Ever since he was a kid, John Smith knew that his calling was in medicine. But while Smith didn't have to struggle with the ubiquitous "What am I going to do with the rest of my life?" question, the newly minted M.D. has struggled to pay off his high-interest-rate student loans.
The problem? Although Smith never missed a payment on his student loans, he was frequently unable to make the entire monthly minimum payment. And whenever he asked his lender to consider renegotiating that amount, the answer was no—and the lender eventually turned his account over to a collections agency that began making threatening calls to his dad, who’d co-signed the loans.
If his student loans had been issued by the federal government, Smith would have had the option to make affordable, income-based payments until he finished his training and his salary increased. Unfortunately, his loans were issued by private lenders, and they rarely agree to reduced payments—even temporarily.
Heather Jarvis knows these stories all too well. The North Carolina–based attorney and student-loan consultant has spent the last ten years advocating for—and educating—student borrowers. And given that interest rates on federal Stafford loans doubled to 6.8% on July 1, there’s likely be a lot more advocating and educating in her future. We sat down with Jarvis to learn more about student loan consultants—a profession that's, not surprisingly, in high demand.
LearnVest: First thing's first ... What exactly is a student loan consultant?
Heather Jarvis: As many of us know, the earlier that students and families start to think about how to manage college costs, the better, but my focus is to help people figure out how to deal with the student loans they have already accumulated. I do this by, among other things, educating universities, associations and professional advisors about student-loan repayment and forgiveness programs.
Although my focus is on training student loan officers, student loan consultants work one-on-one with borrowers to create customized repayment plans. Their advice and advocacy can be valuable, but I encourage people to carefully evaluate their options before hiring someone. There are an increasing number of businesses that are preying on borrowers' anxieties and fears by charging them for so-called "special" programs that are actually open to everyone. So be sure to ask questions about a consultant's education, experience and compensation—as well as investigating their track record with the Better Business Bureau.
How does a student loan consultant differ from a student loan officer who works for a college?
For one, advisors who are independent of a particular university are more likely to point out the importance of considering cost when choosing a school. Also, compared to a student loan consultant, university-employed financial-aid professionals are busy administering the financial-aid programs (including student loans) that people will use to cover their educational expenses, so they're not typically as focused on helping students or graduates deal with how they'll repay those loans once they finish school.
Private vs. federal loans: What's better for the typical borrower?
Definitely federal. Private student loans [those issued by private banks or lending institutions] are typically more expensive and risky for student-loan borrowers because they lack the borrower protections and flexible repayment provisions of federal student loans. And although some borrowers with excellent credit might find private loans with lower interest rates, those rates are often variable and are almost certain to go up over time—sometimes without any cap. Additionally, the most generous debt-relief programs, like income-based repayment and public-service loan forgiveness, are only available to recipients of federal student loans.
Is there ever a point at which you advise people to forgo additional student loans to avoid taking on more debt?
I don't look to establish an absolute threshold with my clients, but I do advise them to consider two key things: The first is that many experts caution strongly against borrowing more than you expect to earn in your first year of postgraduate employment. And the second is that borrowing over the limit on federal student-loan programs—up to $57,500 for undergrads and $138,500 for graduate and professional students taking out Perkins and Stafford loans—usually means not just greater debt, but worse debt that lacks the flexible payment provisions and protections of federal student loans.
What percentage of a person's gross income is a reasonable amount to pay each month toward a student loan?
In general, the longer it takes to repay debt, the more the debt will cost over time, so there are distinct advantages to repaying debt fast ... if you can. That said, you need a monthly payment amount that you can afford, and determining which repayment strategy is best for your circumstances depends on a lot of different factors, including total debt burden, income and projected future earnings.
Defaulting on federal student loans triggers significant collection powers: wage garnishment, tax-refund intercepts, social security seizure and penalties.
Income-based repayment plans can help a lot of people with federal student loans, and they are surprisingly underutilized, in part because they can be tricky to navigate. These “pay as you earn” plans set monthly payments at 10 or 15 percent of someone’s “discretionary income,” which is calculated based on adjusted gross income and family size. They are particularly good options for people who have relatively high debt-to-income ratios, and for people who may benefit from the relief afforded by public-service loan forgiveness, such as borrowers working in government and the nonprofit world.
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Are there any instances when deliberately defaulting on a loan can work to a borrower’s benefit?
Not many. Defaulting on federal student loans triggers the government’s significant collection powers: wage garnishment, tax-refund intercepts, social security seizure, and huge penalties and fees.
You won’t hear this from your lender, but I can imagine scenarios in which it makes sense to stop paying a private student loan. If a person simply can't pay every bill that's due, it makes sense to first cover basic needs like housing, food and utilities. With the exception of the special treatment that private student loans enjoy in bankruptcy proceedings—in 2005, the bankruptcy restrictions that were conferred upon federal student loans were expanded to cover private ones, as well—these loans aren’t much different than other unsecured consumer debt.
Is it ever worth it to take on a big amount of student debt today for the promise of higher earnings tomorrow?
Debt is not to be taken lightly—it has significant and lasting consequences. However, education is highly valuable and arguably more important than ever—people with post-secondary degrees continue to have lower rates of unemployment and higher earnings over time. Of course, for many Americans, higher education is impossible without taking on debt, so I encourage clients to carefully consider what they can afford, borrow only what's necessary, and look at federal loans first.
Do you believe the student-lending industry is broken—and, if so, can it be fixed?
We have a debt-based system of access to higher education, and I'm concerned that students and families are assuming unmanageable student-loan burdens that make it hard to save for retirement, qualify for a mortgage or start a new business.
So I’d like to see an increased emphasis on improving affordable educational alternatives (such as innovations that leverage technology, like Massive Open Online Courses or MOOCs), a simplification of federal student-aid programs, and better accountability in the student-loan “servicing" provided by companies that handle billing and are usually prone to error. Although I’m encouraged to see increased interest in these policy issues among elected leaders, I haven’t started holding my breath yet. But over time, and with continued commitment, I believe that meaningful reform is possible.
Are there any resources, strategies and tools that you'd recommend to borrowers who are deep in student-loan debt?
There is nearly always something that can be done to fix a federal student-loan problem, but the system is overly complicated—and the details matter.
Everyone should start by getting a clear inventory of their loans. For federal student loans, you can check out the National Student Loan Data System. And for private loans, you can consult AnnualCreditReport.com.
Other great resources to explore include StudentAid.ed.gov and StudentLoans.gov, which are both managed by the U.S. Department of Education and provide descriptions of the various federal-loan repayment plans, as well as offer calculator tools to help estimate future payments. And StudentLoanBorrowerAssistance.org, managed by the National Consumer Law Center, is especially useful for borrowers facing financial distress, student-loan default or collections issues.
In your experience, are college-bound students today any more aware of the perils of taking out student loans?
Yes, I find that students and families tend to be more committed to evaluating their options for financing higher education. But it remains the case that student loans are excessively convoluted—even the most sophisticated students and graduates struggle to navigate the system. So increased awareness of the perils doesn’t necessarily mean an increased ability to avoid the perils.