Advising Borrowers Who Lose Jobs

This episode of the CSLP podcast discusses the situation where jobs are lost or income is dramatically reduced.

Student Loans, Job Loss or Income Reduction

This episode of the CSLP podcast discusses the situation where jobs are lost or income is dramatically reduced.  The Government shutdown in January 2019 is an example where Federal workers had no income for weeks.

What options are available to those with student loan payments? Jantz discusses the need for borrowers to stay on top of their debt to avoid serious issues and options to defer or adjust payments temporarily. This advice is helpful for advisors who have clients facing these situations.

At recording time, we were in the fourth week of the government shutdown. Losing income due to job loss or in was the focus due to the shutdown.

The episode centered on what happens to student loan borrowers when they can’t make the payments. Many Federal workers were struggling to make ends meet. Missing a payment is critical any time but for those on the path to Public Service Loan Forgiveness program it can be worse. 

There is a discussion on income-based repayment and changing the payment amount when borrowers encounter hardships such as temporary job loss or income reduction. We’ll cover these and other topics such as loan repayment assistance programs where some areas of the country are covering payments or the entire loan balance for service.

Larry: [00:00:29] Today we are 28 or 29 days into the government shutdown. And one of the areas that this is impacting is our student loan borrowers. And so this is a topic we’re going to talk about that affects the borrower and also the financial advisor with those clients with student loans. I think I think before we get to that Jantz you sent me a note about this that a few days ago the HHS poverty guidelines were changed for income-driven repayment plans. So I guess that’s something that everyone needs to be aware of.

Jantz: [00:01:15] Right. So for 2019 now the human health and service poverty lines have been updated as of January 11th. Slight increases in most states. So you’re looking at just below a 3 percent increase in those poverty lines which should mean a reduction in payment for individuals whose incomes have not increased. How much that means to you is really going to be dependent upon where a client’s income is the lower the client’s income the bigger reduction they will see in their student loan payments. Whereas if you have a higher income client they won’t notice that much of a change from their payment with regards to the poverty line deduction. And that’s as we go over in the coursework we talk about what’s more valuable to different clients see that the percentage of income required to be paid or that poverty line deduction to get to the discretionary income.

Larry: [00:02:18] So is something that everyone should go back in and revisit or just only affect people that are starting into an IDR plan?

Jantz: [00:02:27] So this will effectively change the payments for everyone research defying their income from January 11th on if once your payment is set in an income-driven repayment plan that payment is set for 12 months.

So if somebody had applied for an income driven repayment plan or if they had done their annual recertification for an income driven repayment plan say in December of 2018 that payment would be established at that point in time and it would be set for that twelve-month period.

If a borrower now were to apply for an income-driven repayment plan or recertify their annual documentation they would now get the benefit of the higher poverty line deduction. So for some borrowers, especially those on the lower end of the income scale research defying their income now if their income has not increased would create a smaller payment than it would have say 30 days ago.

Larry: [00:03:33] Ok let’s talk shut down. Let’s talk government shut down so as is in the news many people are really suffering here just with the basic needs of a lot of their debts are not being paid. And we know that a missed student loan payment can have a massive impact. So what solutions are available to borrowers who are you know maybe they’ve already missed their payment for January or they know they’re going to miss a payment. What should they do?

Jantz: [00:04:10] Well certainly borrowers to do their best not to fall behind in payments and they should work with their loan servicer as challenging as that could be if they have federal student loans then they certainly should look at their opportunities of potentially asking for a forbearance or even economic hardship deferment preferably over a forbearance.

And in order to have those approved they’re going to have to contact their loan servicer and ask them for some sort of payment relief specifically the deferment forbearance option should be used for those employees federal employees who are out of work that are on their traditional repayment plans are and are anticipating are expected to pay off their loans.

Remember though that in deferment the interest on the unsubsidized loans is still the borrower’s responsibility and in forbearance, the interest on all loans are still the borrower’s responsibility. So doing this may give a borrower payment reprieve. But at the same time, they could be increasing the amount that they owe. So if they have the ability to make those payments they should certainly try to.

If their intent is to pay off their loans for the borrowers that are income-driven repayment plans which could likely be the majority of federal employees as many of them will likely be striving towards public service loan forgiveness and thus be required to be an income-driven repayment plan.

They technically have no taxable income at this point in time so they should be looking to contact their loan servicer. Do an income-driven repayment plan request with them indicating that their circumstances have changed and had that payment reduced to zero dollars per month as they currently have no taxable income. Now that’s assuming again that they’re in a repayment plan that is only going to look at their income. And of course, filing their taxes if married in a way that would only look at their income.

Larry: [00:06:17] If someone is already in this situation and let’s say their income stream comes back when the shutdown is over. Do they have to go through the same process, contacting their servicer to get back in the good graces of the loan?

Jantz: [00:06:46] So while the payment would be established for 12 months. So if a borrower recertify as their income indicating that their circumstances have changed because they’re they have no income it will take a delay it’ll take about 30 days or so for the service or to process that request may be longer if there’s a high demand of requests coming in but they will still have payments between now and when that payment is that request is processed so they’ll still be required to make their previously scheduled payments until that payment is processed and their loan payments reestablishes zero dollars a month.

That recertification of income based upon a change in circumstances reestablishes a new 12 year period for that borrower. So that payment would then be set for twelve months for say zero dollars a month. However, borrowers are supposed to notify their servicer if there are ever any changes in income up or down.

So when that federal employee is back at work and then has a pay stub they likely should recertify with their servicer again and have that payment plan re-establish at the higher amount again it would take another 30 to 60 day delay for them to process that but once they are back at work and back receiving taxable income they should recertify again. So at least they’re getting a payment reprieve here while they’re not having income coming in.

Larry: [00:08:26] So they really got to stay on top of this thing. Is the shutdown affecting any of the services or as they are still functioning as they should be?

Jantz: [00:08:39] Yes. So the loan servicers are not affected by the government shutdown they are independent companies that are contracted by the government in order to help service the payments of federal student loans. So the government shutdown is not affecting that particular portion of the student loan repayment options.

However, there are some aspects of the federal government shutdown that are affecting borrowers so that the student loans dot gov know those employees that are there to assist borrowers with completing applications or answering questions. Those individuals are furloughed. So that number is not being answered by anybody at this point in time so borrowers who maybe are not working with their services are having issues with their service or trying to complete the electronic applications online and calling that 800 number is not reaching anybody.

Furthermore, the student loan ombudsman is also a furloughed office. So the role of the student loan ombudsman is to help come to resolutions or find resolutions between conflicts between borrowers and their loan servicers. And oftentimes they want you to first work with your loan servicer document that process and then they will help get a resolution between a borrower and their servicers over conflicts payments interest calculations. So on so forth. So that office is also closed.

Jantz: [00:10:16] There’s also it’s been stated that the consolidations are being held up and I can’t verify that because of the offices that. Verify that they are closed but it’s likely that the consolidation applications that are being filed are being placed on hold and will not be processed until the government shutdown ends. Which is a pretty big problem for those borrowers that are behind in payments.

Those borrowers that need maybe need to do consolidations in order to rehabilitate their loans or if they have ineligible fell loans or Perkins loans that they’re trying to convert to be eligible for an income-driven repayment plan or public service loan forgiveness.

Larry: [00:10:58] Specialty programs that provide forgiveness based on the kind of work you’re doing. I notice this past week it was a news article that there is a new federal program for those people that work in the addiction treatment industry and that could be a nurse a doctor or a pharmacist a counselor that this program, Mind you it says only available in Massachusetts is going to offer up to seventy-five thousand dollars per individual to repay debt. And this is very recent but it is a federal program from the Health and Human Services Group. Do you have any additional information on that? I know there are programs for teachers and we have a module coming out in the CSL a program but any comments on this or any news you have.

Jantz: [00:11:59] Yeah I think that all borrowers should explore their opportunities for forgiveness and this program is another great opportunity for those individuals again. This is pretty segmented and oftentimes these programs are limited to individuals who work in high need areas. There also may be the high need areas may be classified by income or location or specific service field. And there are a number of these opportunities that exist out there and they’re something that people that have high amounts of debt and are willing to or desiring to go work in those fields should certainly consider.

I like to think that those student loans influence some of the decisions that people make. I like to think that with the planning that the CSLP can do and knowing the various options that exist out there especially for federal student loans that borrowers should really make their decisions based upon their life path and advisers are there to help sort of modify their student loan strategies such that it fits their desired life path.

However this is a real problem when you run into borrowers that maybe have excessive private student debt so you certainly people that are out there that have private student loans there are not the forgiveness opportunities that exist for the federal repayment options whether it be public service or the income-driven repayment plans and these whether it be employer-sponsored government-sponsored or private entity sponsored forgiveness options. These are something that those individuals with private student loans should really consider as it can help them get out of the burden that they have from those private loans.

Larry: [00:13:56] It seems to me that there is just an increasing number of marketing campaigns going out from lenders such as Discover and others to try to get people in. In fact, I received one from Wells Fargo the other day. In fact, they even called and said you have a student loan let’s come in and let’s talk about you know a private loan and consolidate this. So this sounds like an area that people really have to watch out for because the offers really are sounding pretty good. But as you’re pointing out there is a significant risk in converting to a private loan.

Jantz: [00:14:39] And I think that a lot of financial advisors historically have always looked as any consumer debt. Their advice has been to find a lower interest rate and while private refinances can secure a lower interest rate advisers may before they make that recommendation to a client should also really consider the protections that exist with the federal student loans and that most borrowers.

Interest rates are not necessarily going to be lower on a private student loan than they would be on the federal student loan we’re talking about only those borrowers with exceptional credit scores high incomes or high incomes compared to their debt are going to achieve those oftentimes publicized lower rates.

Certainly, there’s an opportunity there, especially if somebody secured private student loans for their funding their education originally they may be a better borrower now that they’re working than they were when they were a student and can get better terms. But advisers and borrowers should really be hesitant before they jump into these private refinance opportunities.

I’d also say that I’ve seen and heard from a number my clients if there’s been an uptick in the debt negotiation debt consolidation Robo callers that are calling and I have a theory about what it is actually also linked to the government shut down because the FCC watchdogs who usually are on top of these spam calls are all out of work. So these companies feel that they have a little more freedom to overreach their bounds of marketing at this point in time.

Larry: [00:16:20] So you talk about the fact that the probably the best terms on private loans are only reserved to those with the best credit situation. So if I recall correctly I think the average credit score right now people in the US is still maybe slightly under 700. Do you have any idea what one could expect in a typical private loan offer?

Jantz: [00:16:50] Yeah it really varies. I mean the credit score is going to be a major component to that. Whether or not they want to have a cosigner on it is going to be a big component in their debt to income ratio is going to be a good component. So if we’re talking about someone with high income to debt ratio someone that’s got a good credit score and they have maybe a good banking relationship they could be looking at securing rates on an on a variable rate over a short five year period of time something in the around 2 percent. If they wanted a longer period of time and they’re willing to assume a variable rate that they could be looking at 5, 4 or 5 percent which is still some significant savings. About a year ago New America came out with a study on private student loans and it’s one of the resources in our course package that is titled In the interest of few and then they did as they really examined.

Jantz: [00:17:50] Who applies for student loans how much people could benefit from student loans if everybody qualified but then they dial down and said who really qualifies what interest rates are actually achieved by these borrowers and then compared those to the values of the income-driven repayment plans and they found that less than 15 percent of borrowers would have more favorable payment terms through a private refinance than they have with their existing federal student loans whether that be based upon interest rate or based upon forgiveness provisions within the income-driven repayment plans.

And again that’s looking at sort of a best-case scenario because those individuals that may have secured better terms from an interest rate standpoint and paying off their loans to a private refinance may be giving up a lot of federal protections if say they were a federal employee and the government shuts down in there they’re no longer receiving income it’s gonna be much harder for them to defer payments than it would be for someone that had federal student loans or if or if a borrower became permanently disabled or if a borrower passed away and what lingering effects there may be to another individual with the private student loans that wouldn’t exist for the federal student loans.

Larry: [00:18:58] I think the last thing that we should talk about today one of the last things. Is the CLP certification course. You know there’s tons of content and we’re constantly modifying this. Can you give our listeners an idea of what’s on tap for the next quarter in terms of new material updates and so forth.

Jantz: [00:19:26] Yeah. So we are in the process of creating some additional material with and of course some elective material that will be profession-specific. Most of the material right now is is general information that applies across the board with regards to federal and private student loans basic information.

But we have created in our will continue to create some profession-specific modules that dig into how student loans are affected by a given profession some forgiveness programs that exist whether they be federal programs or state-based programs or nonprofit based programs.

Jantz: [00:20:06] We’re also looking to work with members in the H.R. community of human resources what we are discovering is that as much as there is a misunderstanding of the impact of student debt it from the standpoint of the financial service there is also a huge misunderstanding of how employers and human resources can help their employees with the administrative part of student loans.

This topic of assisting borrowers or student loan repayment is something that is growing in the Employee Benefits community. But what we think is that there’s a lack of education from the employers to really understand how they can implement the various options they have whether it be some sort of assistance private refinance whether it be the employer wanting to pay some money towards their employees student loans or provide some sort of counseling or assistance. How they do that is going to vary from employer employer but they really need to be strategic with how they use their dollars to make sure that they’re getting the best value out of those benefits for their employees and some of the processes that they have in place within their own employee employment and H.R. department to help facilitate those borrowers that may be an income-driven repayment plans.

So that’s something else that’s on tap for this quarter. We’re also really going to make a push here in the next couple days to try to identify some material to tax preparers. This is the season for borrowers to show up with their tax forms.

And if a CPA or a tax preparer and a rogue agent come across somebody that has a student loan interest form in there that should trigger them to immediately have a discussion about what they’re doing with their student loans because the tax preparation component can have a very big effect on what student loan payments will be.

So we want to make sure that that community is engaging with our educational material and helping to assist borrowers and making sure that they are getting the most advantageous repayment terms possible.

Jantz: [00:22:30] Now I forget to mention that the IRS Data Retrieval Tool seems to be sporadic at best with the limited staff at the IRS. So many people that are doing their electronic forms they’re not getting that retrieval which means paper forms which means more error.

Larry: [00:22:50] One of the issues with the shutdown is that people there their focus probably mainly on just the basic essentials. If you read and watch the news and you know I’m concerned that people will they’re gonna miss student loan issues that for example if someone is in a public service loan forgiveness program and they miss a payment they could have an adverse impact.

Jantz: [00:23:22] Right. That doesn’t count as a qualifying payment if it’s too late or it’s not paid in full. And you know there’s an interesting component here. If somebody certifies that it’s a federal employee that says hey I currently have no taxable income which is 100 percent true because they’re not getting paid.

And then a year from now they certify this period as being a full-time employee of the Department of Defense. Or some other version of the parks service then they’re going to end up there. There’s sort of a weird contrast here where they’re saying they have no taxable income but they actually still are a full-time employee. So there they are indeed a full-time employee at this point in time but they’re not receiving any income and they’re certifying that they’re not receiving any income. So there are some quirky components to the Public Service Loan Forgiveness portion of that.

Larry: [00:24:19] Yeah it sounds like that that financial advisers who have clients with student loans really need to alert their borrowers that I mean if you look at all of your debt this perhaps may be the most critical one to pay to find a way to pay. I know that a lot of mortgage companies credit card companies are now offering some type of relief. This one doesn’t sound like it’s an easy thing to necessarily get relief and that it should be given priority over all the other debts. Would you agree with that?

Jantz: [00:24:58] Yeah you know I guess that you can ask for that deferment or forbearance or you can recertify your income if you’re an income-driven repayment plan to drop that payment to zero so there are options there but that’s not immediate. All the forbearance a deferment could be. But you’re foregoing qualifying payments hopefully not a lot.

But who knows at this point and again what we’re talking most about federal student loans. But if you have private student loans they usually will work with you to have some reduced payment for a short period of time whether they interest-only but they don’t have as many options for you to have a real payment relief especially if it’s an extended period of time.

And I’ve heard crazy things where people think that they don’t have to pay their loans period. Now whether they’re federal employees or not because they think that the federal government is on shutdown, therefore, they just automatically get payment relief then that’s not the case. So you know as advisors you’re going to hear some pretty crazy things out there. And as oftentimes, you find in financial services your clients are getting information from their co-worker or neighbor and it’s oftentimes wrong.

Larry: [00:26:17] Right. Right. It’s like there’s there may be people out there that are thinking oh well the IRS is sort of shut down for the most part. They’re trying to get back to work. So forget the taxes.

Jantz: [00:26:27] Right. Right yeah. I mean is their student loans are in a big enough cluster as it is hung at in some extra complexity of hey the IRS Data Retrieval Tool doesn’t work consolidations aren’t potential aren’t working. And then people told you their loan servicers they won’t pay their loans. It’s easy to see how the average person can get. Led astray here. Yeah, I would just say it’s all the borrowers and advisors out there.

If you’re a financial adviser and you have clients that student loans are your tax preparer and you have kind of your student loans this is a very important time of year to make sure that you reassess with them as to what the tax preparation standpoint is especially if you have married borrowers. You want to make sure that the tax component and tax preparation opponent matches the planning that you have in place with their student loans and really taking into account student loan payment and tax costs of filing married separate or married joint.

If you have self-employed individuals you certainly should be looking at what sort of Sep either ready or HSA contributions you can make still for 2018 that can affect your age guy for your next tax filing and also affect your student loan payment. So even if a client is not upon their annual recertification at this point in time it’s always a good idea to touch base with them to make sure that they are familiar with the tax preparation options and what that means with regards to student loan payments specifically.

Again those married couples but also times you’re going to have a lot of individuals that are using Turbo Tax or some online tax preparation software and not going to CPA and they’re really void of anyone catching their student loan issues and if they if they file their return in a way that’s detrimental their student loans there may not there may be no way to go back at least for another year until they can file subsequent return.

Larry: [00:28:29] Yeah yeah that’s another topic we can delve into on the next podcast because of things that borrowers need to know and certainly things borrowers need to ask their CPA their tax preparer about. So we’ll definitely focus on that one in the next go around.

Jantz: [00:28:50] Yeah I think it’s important to there’s not. Not everyone’s gonna use a CPA or a tax preparer or the exactly online tax preparation has become more and more popular. And with that, there’s nobody really to catch something like hey you have student loans.

How does this affect your student loan payment or have you talked to somebody about how this could affect your student loan payment so that that that can do it yourself mentality is great to save you some money but you also don’t have the oversight of someone saying Hey caution this may cost you a lot more money doing this than that.

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