I just received an education, and for that accept my gratitude.
How can this be legal? This is as big a scam as any I’ve heard of. Interest is interest, not principle.
If the federal government was interested in providing loans to help students finance their education then they would offer the loans without any interest while the kid is in school and once out at an interest rate of a few percent. I think the average interest rate on fed loan is 8%
The Dept of Education uses outside service providers to service the loans, much like homeowners with mortgages. In our case, our loan is serviced by the Pennsylvania Dept of Higher Education under the name FedLoan Servicing. This company is not just for PA borrowers, they currently service about 9 million loans and is considered one of, if not the largest service provider. FedLoan announced last summer that once their contract expires in December they were going to stop doing this, our loan would then be assigned to another provider. This is one of the reasons why I pushed very hard to pay off the loan because I don’t want to be caught up in the turmoil that will result in the transition.
I do not know why FedLoan is getting out of this. I do know that there have been legal issues and misbehavior but I think the big problem is the sheer number of non-payers out there. It takes weeks for a payment to be processed by them, sometimes a month or more.
One other point I want to be clear on.
Any borrower who (like me) made payments during the time while in forbearance, those payments, while voluntary, went to repay the amount that was added to the original loan (interest while the student was still enrolled) before any of it went to the original principle. In effect, student loan borrowers (Fed Loan) are actually paying compound interest to the government.
I would speculate that many borrowers that continued regular payments during the pandemic while appreciating that no additional interest was applied, are none the less at least slightly pissed off that their principle has not really been reduced very much. To some this might seem a small issue but most of us are used to seeing a percentage of our payments for say a car loan go to the principle right from the start. For example if you have a car loan and you send in an extra $100 that $100 goes to principle reduction not interest.