Beware of student loan consultants offering "forbearances," a fancy word for an option that allows borrowers to temporarily postpone payments.
That's the finding from a new report by the Government Accountability Office, which details how some colleges hired "default prevention" consultants to contact former students who were falling behind on federal student loan payments. Some consultants may promote short-term fixes that can mire students in more debt down the road, the report said.
The GAO found that some consultants were steering borrowers into potentially costly "forbearances," rather than more helpful options like flexible repayment plans.
Students in forbearance can temporarily stop making loan payments, yet be considered current on their loans. But interest still piles up, so students can end up owing much more than they did in the first place.
Colleges have an incentive to keep borrowers up to date on their loans, the report said, because if too many borrowers default within three years of starting repayment, the college may lose its eligibility to offer federal financial aid to current students.
Once borrowers pass the three-year mark, a default no longer counts as a blemish on the college's record.
Borrowers in long-term forbearance defaulted more often in what would be their fourth year of repayment, when colleges are no longer penalized for defaults, the report found, suggesting that forbearance had merely delayed default, rather than preventing it.
Consultants have an incentive to promote forbearances, the GAO found, because they usually can be approved quickly over the phone.
