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Jul 30 2019

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Student loan forbearance: A way to put your student loan payments on hold temporarily. During forbearance, interest continues to accrue at the same rate. If you don’t make any payments during this time, that interest will capitalize, or get added to your balance. This could increase your student loan payments afterward.

Student loan deferment: Another way to postpone student loan payments temporarily. Unlike with forbearance, interest on subsidized federal student loans is waived during deferment. Interest isn’t waived on unsubsidized loans.

If forbearance is so costly, why do so many turn to it? One possibility: Student loan servicers might be steering some borrowers toward that option. For example, Navient Corp., a major student loan servicer, faces six lawsuits alleging harm to student loan borrowers during the repayment process. The Consumer Financial Protection Bureau, one of the parties suing, alleges that Navient has added $4 billion in interest to student borrowers’ loans through the overuse of forbearance.

When Department of Education auditors listened in on randomly selected Navient calls from 2014 to 2017, they found that in almost 1 out of 10 calls examined, 13 Navient representatives didn’t mention options besides forbearance, according to a report by The Associated Press, which obtained a copy of the 2017 audit. Navient disputed these allegations in a statement, 14 saying that its use of forbearance is “in line with or lower than other major servicers.”

In other cases, struggling borrowers might be encouraged to go into forbearance by the colleges they attended. That’s because schools that receive federal aid are expected to maintain a low “cohort default rate,” the percentage of the school’s borrowers who default on certain federal student loans within a three-year period after starting repayment. In this case, “defaulting” means falling more than 360 days behind on payments.

To keep these cohort default rates low, some schools hired “default management consultants” to encourage borrowers with past-due student loans to pause payments through forbearance, even in cases where better options were available, the GAO report found.

For these consultants, encouraging loan recipients to try forbearance to avoid default makes sense, in part, because it’s quick. In a letter to borrowers, one consultant said a verbal request for forbearance takes about five minutes to process, according to the GAO report. (Enrolling in an income-driven repayment plan is typically a better option, but it takes up to 15 business days to process the paperwork, according to the Department of Education.) Borrowers can also generally stay in forbearance for up to three years, at which point they can default without it being considered a “default” according to cohort default rate. The GAO report found that some schools had offered gift cards to borrowers as an incentive to put loans into forbearance.

CONSUMER TIP: TRY THESE ALTERNATIVES INSTEAD OF STRUGGLING WITH PAYMENTS

Before turning to forbearance, assess the options. Find out if you’re eligible for deferment. If you have subsidized federal student loans, interest won’t accrue on these in deferment. (If you defer unsubsidized federal student loans, you’re generally responsible for paying interest that accrues on these loans during the deferment period.)

Alternatively, you could lower monthly payments with an income-driven repayment plan, which sets loan payments based on how much money you make. While some income-driven plans come with eligibility requirements, you can sign up for the Revised Pay As You Earn plan (REPAYE) regardless of income.

“Income-driven plans give you the flexibility to cover other bills and save money, plus you could get forgiveness on the balance left after 20 or 25 years of payments,” Nykiel says. Once you’re in a better place financially, you can opt to make larger-than-minimum payments while remaining on the income-driven plan. You also have the option of going back to the standard repayment plan, but unpaid interest may capitalize when you switch plans.

Income-driven plans give you the flexibility to cover other bills and save money, plus you could get forgiveness on the balance left after 20 or 25 years of payments.

Teddy Nykiel, NerdWallet’s student loans expert

Terms to know

Subsidized loans: Federal student loans for which eligibility is based on financial need. These are available to undergraduate students. They are “subsidized” because the federal government pays the interest on the loan while the student is in school.

Unsubsidized loans: Federal student loans available to all students — undergraduate or graduate — regardless of financial need. The government does not pay any interest on these loans; that’s entirely the student’s responsibility.

Credit card interest is costly

Paying down credit card debt can feel like plodding along on a treadmill: It’s a good habit, but progress can be slow — especially when you’re dealing with credit card interest charges. As of August 2018, credit card accounts on which interest was assessed charged an average annual percentage rate of 16.46%, according to the Federal Reserve Bank of St. Louis.

That means a household with the average revolving credit card debt of $6,929 would owe about $1,141 15 in interest over the course of a year. And rising rates could drive up those costs even further.

Some households will pay more in interest than others, too. For example, according to the 2016 Survey of Consumer Finances, about 51% of couples with children carry credit card debt, while 42% of couples with no children do so. Those couples with children carrying credit card debt will pay an average of $1,356 16 in interest charges per year — about 16% more than the average U.S. household carrying credit card debt.

As long as you know you can pay off your debt before the end of the 0% APR introductory offer, then a balance transfer card can be a great option.

Kimberly Palmer, NerdWallet’s credit card expert

Consumer tip: Look for a card with introductory 0% balance transfer APR

For those with good or excellent credit, moving high-interest credit card debt to a card with an introductory 0% APR period on balance transfers could help save on interest — and it might even accelerate repayment efforts. About 8 in 10 Americans (78%) say that seeing their credit card had a low interest rate would motivate them to pay down credit card debt faster, according to NerdWallet’s survey.

  • No annual fee.
  • A long introductory 0% APR period on balance transfers (15 months or longer).
  • No balance transfer fee, or a low balance transfer fee. Generally, you don’t want to pay a fee of more than 3% of the amount transferred.

Just remember, after the introductory 0% APR periods on these cards expire, interest will start accruing at the regular rate.

“As long as you know you can pay off your debt before the end of the 0% APR introductory offer, then a balance transfer card can be a great option,” Palmer says. She notes that if you need more time, a personal loan with an interest rate lower than your credit card’s interest rate may be a better alternative.

No matter which method you choose, keep in mind that what someone else finds motivating when it comes to paying down debt faster might not work for you. For example, while 51% of Americans say that having a friend or family member who checks on their progress regularly would motivate them to pay off credit card debt faster, 49% say it wouldn’t, according to NerdWallet’s survey. Similarly, 71% of Americans say that promising themselves a small reward after they finished paying off debt would motivate them to pay down credit card debt faster; 29% say it wouldn’t. Before following someone else’s debt payoff advice, think about whether it’s a good fit for you — and if it isn’t, try a different approach.

Methodology

The survey of 2,008 U.S. adults ages 18 and older was conducted online by The Harris Poll on behalf of NerdWallet on Sept. 25-27, 2018. This online survey isn’t based on a probability sample and therefore no estimate of theoretical sampling error can be calculated. For complete survey methodology, including weighting variables and subgroup sample sizes, contact [email protected]

NerdWallet’s analysis includes data from the following sources:

  • 2016 Survey of Consumer Finances from the Board of Governors of the Federal Reserve System.
  • The Center for Microeconomic Data, September 2018, by the Federal Reserve Bank of New York.
  • Commercial Bank Interest Rate on Credit Card Plans, Accounts Assessed, August 2018, from the Federal Reserve Bank of St. Louis.
  • Federal Student Loan Portfolio in Federal Student Aid, September 2018.
  • Revolving and transacting bank-card balances, June 2018, via email from Experian.
  • Families and Households, December 2017, by the U.S. Census Bureau.
  • Consumer Price Index, September 2018, from the U.S. Bureau of Labor Statistics.
  • Historical Income Tables: Households, August 2018, from the U.S. Census Bureau.

[1] Revolving credit card debt is calculated differently from other types of household debt. The Federal Reserve Bank of New York uses credit reporting from Equifax as the source of its credit card debt data and includes revolving balances (debt carried from month to month) and transacting balances (debt that will be paid off at the next statement). We estimated the amount of revolving debt by using data from the credit bureau Experian to determine balances that were revolved and transacted on bank credit cards. Data about revolving balances on retail credit cards weren’t available; therefore, we assumed that cardholders revolved debt on retail credit cards and bank credit cards at the same rate. Then, we multiplied the total outstanding credit card balances in the U.S. — $944 billion — by the percentage of revolving debt. Finally, we divided this amount by the number of households carrying revolving credit card debt. We estimated the number of households by multiplying the total number of U.S. households (using 2018 estimates based on 2017 U.S. Census Bureau data), by the percentage of households holding that debt (using 2018 estimates based on 2016 data from the Federal Reserve’s Survey of Consumer Finances).

[2] The survey of 2,008 U.S. adults ages 18 and older was conducted online by The Harris Poll on behalf of NerdWallet on Sept. 25-27, 2018. This online survey isn’t based on a probability sample and therefore no estimate of theoretical sampling error can be calculated. For complete survey methodology, including weighting variables and subgroup sample sizes, contact [email protected]

[3] We took the average amount of household debt reported by the Federal Reserve Bank of New York, including transacting and revolving credit card balances, and divided it by the number of households with that debt. We estimated the number of households by multiplying the total number of U.S. households, using 2018 projections based on 2017 U.S. Census data, by the percentage of households holding that debt, based on data from the Survey of Consumer Finances.

[4] This $944 billion total is a NerdWallet-adjusted version of data from the Federal Reserve Bank of New York’s “Household Debt and Credit Report.” According to the New York Fed, the nation’s households had outstanding credit card balances of $844 billion as of September 2018, which includes debt on bank credit cards but not retail, or store, credit cards. To make this number more representative of all credit card debt, we took the $844 billion and added it to 25% of reported “other” debt; the Federal Reserve Bank of New York says about a quarter of so-called other debt is outstanding retail credit card debt.

[5] We estimated the percentage of households carrying credit card debt (47.9%) using projections based on historical data from the Survey of Consumer Finances. Carrying credit card debt, in this case, refers to households that didn’t pay one or more credit cards in full in the last billing cycle.

[6] Consumer price indexes measure changes in price for a set of consumer goods and services.

The price indexes we surveyed include apparel, education and communication, food and beverage, food at home, food away from home, housing, medical, other goods and services, recreation and transportation. According to the U.S. Bureau of Labor Statistics, the medical price index grew from 366.53 to 485.89 from October 2008 to October 2018, and food away from home increased from 219.29 to 277.513. To compare the increase in the price index categories with income growth since 2008, we projected a 2018 median household income based on the rate of growth over the past 10 years. Based on Census data, there was a median household income of $50,303 in 2008; our projections show a median income of $61,450 in 2018.

[7] See Federal Student Loan Portfolio in Federal Student Aid, September 2018. The portfolio includes direct loans, Perkins loans and all loans within the Federal Family Education Loan program, including Department of Education-held FFEL loans, commercially held FFEL loans and FFEL loans assigned to guarantee agencies.

[8] To estimate how much student loan borrowers would owe with a loan in forbearance for an extended period of time, we used data from the U.S. Department of Education’s Federal Student Loan Portfolio. We divided the outstanding balance in forbearance for federally managed student loans ($113.2 billion) — which includes the principal and interest balances of direct loans and FFEL loans held by the Department of Education — by the number of borrowers with federally managed loans in forbearance (2.6 million) to calculate the average student loan balance in forbearance.

[9] See Colleen Campbell, What Do We Know About Student Loans? Less Than You Think, Center for American Progress (Aug. 16, 2018)

[10] We used this interest rate because it’s the fixed interest rate for direct subsidized loans and direct unsubsidized loans for undergraduates first disbursed on or after July 1, 2018, and before July 1, 2019.

[11] Using the average student loan balance in forbearance, we estimated interest charges based on an APR of 5.05%. In forbearance, the interest that accrues doesn’t capitalize — that is, it’s not added to the balance — during the forbearance period, but it may capitalize afterward, depending on the loan. Borrowers also have the option of paying the interest as it accrues so it doesn’t capitalize.

[12] First, we calculated the number an individual student loan recipient would owe in this situation ($2,198.69). Then, we multiplied that by the number of student loan recipients with federally managed student loans in forbearance (2.6 million). This cost is based on a hypothetical situation.

[13] See Navient Use of Forbearance: Site Visit Review, U.S. Department of Education (May 18, 2017)

[15] To estimate credit card interest over the course of a year, we used our estimate of revolving credit card debt and data of the average interest rate on credit card accounts assessed interest from the Federal Reserve Bank of St. Louis.

To estimate the debt over the course of a year, assuming a constant balance, we multiplied the average revolving credit card debt among households with credit card debt by the average APR. This is just an estimate — for simplicity, our estimate doesn’t account for daily compounding or fluctuating balances. Daily compounding would increase the result slightly. The fluctuating balance might increase or decrease the result, depending on the method by which the issuer is calculating credit card interest.

[16] To calculate this, we used demographic data about credit card debt from the 2016 Survey of Consumer Finances, and scaled it up to our 2018 estimates for revolving credit card debt. Assuming an interest rate of 16.46%, we estimate that households with two adults and children would owe $1,356 in credit card interest, on average.

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American Household Credit Card Debt Statistics: 2018

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