 1  

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Module 1: Customer Service Representatives

Payment options for borrowers

To receive a telephone call from a borrower who has done his/her research about the different payment plans and methods would be ideal for a customer service representative. Although this may be true of some borrowers, it is likely that most borrowers will need to be reminded of the various payment plans and options that are available for making their student loan payments. Most importantly, it is in speaking about the various payment options and methods that customer service representatives should stress the importance of making timely and regular payments.

Most lenders and servicers offer students a number of options that make it easier for students to send in payments. Some of those options include:

  • Setting up automatic debit withdrawals from a student's bank account
  • Making payments online
  • Processing a check over the telephone
  • Mailing a check

In speaking with borrowers, it is important for customer service representatives to explain the benefits of choosing one payment method over another. For instance, many lenders and servicers offer students interest rate discounts when signing up for automatic debit withdrawals. In this instance, not only can students save money in the long-run, but also, automatic debits ensure regular and timely payments to the student's account.

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Types of Repayment Plans Available to Borrowers

In an ideal world, college students graduate and find a job that will afford them a comfortable lifestyle while having enough money to meet their debt obligations. However, people's lives are always changing, and unexpected situations occur that make it difficult for some borrowers to repay their student loans. The good news is that the Federal Family Education Loan Program (FFELP) gives borrowers a number of options to assist them with repayment and prevent them from defaulting on their student loan due to unforeseen situations.

Because there are numerous repayment options, it is important to help borrowers choose the best plan for their particular situation. Borrowers may not know exactly what to ask for, so begin by discussing with the borrower his or her financial situation. In this way, the most appropriate repayment plan can be recommended.

All borrowers should be encouraged to stick to a repayment plan and make timely payments. However, when borrowers are unable to make regular monthly payments during periods of hardship, deferment or forbearance is an alternative repayment solution. It is important to assess if the situation truly warrants a deferment or forbearance. If a borrower can afford to make reduced payments (as opposed to postponing full payments) with a forbearance, a customer service representative should counsel the borrower accordingly. Additionally, a borrower's situation should be carefully assessed so that a forbearance is not automatically applied when the borrower may qualify for a deferment.

The majority of borrowers will not be able to repay their entire loan balance immediately upon entering repayment. The FFELP offers borrowers a number of different repayment plans to help them repay their student loans over a period of time.

For most borrowers, a standard 10-year repayment plan provides sufficient time to repay their loans; although, depending on their circumstances, an alternate repayment plan may work better. For example, most students right out of school may initially find it difficult to make the payments required for their loan balance. But because of having a college degree, they can realistically expect their income to increase over time. Therefore, having a smaller payment at the beginning and somewhat higher payment toward the end of the repayment term makes paying back the loan easier, therefore reducing the possibility of default.

Generally, borrowers take between five and 10 years to repay their student loans. The minimum annual payment is $600.00, which is typically prorated to a minimum monthly charge of $50.00. In exceptional circumstances, the monthly payment may be less than the standard minimum of $50.00. However, the payment amount can never be less than the amount of interest that accrues each month.

When the loan enters repayment, the borrower is notified of the due dates for each payment. The borrower can always pay early or even in lump-sum payments (with notice to the lender) without penalty, however late payments often result in penalties such as late charges, negative credit ratings, and a loss of some on-time payment incentives.

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Standard Repayment Plan

Unless otherwise requested, borrowers will generally start out with a standard repayment plan. A standard repayment plan typically amortizes a loan into equal monthly payments over the repayment period. Each payment will be applied first to outstanding fees and charges, then to interest, and last to principal. Although factors such as late payments, interest rate changes, and capitalized interest may affect the monthly payment amount, the borrower's monthly payment will usually stay fairly consistent, making it a preferred option for most borrowers.

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Graduated Repayment Plan

Many borrowers who graduate from college often begin their careers earning a significantly lower salary than they had anticipated. In these situations, a graduated repayment plan, which requires lower initial payments that gradually increase over time, may be a better choice. When a borrower chooses a graduated payment plan, the amount of time to repay the loan does not change — the standard term is still 10 years. (See Table 1 for a sample repayment schedule of a Graduated Repayment Plan)

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Extended Repayment Plan

Borrowers with high loan balances often find the payment amount required in a Standard Plan difficult to maintain. Borrowers whose first disbursement was made on or after October 7, 1998, may select an extended repayment plan that allows for a repayment period of up to 25 years. This extended plan is only available to borrowers whose principal balance is greater than $30,000.00.

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Income Sensitive Repayment Plan

If a graduated and/or extended repayment plan is not enough to help the borrower who is having difficulty making loan payments, the borrower may request an income sensitive repayment plan. The income sensitive plan helps borrowers with low income avoid delinquency and default. The monthly payment amount is based on the borrower's total monthly gross income from all sources. The borrower must provide proof of income.

Unlike the graduated payment plan, the income sensitive plan requires the borrower to reconfirm income with the lender each year. A maximum of up to five years must be added to the 10-year repayment period through the use of reduced-payment forbearance if the borrower requires the additional time to repay the loan in full. (See Table I for a sample repayment schedule of an Income Sensitive Repayment Plan. In this example, the payment amount was calculated based on a borrower making $2,000 monthly and allocating 4% of monthly salary to the student loan payment.)

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Consolidation

While not technically a repayment plan, loan consolidation is another option available to help borrowers in managing their student loan debt. With consolidation, the original loans are paid in full and a new loan for the combined balances is originated. This new loan has a fixed interest rate and, potentially, a longer repayment term, which could reduce the monthly payment amount. Of course, it is always important to remember that a longer repayment term may result in more interest paid over the life of the loan.

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