January 2011
Federal programs afford borrowers ways to manage out-of-control education debt
By Ken Tarbous
If you’re one of the millions of college graduates who left the halls of academia in the past decade, you’re probably still paying off your student loans. You might be among those burdened with student debt two, three or even four times your salary, facing years, if not decades, of excruciating monthly payments hampering your ability to save for the future, buy a home or raise a family.
You’re not alone. Debt for graduates in the Class of 2009 averaged $24,000, according to the Project for Student Debt.
But hasty decisions or ill-advised actions while handling your debts in your 20s or 30s can do irreparable harm to your credit rating and have dire consequences for your financial health.
“If you’re having trouble making your payment, affording your student loan payment, don’t ignore it,” says Edie Irons of the Institute for College Access & Success, a nonprofit independent research and policy organization. “Do not avoid the phone calls and stick your head in the sand and hope it’ll go away. It won’t. It will get worse. But if you find out what your options are and talk to your lender and get informed, there are actually a lot of tools you can use to keep your loan in good standing and make your payments more manageable.”
So it’s important to know what type of loans you have. Federal student loans, such as Perkins, Stafford and PLUS loans, have much more flexible repayment options, and protections for borrowers, than private student loans.
You might want to consider consolidating your loans with one lender to simplify your record keeping and payment schedule, although generally it won’t lower your interest rates unless you have older, variable-rate federal loans. Valuable tools are available to help you mange your debt if you have federal loans. You’ll want to check out a relatively new program known as Income-Based Repayment, or IBR, under which your monthly payments can be adjusted based on your income and family size. If you qualify, debt that remains after 25 years of repayment may be forgiven.
In addition, the Public Service Loan Forgiveness, or PSLF, program may lower payments or even cancel federal loans if you have a qualifying job in government service or the nonprofit sector, with loan forgiveness after 10 years.
Other avenues to explore for federal loan forgiveness are national service organizations like AmeriCorps and the Peace Corps, or jobs in education, health services and social work in underserved areas.
Private student loans, unlike the loans guaranteed by the government, often carry variable interest rates, and Ms. Irons warns that although interest rates are low now, the banks and other lenders might raise your rates at any moment.
If you can’t make your payments on time, lenders of both federal and private loans often grant forbearances and deferments. During those periods you won’t need to make payments, but use caution because interest accrues on unsubsidized loans, leaving you with higher balances due than when you started. If you take that route, ask about interest-only payments until you can afford full payments.
If you do slip behind on your payments, you need to stay in contact with your lender to ensure you don’t default on your loans. The federal government has powerful resources to go after defaulters. It can garnish your wages and confiscate your tax refunds among other things. And private lenders can secure judgments against you that can ruin your credit.
And don’t think bankruptcy is a realistic option in your struggle with the staggering student debt. It’s not. Federal loans are difficult if not impossible to have discharged or canceled through bankruptcy, and since the Bankruptcy Reform Act of 2005, private loans have special protection in bankruptcy court — so you’re not likely going to find solace in that forum.
So what to do? The first step is to create a plan that attacks the debt with the highest interest rates, like credit card balances, first.
Andrew Petrone, a financial adviser at Princeton-based Petrone Associates Inc., says learning to manage student debt can have a positive effect on future finances.
“You need to understand money, learn budgeting and regularly make repayments. These skills are valuable as you begin to save for retirement and other goals — like buying a house or saving for your children’s education,” Mr. Petrone says.
To save money, many recent and not-so-recent grads have moved back home, and if you’re among them you have a huge opportunity.
“In one sense that’s a good thing, because it obviously frees up a lot of money that would go into living costs that could be used for debt repayment,” says Barbara O’Neill, a Rutgers University professor of financial resources management. “If they’re going to be in that situation, it’s a window of time that they can really make a dent in that debt repayment, especially if Mom and Dad aren’t going to be charging much rent.”
