In early March, President Barack Obama proposed a “Student Aid Bill of Rights” that will help students manage their federal student loan debt and create a responsive feedback system where student loan borrowers can file complaints. In effect, the Student Aid Bill of Rights is designed to simplify and ease the loan process for student borrowers.
For the 40 million households with student loan debt—which, according to the White House, hovers around $28,400—this might come as welcome news. More than 70 percent of students who graduate with a bachelor’s degree leave with some debt.
Student loans and your credit history
While student loans can be a challenge for people just graduating college, they can also offer some benefits for your credit report and credit score. Student loans are categorized as installment loans because you pay the same amount every month until they are paid off. Carrying student loans adds diversity of credit to your credit history and, if you pay your bills on time, can add positive payment history to your credit report.
“A student loan is no different than any other type of debt. Timely payments can be great for your credit report,” says Kevin Weeks, president of the Financial Counseling Association of America.
“What’s difficult with student loans is, with deferment, it’s easy for a 22-year-old to ignore them,” Weeks says. “And the next thing you know, you are moving toward a default.”
Your payment history is the most heavily weighted factor in your credit score, which means that missing multiple payments could have a serious impact on it.
“Even if you start making payments, those historical late payments will still show up on your credit report,” Weeks says.
To help ensure that borrowers can afford their monthly loan payments and avoid the hassle of missed payments, President Obama’s proposed Student Aid Bill of Rights directs federal agencies to take the following steps to help students pay their federal loans:
1. Create centralized websites for loan management and student feedback.
President Obama has called for the Secretary of Education to create a new website by 2016 that will serve as a place where students can submit feedback about federal student loan lenders, services, collection agencies, and colleges or universities in a simple and straightforward way. The hope is that in creating such a website, students and borrowers will be ensured that their complaints will be directed to the right party for timely resolution and response by the Department of Education.
Currently, borrowers can submit complaints on the Consumer Financial Protection Bureau’s website, Weeks says.
The Department of Education will also establish a centralized repayment center, which may help students stay on top of their monthly payments. Currently, if you wish to view your student loans, you can sign in to the National Student Loan Data System, but you must visit the loan servicer’s website to see all of student debt obligations, payment amounts, due dates, and payment options.
2. Collectors must apply prepayments to loans with the highest interest rates.
The interest rate of your student loans makes a big difference in the total cost of your education. In order to help reduce debt, some borrowers choose to make extra payments toward loans with the highest interest rates, as those cost more the longer it takes to pay them off. But the process can be arduous because loan servicers usually apply any extra payments toward your next monthly bill overall, indiscriminate of interest rate. In order to apply funds to a specific loan, you often have to speak to a customer service representative or send a letter with your check.
The proposal directs collectors to allocate prepayments first to loans with the highest interest rates unless the borrower requests a different repayment plan.
3. Improve communication and consumer protection during the repayment process.
The Student Aid Bill of Rights also directs government agencies to provide better consumer protection and communication (such as enhanced disclosures throughout the repayment process); better protect borrowers from falling behind on their payments; and attempts to ensure consistency across loan servicers.
The government currently relies on private collection agencies not only to collect debt but also to communicate with borrowers about their debt repayment options. As noted in a 2014 report from the Student Loan Borrower Assistance program, “there is inherent conflict in these dual responsibilities.”
“The third-party services act as a collection arm, not an advocate for borrowers,” Weeks says. He says consumers need more education about their federal loan options.
4. Provide clarity on the rights of the borrower in bankruptcy.
Student loans are difficult to discharge in a personal bankruptcy. In the Student Aid Bill of Rights, President Obama ordered administration officials to review whether the bankruptcy laws should be changed.
Even in light of these proposed changes, you should communicate with your lender if you are having trouble making your payments. You may be able to enroll in an assistance program, such as an income-driven repayment plan or a pay-as-you-earn plan.
Camille Puschautz is a researcher, writer, and Web producer at Think Glink Media, and a regular contributor to the Equifax Finance Blog. Previously, Camille worked for Bloomberg News in New York and MediaTec Publishing in Chicago. She is a graduate of the University of Dallas and Northwestern University, where she received a master’s degree in journalism.
Kristin M. Harty, Vice President- Strategic Solutions- Education Vertical with Equifax, contributed to this article.
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