As a newly minted physician, I recently amassed more than $240,000 in loans to pay for medical school. Paying off those loans is hard. As borrowers are discovering, the U.S. Department of Education’s illogical lending policies make student-loan repayment substantially harder.
The student-loan landscape changed drastically over the past five years. Until recently, students could borrow federally guaranteed money, but they did so through a host of private lenders. Options — and competition — for lenders were plentiful, ranging from giant, publicly traded companies to small, nonprofit state partnerships.
However, with amendments made in 2010 to the Higher Education Act, the U.S. government became the de facto monolithic lender of all federally backed student loans.
The universal lender concept was touted as an improvement on the previous system. The U.S. Department of Education provides one-stop shopping to all borrowers, eliminating the need to compare terms between lenders. Graduates could also consolidate many smaller loans accrued over an educational career to take advantage of numerous repayment options.
One such option is called income-based repayment, or IBR, which caps a borrower’s monthly repayment obligations at a fraction of the standard 10-year repayment amount. This is an attractive alternative to many recent graduates, who make smaller payments commensurate with their smaller salaries. All that Uncle Sam asks is annual proof of income in order to establish future payment requirements.
So it was when, on Aug. 16, I received a letter from Direct Loans informing that it was time to recalculate my monthly payment amount under IBR. (Direct Loans is a loan servicer, authorized through the U.S. Department of Education.) The letter notified, “If proof of your current income is not received within 90 days of the date of this letter, your repayment plan will be changed to Standard Repayment Plan, which could increase your monthly payment amount.”
On Oct. 23, I faxed last year’s tax return as proof of income and forgot about the process, until I received notice eight days later that my next month’s payment had skyrocketed 1,600 percent, from $177 to $2,916. This charge equals one standard repayment, and was only $125 less than my monthly take-home salary.
Shocked at this logarithmic rise, I called Direct Loans to ask for an explanation. The customer-service representative stated that the loan servicer had not received my forms in time and thus had to adjust my payment to the Standard Repayment rate. When I pointed out that we were having our conversation on Nov. 7, clearly within the 90-day window of the initial letter, the representative did not budge.
In the end, I was told to either pay the full amount or pursue forbearance, where that month’s payment is added on to the principal of the loan, with compounding interest adding insult to injury. The outcomes were clear: Pay too much now, or pay even more later.
Borrowers have stunningly little recourse to address this government-sponsored racket. In the past, they could have switched to a more transparent, fair and competitive loan servicer. Today, students and graduates have no other option. Any dispute involves going against an arm of the government that has no apparent interest in its stakeholders. At least one can argue with the Internal Revenue Service through arbitration. What’s a borrower supposed to do — sue Secretary of Eduction Arne Duncan?
Barring a reversal, of course, tens (if not hundreds) of thousands of borrowers nationwide could confront the same scenario when paying off their loans. Borrowers will choose between the lesser of two evils: Digging into savings to make a payment that is above the terms of their contract, or resigning themselves to an ever-greater loan balance, courtesy of the cure-all of government-endorsed forbearance.
For the age demographic that most favors expansion of government programs, the takeover of a multibillion-dollar industry is a sobering reminder that federal oversight is not a panacea. Big Brother’s decisions can be unscrupulous at best, and fraudulent at worst.
In his 2012 State of the Union speech, President Obama lamented, “Americans who work hard and play by the rules every day deserve a government and a financial system that do the same.” What irony that one of his own initiatives fails to accomplish that very aspiration.
Philip Lehman IV is a resident in internal medicine at Duke University Medical Center in Durham, N.C.