5/29/2012 3:55 PM ET|
Best-kept secret in student loans
Student debt has ballooned in recent years. But a federal program can cut loan repayments to as low as zero without triggering default.
Are you scraping by, just barely able to make your student loan payments? Or maybe you're making the payments, but you're worried you'll stay in debt forever?
Don't overlook one of the best repayment options out there. Lauren Asher, an expert on student loans and the president of the Institute for College Access & Success, an independent nonprofit organization that works to make higher education more affordable for people of all backgrounds, calls it the "best kept secret" in the student loan world.
Maybe it's not a total secret, but many eligible borrowers aren't taking advantage of the Income-Based Repayment Plan, so it deserves all the attention it can get.
I recently interviewed Asher on my radio show, "Talk Credit Radio." Here is an edited excerpt from that interview:
Detweiler: Can we start off by discussing the trends in student loan debt?
Asher: Student loan debt is touching more and more people's lives every year. A generation ago, less than half of people who graduated from four-year colleges had student loans. Now it's at least two-thirds. And for the class of 2010, which is the most recent data we have, the average debt for those borrowers was more than $25,000.
Detweiler: What about default and repayment rates? Are people having trouble paying back their student loans?
Asher: Default rates have gone up recently, although they've come down from a high a couple of decades ago. They do sometimes reflect changes in the economy. Certainly it's harder to pay off your student loans when it's harder to find good-paying jobs. But what's important to know is not just how much you owe, but what kinds of loans you have that can really affect your options for repayment.
If you have federal student loans, there are actually a lot of good ways to keep those payments under control even in tough times. But you need to know what those options are and how they work before you get into real trouble. One of those options is the Income-Based Repayment program.
Detweiler: Tell us about the IBR program and the benefits.
Asher: Income-Based Repayment is the best kept secret in this whole student loan debate. It has been around since July 2009. It's available to students with federal loans. So that includes Stafford Loans and Grad Plus as well as Federal Direct Consolidation Loans.
If you have direct loans or what used to be called "guaranteed" or "federal family education program" loans, whether you have had them for many years or just finished school, you can qualify for IBR if you're earning relatively little compared with what you owe.
A good rule of thumb is, if you owe as much as you earn in a year, you probably qualify. But, there's a calculator on our site -- IBRinfo -- and also a link to the (education) department site and their calculator to help them figure it out. So the nice thing is that, once you qualify, your payment each year is adjusted based on your earnings and family size.
If you earn less than 150% of the poverty line for your family size, your required payment is zero. You remain in good standing, you're not delinquent, you're not in default. And those payments -- even if they're as low as zero -- count toward either 25 years of forgiveness, meaning after you've made affordable payments for 25 years in IBR, if you still owe anything it's forgiven. Or if you work for a public or nonprofit employer and you had a direct loan, you could get forgiveness in as soon as 10 years in IBR.
IBR provides two things. One, it provides you the assurance that your payment will be fair and manageable based on what you actually earn. The other thing it does is give you a light at the end of the tunnel. Repayments will not go on forever.
Even if you hit a patch where you can't even cover your interest and your IBR payments are very low, eventually if you haven't been able to pay it all off, it will go away and you can move on with saving for retirement, paying for your kid's education and the other things you need to do.
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I've done 10 years of college. 5 years to get my undergraduate degree, 5 years to get a Master's degree.
I've worked at least 1 job throughout my entire college career, paid on loans as I could afford even before I was in repayment, and entered repayment with a $42,000 student loan balance. Not bad, considering that I probably incurred close to $100,000 of costs to spend 10 years in college. Some of it was offset by small reimbursements I got from work, but most of it was paid out of my own pocket, and I understand that the debt is mine until it's paid off. I'm not asking for handouts, and unless I am unfortunate enough to become unemployed, I'll be able to keep making the payments, along with my mortgage.
But here's what really bothers me...I have to pay 6.8 percent interest on these loans, when I was able to go out and get a 30 year fixed mortgage loan for 3.75%. Our federal government (which funds these loans and collects the interest) is sitting on their hands, and doesn't give a crap about people like me. I'm middle class, I live within my means, but because of the fact that I worked to put myself through college, my income was never low enough to qualify for the ultra-low interest rates.
So here I sit, paying less interest on a $200,000 mortgage than I'm paying on $40,000 in student loan debt. Not exactly fair, in my book. For a nation that wants to educate students, and wants kids to go on to college, this is a problem that really needs to be looked at.
I came from a very dirt poor background but was able to go to college with student loans. I did the smart thing at least, went to community college the first 2 years then transferred to a 4 year University for the rest, only racked up about 25k total in debt. I'm now making $50k a year which is something I definitely could not have made had I not gone to college, $25k is a small price to pay to start off this good in life, and it only gets better.
My advice is take out student loans if you need them, but realize that it is money you will have to pay back so only go to instate schools and try community college first. Community college is also a great way to get acceptance into better schools.
I went to a very reasonable in-state university and ended up with about $30k in student loans. I had to work my way through college working part time during the school year and during the summers working full time and never was able to go do much during spring break or christmas break because of the job I had, but I did manage to have just as much fun during the school year as anyone else i knew, because the group I ran around with were just like me, they came from working class families that would help them out every now and then but they weren't fortunate enough to have their parents pay for school, so taking out student loans was the only way to go to be able to get a degree and better our lives. People ripping on the ones that have to take out student loans are so full of it and themselves it seems that they have lost touch with reality.
Personal Finance should be required in high school for all students. It will affect every student eventually - even if they win the lottery.
A start might be to have universities require it at some point before they can graduate. Maybe a like a freshmen orientation class - only this would be orientation to how the world works. Include things like how saving, IRAs, 401ks, car loans, mortgages, personal loans, credit/debit cards, banks, credit unions and a whole host of things work.
Things WE ALL learned the hard way.
Why do you have to take two years of "General Education" courses in college anyway? Isn't that what High School is for?
Why can't you just choose a course of study and then take the classes that are required for that chosen dissapline? It would cut the time spent in colledge by two years and effectively lower the cost of a bachalors degree by 50%.
I went to college hoping have a career and be able to afford the finer things in life. Unfortunately, due to the economy, the industry that I intended to forge my career in ended up overseas (about 17 years ago). I've tried turning my experience and education other directions only to be let down by employers that have no loyalty to the workforce. My wife has become disabled and cannot work further reduce the take home pay for my family.
I want to pay my student loan, I accept my responsibility but when you are stuck making $10.00/hr as a contract employee with no benefits, it's hard to pay those extra bills and get medical for my wife, kids, and electricity and rent, oh yeah food on the table.
Not everyone out here feels "entitled." I could give two s**ts for the "Occupy" mob mentality. I just want to come to the end of my life debt free, fulfilled in the knowledge I made a career and had a purpose. But that's not probably not going to happen. So thank you to all of you out there who have no clue, haven't taken the time to walk a mile in someone else's shoes and assume we are just lazy, welfare, scabs out for a free lunch. I know there's no such thing, I live it everyday.
One of my professors at Michigan State was making $150,000 a year as the head of the dept and she was the professor of 1 class per semester. She tried telling me Auto workers were overpaid because it is unskilled labor. Then I asked her what she felt about her $150k a year salary for teaching 1 class per semester because thats unskilled labor as well. She had no answer.
Professors wages are whats making college costs skyrocket.
Actually, if the Anthropology major goes into market research or works at some NGOs, that $100k will be paid back without a problem. The biggest problems with paying back loans right now have less to do with the major you get and more to do with your chosen career path. Academia is not the place for a large paycheck, and many students don't realize that until it's too late.
That being said, there are some majors that do not teach skill sets appropriate for use outside of academia. Before deciding on a major, students should have a basic understanding of what the job market is like for the skill set they're learning.
'Best-kept secret in student loans"
Don't fall for it. Don't take a loan out for school unless you can and will pay for it. WHO CARES WHAT SCHOOL YOU WENT TOO? Go to one you can afford.
I notice in all of these comments, that no one is asking the obvious question: Why has the process of obtaining a higher education far outpaced inflation, or any other type of economic indicator for that matter? Many of the universities have millions and even billions sitting in the bank or invested.
It seems to me, the best investment they could provide college graduates is to not have an albatross of severe debt dragging them down after completing their courses and graduating. They charge more because they can. You see, after deriding capitalism and promoting socialism, the faculty is just as greedy as the masses of the "uneducated" workers that want to get ahead. They manage to do this at the expense of the well-being of the students that they have been nurturing for 4, 6, or 8 years by overcharging for everything from parking passes, to cost of books (what a scam), and to the ridiculously high charges of tuition. It amounts to nothing more than government endorsed price fixing and the tax payers are footing yet another bill.
As nice as it sounds, income based repayment is actually going to enslave you to your debt because in most cases interest accumulation will outweigh (in some cases greatly) any monthly payments that are made. It will keep you out of default, but your debt will grow beyond all reason.
Unfortunately, this is another method of financial slavery.
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