Sallie Mae is rolling out a change in student loan forbearance rules aimed at reducing the number of active forbearance accounts. The change limits the amount of time your loan can be in forbearance.
The move is expected to keep Salle Mae borrowers paying their loans and staying connected with the lender, even if it means making regular, if smaller, payments in lieu of forbearance.
Here’s the deal. Forbearance allows student loan borrowers to stop making loan repayments over an agreed timetable. During that process, the loan term is extended and interest payments on the loan continue to accumulate.
For student loan borrowers struggling with repayments, the new policy could make it harder to pay your loans – and even make it more likely you’ll default on your student loan debts.
That’s a problem when roughly 40% of all student loan borrowers are expected to default on their student loans by 2023, according to a study from the Urban Institute.
Sallie Mae Forbearance Changes – The Pro and Con
Sallie Mae is a prominent force in the U.S. student loan market, managing almost $13 billion in private student loan assets and working with approximately two million student borrowers and co-signers.
Under Sallie Mae’s new rules, any borrower who has been in forbearance now has to wait six months before re-entering into forbearance.
However, Sallie Mae is simultaneously introducing a new program that enables approved delinquent student loan borrowers to make interest-only loan payments for a six-month period.
The combo rollout allows delinquent borrowers to avoid forbearance, repay (at the least) the interest portion of their debt, and keep the lines of communication open with Sallie Mae instead of unplugging after entering into loan forbearance, Sallie Mae reports.
What’s Sallie Mae Up To?
The six-month timetable for both initiatives is no coincidence.
Ray Quinlan, chief executive officer at Sallie Mae, and Steve McGarry, chief financial officer at the company, both made it clear on Sallie Mae’s third-quarter earnings conference call that keeping borrowers engaged and making loan payments - even minimum payments – on a regular basis was a preferred option to “losing” them with six months of forbearance.
“Consequently, we are changing a few things here,” he adds. “We are testing our way through 2020. And in general, I'd say from a philosophical standpoint, what you'll see is we're moving from periods of no payment to periods of low payment.”
McGarry fleshed out Sallie Mae’s new stance on forbearance and on borrowers “taking a break” on loans through forbearance, noting that steering those borrowers towards interest-only payments for six months was a better policy for the company.
“It’s always good to review our collection practices on an ongoing basis,” McGarry said on the call.
“There’s the idea of forbearance, which essentially is a period during which a customer doesn't make payments on the loan.”
McGarry noted that forbearance was “especially designed” for student loans, given the often precarious nature of borrower’s financial health in the first seven years after graduating college. “So, forbearance has become traditional, but it has always been a practice that (lenders) worry about because you don't get a payment and you're not in particular contact with the customer.”
That scenario “always makes us a little bit uneasy,” McGarry said. “We prefer to have more contact with our customers. We prefer to have a minimum payment. We prefer to be in touch with them every day.”
What Sallie Mae most wants to avoid is losing contact with the borrower in forbearance and risk losing them altogether.
“We monitor forbearance carefully, but it's a situation that always causes us to worry because we don't have a payment from a customer for a longer period of time,” McGarry added. “So we looked horizontally across the industry, and we've noted that some people are doing pretty well (with a policy of less forbearance) and it's always something to learn from our competitors.”
There is some downside risk for Sallie Mae and for borrowers who struggle making any payments at all, as default becomes more likely. The company noted that defaults over the life of a loan could rise by between 4% and 14%.
Risks with Long-Term Forbearance
Being a private lender, Sallie Mae is especially vulnerable to forbearance loan activity that extends beyond the conventional six-month “time out” loan repayment period.
“Sallie Mae is a private lender, and that means all the loans it holds actually need to be paid back unlike federal debt,” says Travis Hornsby, founder of the website StudentLoanPlanner.com. “One off forbearance requests can be extremely helpful, but to allow long term forbearance on a private loan significantly increases the chance that loan won't get paid off since the loan continues to grow during that time.”
“After all, if you have a hard time paying the loan before, it will only get tougher with a larger balance,” he adds. Hornsby believes Sallie Mae is using behavioral finance to encourage borrowers not to enter into forbearance because they obviously want to get the entire student loan repaid."
“This is a great reminder that federal loans have far better forbearance protections than any private lender ever will,” he adds.