5/16/2011 11:09 AM ET|
Will student debt ruin your life?
Defaulting on your loans can have serious consequences. But if you recognize the problem in time, there are usually ways to repair the damage.
Imagine going to college to improve your life and walking away with $500,000 in student debt. That number is no typo. A young Seattle couple ended up so mired in debt on the way to their degrees that they "couldn't even make the initial payments," says Christina Henry of Seattle Debt Law.
After the collection agencies started calling, the couple, who have two children and earn a combined $80,000 a year, visited Henry for help. "They took out as much as they were able to and didn't even know how much they had. It's the most egregious case I've ever seen."
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Consider it a cautionary tale. Over the past decade, college students have had every reason to borrow for college and little reason not to. College costs exceeded inflation by as much as 6 percentage points a year, bringing the average annual price of a private-school education to $37,000. Congress raised the maximum on federal student loans and introduced the Grad PLUS loan, allowing graduate students to borrow up to the cost of attendance. And until 2008, when credit began tightening, lenders handed out private student loans as if they were party favors.
Result? More students borrowed, and in larger amounts. The average debt at graduation was $24,000 in 2009, up 6% from the year before, according to the Project on Student Debt. But that understates the dramatically higher debt that some students racked up. And many of them got swamped by their bills almost immediately. Of the 3.4 million federal-loan borrowers who entered repayment in 2008 (as the economy slid into recession), 7% defaulted within the year, the highest percentage in more than a decade. That statistic doesn't include the thousands of borrowers who fell behind on their payments without defaulting, or those who couldn't keep up with their private student loans.
Missing a few payments invites dunning calls and letters, but defaulting has the potential to destroy your future. Being on the dark side of federal student debt means the feds can demand payment in full, assign your case to a collection agency, garnishee your wages, pocket any state or federal refunds and even come after your benefits in your old age. "We see people who defaulted on loans in the 1970s and 1980s whose Social Security benefits are being garnished," says Paul Combe, the president and CEO of American Student Assistance, an agency that guarantees federal loans. Worse yet, old, neglected loans carry decades' worth of fees, interest and collection costs. "A $2,000 loan that defaulted 20 years ago is now $30,000," says Combe.
The federal loan program offers several plans that can get you back on track. With private loans, you have to negotiate with the lender. Either way, start by knowing what types of loans you have, where they originated and who services each one. For federal loans, go to the National Student Loan Data System. For private loans, review your loan agreements, which should include the terms of the loan and repayment options.
Help with federal loans
With the federal loans known as Staffords (now part of the Federal Direct Loan program), as well as Grad PLUS loans, the loan goes into delinquency when your payment is 21 to 30 days late. If you fall 60 days behind, the loan agency will report the lapse to the national credit bureaus. Meanwhile, late fees and interest will add up.
If none of the federal repayment programs offers a solution, apply to your lender for deferment or forbearance. Deferment lets you forgo monthly payments, usually for a year at a time, for up to three years. The feds pay the interest on subsidized Staffords but not on unsubsidized loans.
Accrued interest gets added to the principal. You have a legal right to deferment if you meet certain criteria, including economic hardship or status as a half-time student or being on active duty in the military.
Forbearance gets you off the hook on payments for up to five years, in yearlong increments. Generally, the lender decides whether you qualify. Interest accrues on all the loans, including subsidized Staffords. Forbearance makes most sense for borrowers who are experiencing a short-term financial crunch, not those whose situation is unlikely to improve. Such borrowers are better off in an income-based plan, which can reduce the payments to as low as zero and offer forgiveness after 25 years.
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If you fail to make a payment for more than 270 days, your loan is technically in default, but most lenders wait 360 days to make the default official, giving you a window in which to redeem yourself. (If you're in that phase, call your lender immediately to discuss your options.) After the loan defaults, you lose access to forbearance and deferment, as well as to future federal student aid, and the default goes on your credit record.
Uncle Sam gives you several ways to get back in his good graces. One is to rehabilitate the loan, in which you contact your lender and arrange to make nine timely, "reasonable and affordable" payments over a 10-month period. The Department of Education sets guidelines as to what constitutes reasonable and affordable and stipulates that the lender can't require a minimum payment.
In practice, however, negotiating the amount with the lender can be "a huge problem," says Deanne Loonin of the National Consumer Law Center. If you and the lender can't come to terms, contact the Federal Student Aid Ombudsman, at 877-557-2575, to ask for help. If you rehabilitate your loan, the default disappears from your record.
The other strategy is to consolidate your loans with the Federal Direct Loan program, which lets you immediately enter one of the income-based repayment programs. (If you have already consolidated your loans in the Direct Loan program, you generally are not eligible to do so again.) "The advantage of consolidation is that it's faster. You don't have to make nine payments first," says Loonin. But the default remains on your credit record for up to seven years.
You may conclude that your debt is simply insurmountable and decide to try for bankruptcy. To succeed, you must demonstrate to the court that your payments impose "undue hardship," with no prospect of remedy, and that you made a good-faith effort to repay.
In a few circumstances, such as death or permanent disability, or if the school closed while you were enrolled, your federal loans are eligible for cancellation. For details, go to the Student Loan Borrower Assistance website.
Help with private loans
Lenders of private student loans typically consider you to be in default as soon as you blow past the payment period, and you can count on receiving collection calls shortly thereafter.
To avoid that scenario, some lenders allow you to make lower payments for a few years and catch up later. They may also grant you forbearance, for three months at a time, during which interest continues to accrue. But don't expect them to go out of their way to extend these deals, says Loonin. Check your promissory note. If you don't see an alternative plan, call the lender to try to arrange one.
Unlike the federal government, which can garnishee your wages and pursue the debt indefinitely, lenders of private loans must sue to collect on a default, and they are subject to your state's statute of limitations, usually six years. Lenders can and do take borrowers to court, says Loonin. "We've seen more-aggressive collection efforts, including more lawsuits, on the private-loan side."
If they succeed, they can garnishee your wages, put a lien on your house and tap into your bank account. As with federal loans, private loans are extremely difficult to discharge in bankruptcy and require that you meet the same stringent standards. But a lender might consider settling the debt when the prospects for full payment are dim, says Henry. That was the case for her Seattle clients. With no chance of repaying the entire amount, the couple settled some of their private loans, arranged an income-based repayment plan on the federal loans and hope to discharge the remaining debt in bankruptcy.
This article was reported by Jane Bennett Clark for Kiplinger's Personal Finance magazine.
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I went to the local community college in the fall of 1984. My son is attending the same institution starting this fall. My tuition was $900.00 a year, his is $5,000. My wages have doubled but the cost of nearly the exact same degree has went up 5 times.
The problem is that colleges are simply charging too much. Where is all the money going? I'm sure that professors at JCC (some of whom are still employed) are not making 5 times the wages. The buildings are paid for.... So why is the cost 5 times as much???????
Obtaining a college degree was the most stupid financial decision I've ever made...the sacrifice was just not worth it. I worked 40 hours a week while going to classes since I was on my own since age 18 and did not have parental financial support. I then worked 70+ hours for five years to pay off the student loans to save some money on the interest of the 15 year loan. Do I make significantly more than those I know with an AA degree or less education: no. Huge waste of $50K and the best years of my life. That money could have been invested or enjoyed. In hindsight a program at a voc school would have been the way to go. Think carefully, do you really need that degree if mommy or daddy is not footing the bill entirely?...maybe not
I have what I call an H3 Hummer payment. It's jet black with all chrome trim, plush leather interior with a $10000 pioneer stereo system. Actually I'm being sarcastic, the payment that would go to a vehicle like that is what I pay on my school loans every month. I don't care what any experts say about student debt being a good thing ..... remember .... these are the same morons in 2006-2007 saying how real estate was such a good buy (before it crashed). If I had it to do over, I would have done anything to not get in debt. This means looking at Universities overseas, going part time, going to cheaper universities, spending as much time in a community college (if the costs are reasonable), etc. Some careers don't require a degree either. I know people (family) making as much money as I am with no degree (and no $600 month payment).
Forbearance: This is defined as a jackpot for Direct loans (they charge you a lot of interest).
My loans went from $37000 to $50000 by a first year forbearance and deferring them for 5 years ... very bad idea!!
just for the record I'm an Aerospace Engineer doing software development. Have an excellent career but I wonder what I could be doing with the extra $600/month so my actual salary is much lower than others (especially the ones whom didn't get a degree and have a salary close to mine). Oh, one other thing .... I use nothing from my degree in my work. For all intents and purposes, I could have picked my degree up at the local grocery store.
I left college with around $45k (undergrad and a masters degree) in student debt as I chose to not work during the time I was in school and I did not have help from anyone in paying for my education (except for some grants that covered a small portion).
However, I was proactive in job searching well before graduation. I paid the entire amount off in less than three years. Not because I made a huge salary, but because I took the debt seriously and didn't want it hang over my head for years.
I didn't live in a fancy apartment and had a roommate to help share expenses. I didn't go on lavish vacations and put off any expensive purchases, except for a new car which I was also able to payoff in two years even with a 6 month stint on unemployment.
College can be a great investment if you make a couple of key decisions at the beginning:
1. Pick a major that actually has job prospects now and into the future
2. Pretend like you are poor and spend accordingly (because you actually are at that point)
3. Look for internships and jobs well before graduation.
I don't regret the college experience one bit. I've met a ton of great people along the way and received a great education. Just be smart with the choices you make once you've racked up the debt.
I have been a high school teacher...and an adjunct professor at a community college. The pay for many degree positions do not match up with the cost of living. Ultimately, I do not believe it is worth it to take out any college loans.
Now, at the prices of tuition, a college education is basically for rich kids, or high achievers who can work the system for scholarships.
Thats the way it used to be for almost all of America's history, and frankly, I wish thats the way things continue to go. If college gets too expensive, then the HS Degree, and not a BS, becomes the standard bearer again, which will make college non-mandatory for getting a decent job, thus lowering costs for everyone.
We see the fallout of the Vietnam era draft exemption [ask you parents if they went to college just for the exemption; I'd imagine that for a lot of them, the answer would be a "yes"]. Assuming everyone could afford college and replacing the HS Diploma with the BS degree has caused undue hardship for many.
As people mention below, I also come from a working class family with no one in our family graduated from 4-year College other than me. With little or no help from my parents, I had to work my butt off to get scholarships and grants, etc. to attend University of California, Davis. From my experience, I have to say education is not for everyone. Also, it’s not an individual right but a privilege. A lot of people approach as if they attend school by any means, they will succeed…unfortunately not the case in reality.
The issue isn't so much most people taking out huge amounts of loan debt. Most take out what they need. In some cases, that may be beyond tuition alone. It may be to help with living expenses for married students, for books, etc. I didn't know very many that were using their loan money for beer and vacations. And most people don't think they're getting a 6 figure job when they graduate. They assume they will get A job and be able to start making a dent. But when you can't, the downhill slope become very slippery. Everything gets tacked on to the end of the debt, and it grows and grows. So if, as most people, your income grows gradually, so does your SL debt. If you couldn't do it last year, and you've gotten a raise, you probably can't this year, as the payments have went up.
Oh, and that loan rehabilitation. Yeah, that's a crock. You can make minimum payments for 10 months, and get out of default. Great. After that? Your loans revert to the original terms, with the payments being right back up to un-doable levels.
Lets face it. There is a "promise" out there that we all heard from grade-school on that said if you go to college, life will be better. And then we let Sallie Mae lobby congress into un-heard of protections and it all went out the window.
Yes, I know for all of you saying "you took it, pay it back". In an ideal world that would be so. But the fact is that this ISN'T what is happening, and whether you want to believe it or not, most of it isn't because of lack of will to pay, it's lack of funds to pay. Instead of being holier than thou, maybe look for solutions?
I can still remember the smug looks on the faces of my friends when they found out I was going to attend community college. "That school is for dummies," they said. I remember taking classes by day and working nights at low-level jobs most of them would not even consider. I worked and studied alongside hard-working, LEGAL immigrants that many of these selfish brats would not even give the time of day to.
Fast forward a few decades, and I'm debt free and working in a career providing needed health-care to vulnerable populations while earning a decent living. I won't get rich, but that's not the point. I'm paying my own way with the fruits of my labor, and I'm student loan free! Meanwhile my friends and their fancy degrees are mired in debt, desperately trying to avoid having to work one of "those jobs" just to make the payments.
And those same people keep telling me how "lucky" I am to have a job, and they scorn me because they say I'm overpaid and lazy. I'm lucky and lazy? Really? If you look honestly at it, I'm anything but. Where I am today is a direct result of my humility and lack of selfish entitlement thinking. Most of those whining, selfish, brats would not last in my job because it's grimmey, physical, and sometimes dangerous. And I provide a necessary service to society. In their mind they should make the same as I do simply because of who they are, and it should not matter if they perform a valuable service to society. You see, to them society owes them.
Now, at the prices of tuition, a college education is basically for rich kids, or high achievers who can work the system for scholarships.
I wouldn't even think of spending hundreds of thousands of dollars to get what they sell. It's not worth it.
What a bunch of maroons. Go to the community college, work part time, save money and then for your last two years transfer to a 4 year school. BUT< be smart and DON'T expect to get a job paying enough to pay off 100K in loans if you get a degree in basket weaving, English Lit or some other dumb "major".
I went three nights a week for over 5 years while working full time to get my degree and then got a raise and promotion at work because my degree was something useful to the company.
jjmciny: I went to a community college in 1972, cost for a 16 credits and misc, charges were a big total of $136.00. $7.50 per credit, My son Is enrolled at another CC for the fall cost is $249.00. Books you could get back in 1972 at the book exchange for just 3-10 bucks. Now it seems that they change every year and the price is not less than $50 or more. Plus the activities fees.
You could not get government loans and cost had to be keep down. It just like the Government now out of control, the whole thing will collaspes. $10 to $15 hr jobs if you can find one and in debt to your eye balls with college loans in the 10's of thousands. You have now become a slave.
Personally, I escaped undergrad with virtually no debt thanks to dear old dad and my choice in attending a CSU. Tuition was only a few thousand a year so it wasn't too much of a burden for my dad and I worked to pay my living expenses. So it's possible to escape with virtually no debt or minimal debt if you work hard. (I've had 12-14 hour days for so many years I can't remember what it's like to eat dinner on a weekday, watch TV or do anything else rather than immediately going to bed.)
I'm a pretty frugal person. In retrospect, I think that if I had to take out loans for school I wouldn't have gone or I would have done something that directly translated into employment. But going into debt would my very last resort for undergrad. Any $1 borrowed is $2-$4 that must be paid back.
Now with all that said I had this crazy idea that I was going to be an Attorney. And crazy it is...here I am today, one year more to go and about $100k in debt. Hoping that the risk I've taken will translate into an investment. I keep wondering if I'm making the right decision. I guess only time will tell. Right now in this economy I feel like $100k is a high price to chase your dream. But all 1st tier law schools are about that price. So here's to all the interest I have to pay back and hoping and praying that it's worth the investment...
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