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5 Steps for Negotiating Private Student Loan Relief

Is it true that all good things come to those who wait?

For some struggling student-loan borrowers, that may finally be the case as Wells Fargo and Discover Financial Services—the nation’s second- and third-largest private education lenders—have recently announced plans to take more substantive measures to help.

The decision to modify a delinquent loan is a tough pill for lenders to swallow for a couple of reasons. Foremost is the concern that once the word gets out, less-troubled borrowers will claim distress or worse: Purposefully withhold their payments in order to score a better deal. The second has to do with lenders’ reluctance to come clean about the true nature of the loans they have on the books.

When full repayment at originally agreed-to rates and terms becomes uncertain, financial institutions will flag the loan so that they may more closely track remittances while looking for signs of deteriorating creditworthiness. But when the borrower is in or on the verge of default, the loan becomes nonperforming—probably the dirtiest word in a lender’s vocabulary.

To a lender, nonperforming loans are dead assets. That’s because going forward, every payment it receives for those loans must go toward reducing the outstanding principal, which means that no interest income may be recorded even if the borrower is able to pay all or part of the interest that’s due. Not only that, but the lender is also compelled to estimate the loan’s ultimate recoverability in the event of that default. It does so by subtracting from the principal balance its estimated value of the underlying collateral, if any. The difference is promptly written (charged) off.

By that accounting, nonperforming education loans—which are not collateralized—should be fully charged off, even though the debts are virtually impossible for the borrower to discharge in bankruptcy.

Consequently, private student lenders do all they can to avoid this from coming to pass, whether by agreeing to temporarily reduce or discontinue payments, or by actively managing a chronic delinquency so the contract doesn’t stray into nonperformance land.

The problem, however, is that these short-term tactics do little more than drop-kick the unsettled matter, frankly, at the expense of the borrower. Between late-payment fees and the compounding effect on all that deferred interest (known as negative amortization), the debt swells in value.

So when the lender decides it has no other option than to permanently modify the loan it wishes it hadn’t made in the first place, it can take any one or a combination of the following actions: lengthen the term, lower the interest rate and/or forgive a portion of the principal.

As you might expect, there is a pecking order for all this—one that favors lenders over borrowers.

Since nonperforming loans produce no income for the lender until the loan balance is repaid, it follows that the recovery of that principal is paramount. It also makes sense for the lender to collect at least some of the interest that it will be able to count as income once the loan is paid off. Therefore, a lender’s first offer will be to extend the loan’s duration.

Too bad the borrower ends up paying more in order to pay less.

You see, the longer a debt remains unpaid, the more interest it accrues. For example, a $30,000 private student loan that’s repaid over 10 years at 10% interest will cost $17,574 to finance over its life. But if the term were to be stretched to 15 years and the rate were to remain unchanged, even though the monthly payment will decline, that restructure will cost the borrower an additional $10,454—59% more for a total of $28,029 atop the originally borrowed $30,000.

So what’s a struggling education borrower to do when he’s already been granted the relief he needs for his government loans but his private lenders haven’t been as accommodating? Five things.

1. Make an Airtight Case for Relief

Be prepared to prove that you’ve tightened your budget to the point that you’re earning as much as you can and have eliminated all discretionary expenditures. The lender may ask for your bank and credit card statements for verification.

2. Don’t Settle for Temporary Measures if Your Problem Is Anything but Temporary

Lenders and their loan-servicing agents prefer bandages to surgery. If the financial distress you’re experiencing is permanent in nature (lower-paying job or disability, for instance), press for a solution that speaks to your reality. Escalate the matter to a supervisor or manager if you meet resistance.

3. Pay Attention to the Structure

Some lenders offer hybrid restructures, where interest rates are reduced for a few months or years. Sure, the payment will decline for a while and the interest you’ll pay overall will be less, but take care to determine whether you can live with the higher payments later on. If not, reject the offer.

4. Focus on the Fees

Whenever possible, lenders will seek to collect as much as they can in fees for arranging the relief you need. Not only are fees another form of interest in this context, they also represent the surrender of cash—a resource that’s already in critically short supply.

5. Prepare a Counteroffer

More than anything else, if financial institutions are after principal recovery, why not begin the negotiations by offering to do just that? Continuing with the previous example, if you can afford to make 10 years’ worth of payments at the 15-year rate (which calculates to $322.38 per month), and if $30,000 worth of debt divided by 120 months is $250 per month, why not begin the negotiations at that level and “settle” for $322.38? The lender will end up earning 5.28% on its loan instead of 10% and you’ll end up paying $8,686 in interest as opposed to $17,574—roughly half.

Certainly, that’s not a great outcome for the lender, but when an unsecured loan is headed into default, from the institution’s perspective, cutting a crummy deal today sure beats the time, expense and uncertainty of dragging the matter through the courts tomorrow.

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.

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How To Score A Private Student Loan

It’s no secret that college is phenomenally expensive, and the sticker price rises every year. In fact, college tuition has increased by nearly 1,200% over the past 35 years. For the 2013-2014 academic year, the College Board reports a “moderate” college budget averaged $22,826 for an in-state public college and $44,750 for a private college. The most expensive colleges cost more than $60,000 a year. Cha-ching!

Obviously, most families don’t have that kind of cash lying around, which is why the vast majority of students borrow money to help pay for college. For the most part, there are two types of student loans:

  1. Federal student loans funded by the U.S. government
  2. Private student loans from a non-federal lender, such as a bank, credit union or private lender

Federal student loans offer significant advantages, including fixed interest rates and income-based repayment plans – which means they are generally less expensive than private student loans. However, when it comes time to pay for college, many students who obtain federal student loans come up short.

When a federal student loan doesn’t cover the full cost of college and the student didn’t land a substantial scholarship, it’s time to search for a private loan.

Offered by banks and private lenders, private student loans generally come with variable interest rates between 3% and 12%, origination fees and other charges. These days, most private student loans mandate a cosigner, especially for younger students who haven’t established a credit history.

For these reasons, private student loans are often considered a last resort for families. Even so, with proper research, it is possible to find a competitive loan that meets the student’s needs.

Not sure where to begin with your private loan hunt? Here are a few tips:

A Lot Depends on Credit Scores

As you research student loans, pay close attention to interest rates. Unlike federal student-loan interest rates, which are the same for every borrower, the interest rates for private student loans vary. That’s because private loans are credit-based; students with better credit scores may receive a more favorable interest rate.

Students with a low credit score or no established credit history should apply with a credit-worthy co-signer, like Mom or Dad. Not only will this increase the chances of getting approved, but it could also significantly reduce the interest rate. Co-signers should be aware of the risk they are taking on, however. See Seniors: Before You Co-sign That Student Loan.

Check Out the APR

As you’re shopping around for the best deal, you may be tempted to choose the loan with the lowest interest rate. Don’t make this mistake. When it comes to private loans, it’s more effective to compare the Annual Percentage Rate (APR). Why? Because basic interest rates may not represent the true cost of the entire life of the loan. The APR factors in account deferment periods and repayment terms, which can have a huge impact on the overall cost of the loan.

To top it off, most lenders won’t give you an actual interest rate until after they have a chance to review your application. However, lenders typically provide APR examples up front, which can help you compare loans apples-to-apples. These APR examples also illustrate the lowest and highest interest rates available, which will give you an idea of what you can expect to pay. You’re likely to receive an interest rate that lands somewhere between those numbers.

Compare Payment Plans

It’s extremely important to find a lender that offers some flexibility when it comes to repaying your private loan. While some lenders require that you start making monthly payments while the student is still in school, others allow you to wait until after graduation. Pay close attention to these details and choose a lender that offers the ideal payment plan for you. For additional information on loan repayment, see Time To Consolidate Your Student Loans?

Study Up on Borrower Benefits

For bonus points, some student-loan lenders offer additional borrower benefits. These might include an automatic-payment interest-rate reduction (the interest rate drops for borrowers who sign up to have loan payments deducted automatically from their bank account), principal reduction or even cash rewards. For example, when you enroll in an automatic payment plan, most lenders will offer anywhere from a 0.25% to 0.50% interest rate reduction. This can translate into hundreds of dollars of savings over the life of the loan.

Be sure to read the fine print about these benefits. If borrowers can’t meet their end of the bargain (one month, they miss an auto-payment because their account balance is too low), they could lose the benefit permanently. Read more about the risks and rewards of these benefits here.

Reputation Rules

It’s important to choose a student loan lender that has a stellar reputation and offers first-class customer service. Professional and friendly customer service reps will be able to answer all of your complex questions and act as an ally when a borrower needs support and guidance in tough financial times. Not only can they walk students through their repayment options, but they can also help them avoid late payments.

To evaluate the customer service for each lender, ask the following questions:

Does it offer an online loan application?Does it provide toll-free 24/7 customer service with reasonable wait times?Does it have a website where borrowers can securely access loan information?Does it generate a lot of complaints from their borrowers?Is the lender recommended by schools and borrowers?Most colleges provide a preferred lender list, including contact information for reputable lenders with whom they’ve worked in the past. These recommended lenders usually offer the most competitive rates and superior customer service. Check out the school’s website or ask the college student aid office for a list. For more information, see Top Student Loan Providers and our tutorial on student loans. The website Simple Tuition will also enable you to compare loan options.

The Bottom Line

Families should try for federal student loans first. Private student loans are a last resort when federal loans and other funding (help from grandparents, perhaps) fall short. Research will allow you to compare private loan options and identify the best available deals.

[…]

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How to Stop a Neverending Student Loan Nightmare

Last month, the U.S. Department of Education’s Office of the Inspector General lobbed a grenade at the federal student aid program.

In a harshly critical memorandum to the Federal Student Aid’s Chief Operating Officer, the assistant inspector general condemned the agency’s repeated failure to validate the accuracy of certain subcontractor invoices before authorizing payment.

These weren’t just any nickel-and-dime invoices.

The remittances in question were for commissions and bonuses totaling nearly a half billion dollars. They were paid to private collection agencies (PCAs) that claimed to have recovered cash on previously defaulted student loan accounts — those that had become so past due, they were at the point of foreclosure.

I have absolutely no quarrel with the IG’s rebuke, nor am I opposed to rewarding for extra effort. However, I am concerned about the operational controls that govern incentive compensation plans, especially those that pertain to something as problematic as the student loan program. I wonder in particular whether the feds are ensuring that the collections companies are doing all they should to prevent past-due payments in the first place or worsening when they do.

Stopping a Bad Situation Before It Gets Worse

Experienced lenders know how important it is to quickly nudge back on track the borrowers who’ve fallen one or two months behind in their payments, lest they become chronically delinquent — or worse, headed toward default. That’s why it’s surprising the DOE’s PCA Procedures Manual doesn’t mandate such proactivity or even establish guidelines for acceptable levels of payment delinquency when mega-bonus dollars such as these are at stake.

Moreover, according to Consumer Financial Protection Bureau, education borrowers are complaining about the difficulties they’re having understanding the terms and conditions of their agreements, confirming that their remittances have been promptly and accurately recorded, and complying with instructions that seem to change with each customer service call they make.

The college grads who’ve contacted me also frequently complain about being pitched negatively amortizing forbearances and graduated payment plans instead of provided more helpful information regarding the government’s superior debt-relief programs.

This merry-go-round of misinformation and obfuscation is the reason the CFPB announced in March a proposal to oversee the largest nonbank student loan servicing companies, just as it currently supervises the largest bank-owned operations.

A Real Solution to the Student Loan Problem?

Now that the public comment period for this has passed and the bureau is at work crafting the rules that will govern its new activity, we can only hope the guidelines that are put into place will comprehensively address the fundamental process of managing this enormous level of debt — more than for credit cards or auto loans — at a time when student loan-payment delinquencies are at record-high levels.

I say that because there’s no point in attempting any legislative solution to this serious problem unless it also universally overhauls the manner in which the loans are serviced, not only by the companies the CFPB plans to oversee but also by the bevy of newcomers that successfully lobbied for a piece of this lucrative loan-servicing action.

In particular, we need standardized protocols for the proactive servicing of all education loans, whether performed by the originating lenders or their subcontractors. Among other things, it should stipulate:

A definitive timeline for contacting debtors and resolving late-payment issues. Minimum acceptable levels of staff training and systems support to properly describe and accommodate loan restructures and modifications. Maximum turnaround times for adjudicating customer service inquiries.

We also need incentive programs that reinforce these standards without causing additional harm to cash-strapped borrowers, or added costs for the federal government.

For example, servicers should be held accountable for limiting:

Each category of delinquency — 30, 60 and 90-days past due, worse — to levels that are consistent with other forms of unsecured consumer debt. Past-due payments that migrate from one month to the next (which are known as receivables agings in financial services-speak) so that the collection companies are not undeservedly rewarded.

The validation process should incorporate these important performance measurements before the bonus checks are cut or the servicing agreements renewed.

Meantime, borrowers who are frustrated in their dealings with unresponsive loan-servicing companies should continue lodging complaints to the CFPB and their legislative representatives, as well as with the offices of those who appear to be attempting constructive solutions. They should also familiarize themselves with the various government relief programs that have been put into place so that they are in a better position to advocate for the help they need.

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Students warned about loan fraud

16 September 2012 Last updated at 20:33 ET

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Student loan firm’s fraud alert

Freshers are being warned their student loans could be stolen if they reveal too much information on Facebook.

The Student Loans Company says fraudsters target unwitting first-year students who give personal details on social networking sites.

An online survey of more than 1,100 university applicants suggests many will invite new people they meet to be Facebook friends.

And two-thirds reveal personal details that could aid thieves.

Fraudsters sometimes try to hack into bank accounts by sending convincing-looking emails which ask for specific personal details. This is known as phishing.

But they start by getting an individual’s email address.

Higher risk

The fraud protection and detection manager at the Student Loans Company, Heather Laing, said: “Freshers are often managing their finances for the first time by themselves when they start university and we want them to make sure they’re keeping their personal and financial information safe, especially online.

“We monitor student loan phishing very closely and close phishing sites down as soon as students alert us to them, to protect other students.

“Students are often targeted at the three main instalment dates in September, January and April and they need to work with us to ensure their identity and financial details are protected and not compromised.”

The online survey of more than 1,100 UK university applicants suggests nearly three-quarters would reveal their date of birth and relationship status without thinking too much of the consequences.

And two in five will give out their email address.

However, most new students have not met their Facebook friends and consider only about a quarter of them as close.

The survey suggests male students are at higher risk of student finance fraud than females as they are more likely to make their Facebook profiles public.

In the last academic year, fraudsters attempted to access money from more than 1,600 students.

The specialist investigations unit at the SLC says it saved more than £2m of student finance from being fraudulently diverted from its rightful recipients.

[…]

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A payday day loan is short-term loan that people borrow until their next pay check. The amount of money that is loaned is only a small amount, the maximum is usually around £1000. Over the last few years payday loan companies have become increasingly popular. It is very rare to find someone who hasn’t seen an advert for a payday loan on television or whilst they have been browsing the internet. But why all of a sudden have payday loan companies become increasingly popular? You are about to find out.

Convenience – Payday loans when compared to a loan from a bank are just much more convenient. Most payday loan companies operate online so those wishing to take out a small loan can simply visit the website and apply, instead of having to make a long journey to a bank.

Faster Payments – Money borrowed from payday loan companies is usually paid into your account within 24 hours of applying for it. They work simply by a direct debit transfer straight into your account. Bank loans often take a lot longer to be paid into your bank meaning that payments are much more likely to be missed.

Easy To Qualify For – The common perception is that payday loans companies lend to anyone and everyone. This is not the case, although payday loans are much easier to qualify for, they don’t lend to just anyone who asks. To be given a loan from a payday loans company you need to prove that you are employed and that you earn over £1000 per month. Payday loan companies will only lend if they know that a person is capable of paying them back.

Easy to Understand – The amount that is required to be paid back is much easier to understand than a standard loan. Most payday loan companies offer a flat rate per amount of money that you lend. For example if you lend £200 you may be expected to pay £210. Before the loan has even gone through users know how much they will be required to pay.

One Payment – Loans are paid back on a set date, they are not spread out over a number of months. This is much more preferred as it allows people to stay more organised when it comes to their finances.

Customer Service – Payday loan companies on the whole have great customer service. They have teams of trained staff working around the clock that are willing to answer your calls. Banks are well know for having poor customer services and keeping those who are in need of a loan on hold.

This guest post was written by John Szabo, a part time blogger, on behalf of Poundaccess. Poundaccess are a UK based company offering quick short term loans.

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  5. 12 Tips for Getting Rid of Student Loans

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