The CFPB Answers Your Student Loan Questions, Part 2: Repaying, Consolidating, Refinancing

Earlier today, Rohit Chopra, Student Loan Ombudsman for the Consumer Financial Protection Bureau, responded to questions from readers about applying for schools and comparing financial aid packages. In this second part, he deals with the many issues involved with repaying your student loans.

Federal student loans have an income based payment option. What options are there for borrowers who took private student loans in addition to federal to cover the cost of their education? There isn’t an income based repayment option for the non-federal student loans. Are their plans to make repaying student loans, including private loans, more affordable?

Rohit: Some private student lenders offer graduated repayment plans and extended repayment plans, both of which might lower your monthly payment. Graduated plans reduce your monthly payment when you first graduate and increase your payment over the lifetime of your loan. Extended repayment plans allow you to repay your loan over a longer period of time. Both of these options may cost you more money over the lifetime of your loan, so think carefully about your options before you make a decision.

Of course, these options may not provide enough flexibility for many private student loan borrowers. One of the top complaints we get about private student loans is the inability to modify or refinance. We’re also worried unmanageable debt might have a broader impact on the economy. The CFPB has launched a project to figure out what can be done.

I have a consolidated private loan that was recently sold from Citibank to Discover student loans. I took the original loan out with Citibank and liked that they offered different repayment terms for my loan. After Discover bought my loan, ALL the terms changed and I was no longer given ANY repayment options other than paying the entire monthly payments or take a deferment.

First off, I never agreed to the terms that Discover is offering. How is it possible for my lender to be changed and for me to have no say in it?

Second, is there a way for me to take my loans elsewhere or am I stuck with a lender I never picked for the duration (or until they sell them to someone else) of my loan?

Rohit: We have heard from student loan borrowers who are frustrated when their loans change hands or when their loan is transferred between servicers. It’s important to pay close attention when this happens. If you’re set up on auto-debit, it may not transfer and, in some cases, your interest rate may change because benefits or incentives may not transfer properly.

The original terms of your loan shouldn’t change. If you’ve experienced problems with the sale or transfer of your student loan, file a complaint with the CFPB. This has helped thousands of consumers get errors fixed – many receive refunds as well.

Is there a general rule for which types of student loans can and can’t be refinanced? Can consolidated student loans be refinanced?

Rohit: You can refinance or make early payments on any type of student loan. But first, some background. Consolidation generally means pulling multiple student loans into one loan. Refinancing a loan generally refers to getting a new loan with a lower interest rate than the loan it’s replacing.

Several years ago, you used to be able to consolidate multiple federal student loans into a new loan with a lower rate. Not so anymore for recent grads. When you consolidate your federal student loans into a federal consolidation loan, you do not get a lower rate. (Strangely, your rate might actually go up, since your weighted-average interest rate gets rounded UP to the nearest eighth of a percent!) Consolidation will generally allow you to make a single payment, and it gives you some additional options to spread out your payments.

Refinance is a whole other situation. In recent years, there have been very few options for borrowers seeking to refinance their loans. Many borrowers wonder why they’re not able to take advantage of today’s historically low interest rates, especially when they have a good job and have been paying on time. In a recent report to Congress, we recommended that we figure out ways to find more refinance options. This is a great option for borrowers with high-rate private student loans to lower their payments.

One thing to be careful about: if you refinance a federal student loan with a private company, you might lose out on options like income-based repayment and public service loan forgiveness.

Under what circumstances would consolidation be preferable for a student with multiple loans vs paying individual payments on each loan?

Rohit: If you’re not having trouble paying your loans, be careful about federal student loan consolidation. While you’ll only have one payment to make, there are some down sides.

I know a number of people who were disappointed when they consolidated an older federal student loan into a new Direct Consolidation Loan. It can be very difficult to determine if you are losing a rate benefit that was tied to your old loan. Perkins Loans have lots of benefits for specific occupations in public service, which can disappear when you consolidate. You also lose the option of making extra payments toward your highest rate loan, which can let you pay all of your loans off more quickly.

Your rate can also go up. Let’s say you consolidate multiple loans at 6.8% — your new rate will be 6.875% because of the rounding formula.

However, if you are having trouble paying your loans or if you want to get forgiveness under the Public Service Loan Forgiveness program, consolidation is a great option. You can put all of your loans into one loan and then apply for income-based repayment online. Only Direct Loans qualify for loan forgiveness, so consolidating older federal student loans can allow you to qualify for forgiveness.

My colleague Holly Petraeus and I published a report about student loan issues facing military families. We noted how loan consolidation can be a double-edge sword, since it can allow servicemembers to get on track for loan forgiveness, but it can also mean they lose out on their Servicemembers Civil Relief Act rate cap of 6% for pre-service obligations. Unfortunately, this is confusing and complicated – probably the last thing a new active-duty soldier has the time to navigate.

In Part 3, coming later this afternoon, Rohit answers additional questions about loan forgiveness and the dreaded topic of defaulting on your student loans.