Please Avoid Consolidating Loans with Navient or Other Private Lenders— Change Is on its Way
As a bartender in my twenties, I met a man who mentioned he worked in debt management.
“You help people in debt?” I asked.
He laughed. “God, no. Corporations.”
He went on to qualify that he did advise family and friends.
So I asked him: “What do you think about consolidating student loans?”
He was gobbling pretzels from a bowl on the bar and I remember his gold watch as he extended his hand. “No,” he said, “don’t do it.”
He went on to explain that, no matter how many loans you have, it is easier to control them separately, and that proper debt management, even on the corporate level, involves maintaining control. When debts are separate you can target the loan that is most costly to you, i.e. has the highest interest, and pay it off faster — and lose less money. If you consolidate debt, he argued, you create a wall of debt that is wedded to a specific lender and specific terms, with an “averaged” interest rate that isn’t always in your favor.
At some point, he even made a small pile of pretzels on the bar to symbolize a small loan. “Now this one, maybe it’s not that big of deal, and it’s the same interest or a little bit lower, or higher, than this big pile over here.” He pointed at the bowl. “But this little pile is easier to pay off and be done with, which is very important psychologically. It helps you feel like you can beat it.”
“Do corporations do that?” I asked.
“Absolutely,” he said, holding a pretzel like a prize. “Control is the name of the game.”
Student loan counseling sessions, namely “Exit Interviews,” often address two primary topics: 1) the dangers of default 2) the “pros” of consolidating loans “into one easy payment,” — a phrasing coined by servicers and even used by online consumer advocates. Yet, if these Exit Interviews were actually designed to protect borrowers, rather than lenders, one of the first things mentioned would be the “cons” of consolidation, namely how certain predatory companies aim to strip away your rights — to deferment, lowered interest rates, and disaster relief. Consequently, they ofter you numerous false perks as bait.
Within days of my request to leave Sallie Mae, three men began calling me. One of them was clearly the boss. He was older and had the demeanor of a cigar smoker. “Why ya leavin’?” he asked me. “Is it India? You don’t want to talk to India anymore? Well, you don’t have to!”
Unfortunately, once federal loans are lumped together in one consolidated loan, they are renamed “commercial” loans, even though they are still backed by the government (if you were to default). Essentially, you lose all the perks of a federal loan and they keep all theirs.
Part of losing federal-loan status means that when the president says all student-loan interest is waived, your parents and grandparents believe this applies to you. You might even believe it. But as the situation stands, a consolidated loan, with a for-profit servicer, will continue to accumulate interest during any pandemic, disaster, or holocaust.
But if you were to default during that same pandemic, disaster, or holocaust, the government would take the loss, not the servicer. It’s a win-win for them and that’s why companies peddle consolidation so strongly.
To lure you into this trap, they use a 10-year repayment formula for your stand-alone loans and offer a 20-year payment plan for consolidations. The 10-year plan can be quite demanding, and Navient, in particular, often neglects to mention Income-Driven repayment options or other means of accessing a 20-year plan.
Consolidation, however, can be a necessary evil — namely when you want to transfer loans out of predatory hands — but the safest bets are often with a credit union or the government. For example, consolidations held by the Department of Education currently receive “waived” interest under the CARES Act (because they have not been relabeled “commercial,” in fine print). It’s also important to realize that you do not have to consolidate all loans; it may be wiser to single out only a certain few — to maintain control. (I recommend this Wall Street Journal piece, which suggests you avoid consolidating during the pandemic and offers further advice, if you must refinance.)
As further proof of why you should be cautious of servicers, I will reveal my own folly. (If this is too dull, skip this section and go to the next.) For years, I’d heeded the “Debt Manager’s” advice and resisted consolidation.
In September 2007, the interest rate on federal student loans was about to make a very historic decrease, from 7.65% to 3.35%. Two months before, Sallie Mae abruptly tripled my monthly payment to $1200 and told me my only recourse, if I couldn’t afford it, was to consolidate my loans (and maintain the higher interest rate permanently). If I had known the insider scoop regarding the impending decrease, I would’ve paid the ransom. But you had to be a member of Congress to know this — or a servicer.
Anytime loan companies peddle consolidation with more vigor, it means something is about to change.
Under duress, I decided to take a few large loans away from Sallie Mae, a partial consolidation so to speak. I filled out paperwork and transferred those loans to the Department of Education.
Within days of my request to leave Sallie Mae, three men began calling me. One of them was clearly the boss. He was older and had the demeanor of a cigar smoker. “Why ya leavin’?” he asked me. “Is it India? You don’t want to talk to India anymore? Well, you don’t have to!”
I told him it that it had nothing to do with their call center in India. Still, he promised me if I consolidated that I’d get access to a “special number” for customer representatives “in America.”
He also told me if I transferred the loans, my credit would be “poorly affected.” I remained obstinate, insisting I would not consolidate with them. Then he said he had a special offer which could reduce my interest rate by 2 percent, if I consolidated. I began to listen. He calculated that my monthly payment would return to $400, but then, while summarizing this “incredible deal,” he mentioned that the rate reduction would happen after 48 consecutive payments.
I transferred 45K in debt to Direct Loan, aka the Department of Education. Thanks to that consolidation, my interest rate remained fixed at 7.68% when the rate changed to 3.35% weeks later.
I lost about $20,000 thanks to that consolidation. But I probably would have lost twice that — if I’d consolidated all my loans and stayed with Sallie Mae, Navient’s parent company.
In hindsight, the Debt Manager’s warning was the closest I’d ever gotten to financial advice or a proper Exit Interview. But there are other great visuals other than piles of pretzels. For example, this letter Navient sent its shareholders in 2019 offers a wonderful education, a 101 course if you will, of the borrower-servicer relationship. Here are some of its highlights:
- “Navient has the expertise, systems, and data-driven strategies to create value by maximizing cash flows…” from borrowers.
- “Our team continues to be laser focused on maximizing the cash flows from our education loan portfolios,” and borrowers.
- “The cash flows we have generated from our education loan portfolio meaningfully exceed initial projections…” meaning borrowers end up paying more on debts than estimated, because of their strategies.
- “Navient has significant business momentum and the right strategy to create long-term, sustainable shareholder value — that is delivering strong results,” through any means necessary.
In the midst of the pandemic, such shareholder value has fallen temporarily, but you can bet servers will try to recoup their losses — and baiting borrowers into new terms is just the ticket.
Change may be brewing. But in the meantime: Watch out.
