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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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 think it’s sad and shameful what they let these collages getaway with charging these kids
Colleges are a business. People are willing to accept said loans, after all...
Nevermind the fact that a BS is more or less mandatory for most jobs today...
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.
I think it’s sad and shameful what they let these collages getaway with charging these kids. Second what they let these loan companies get away with.
I think its sad the power they have to ruin peoples life.
There are not even jobs that most of them can get that will pay off their loans.
I am not saying give them a free ride. But give them a real break with no interest
And a real way they can pay back. We give the wall st boys and big banks breaks
And they make a ton of money” we even back the big banks loans the very one they are giving to these kids. Why don’t we make their life miserable and garnish their money when the screw up and rob people?
You can’t blame it all on the kids. Some of them are really trying to better thair life
The figure they will get a better job with an education. No sooner than they sign thair name “hell” they are in 15 k debt if they cant get a decent job with in a few months
Next thing you know they owe 20- 30 up up up
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.
I have always been very careful to keep my student loan debt in check. I make sure my loans do not exceed 10k and I try to have each loan paid off as soon as possible as I work my way through school.
I am running into problems now with the current vendor who bought my student loans up, ACS student services. They are holding my funds transfer payment to pay off my unsubsidized stafford loan for over a week now, they "combined" the unsubsidized and subsidized loans together (i have yet to determine if they are doing a combined billing or if it was a true consolidation, either way it was done without my permission) even after my unsubsidized was supposed to have been paid off.
It is now past the date on which the pay off amount was listed as good and they are trying to tell me I did not pay them correctly to pay off the account and they cannot say the loan is paid off even though they have my money and drafted it before the pay off deadline!
I am at a loss of how to proceed, when i called their customer service department they tried to tell me the first time I called was to change the name on the loan. I never requested that to be done. I am very dissatisfied with ACS student services as a loan vendor and I do not believe half of what they are doing is even legal. How long can they hold my money, unapplied to my account, while charging me interest on that account??
Frustrated Loan Payer
I'm really tired of people who take out ridiculous amounts in students loans being treated like victims. If you end up with hundreds of thousands of dollars in student loan debt and a mediocre salary, it is your fault for not having a better plan. Even worse, many of these people aren't even aware of the amount of debt that they are in. They just keep signing away for more and more money.
There is a real problem in this country currently with higher education costs and student loan debt. However, treating those who get in way over their heads as victims instead of one of major causes of the problem is counterproductive to the discussion. (Colleges have very little incentive to lower costs when there are those out there who are willing to completely ignore affordability and value because money loan money is readily available.)
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