New York Times Article
By TARA SIEGEL BERNARD
Published: April 17, 2009
They bought into the notion that if they went to college — never mind the debt — their degree would lead to a lucrative job. And repaying their student loans would never be a problem.
But the economic crisis has turned those assumptions on their ear as thousands of recent graduates have been unable to find jobs or are earning too little to cover the payments for loans that are sometimes as high as $50,000.
The result has been rising default rates for student loans. And unlike other debts, student loans cannot easily be renegotiated.
“You often hear the quote that you can’t put a price on ignorance,” said Ezra Kazee, who has $29,000 in student debt and has been unable to find a job since graduating from Winona State University in Minnesota last May. “But with the way higher education is going, ignorance is looking more and more affordable every day.”
About two-thirds of the students graduating from college next month, or an estimated 1.8 million, have taken on student loans to pay ever-rising tuition and room and board. The average cumulative debt among graduating seniors is about $22,500, according to FinAid.org, a Web site that specializes in financial aid.
Mark Kantrowitz, publisher of FastWeb.com and FinAid.org, recommends that students follow a simple rule of thumb. “Do not borrow more than your expected starting salary for your entire undergraduate education,” he said. “If your starting salary is going to be $40,000, then you should borrow no more than $10,000 a year for a four-year degree.”
Gregory Westby, a 27-year-old designer who graduated from the School of Visual Arts in New York last May, is caught in the student loan trap. He has $150,000 in debt. He hasn’t been able to find a full-time job in graphic or set design, but is using his earnings from low-paying freelance jobs and working weekends at a fitness club to pay his rent. And he’s in the process of deferring his loans, which, together, cost $1,500 a month.
“Right now I’m surviving, but who knows when I’ll be able to start paying my loans back?” he said.
While Mr. Westby has found a temporary solution, many others are in default. The most recent default rate on federal loans was 6.9 percent, the highest rate since 1998, according to preliminary data from the Education Department. But this statistic illustrates only a piece of the picture. It tracks only the students who started to repay their loans between October 2006 and Sept. 30, 2007, but who had defaulted by September 2008. And it doesn’t include loans in deferment or forbearance even though those borrowers are unable to make payments. Nor does it include loans not backed by the government.
Perhaps seduced by the idea of graduating from a well-respected university, many students tend to overlook the consequences of graduating with debts that are likely to far exceed their starting salaries. And as many borrowers have learned, student loans are among the most ironclad debts, on par with child support, alimony and overdue taxes. They stick with you no matter what.
Bankruptcy usually doesn’t provide relief, except in the most dire of circumstances. Even death isn’t a good enough excuse for discharging some private loan debts. And the government can wield a heavy hand to collect what it is due: If you fail to repay your federal loans, it can garnish up to 15 percent of your wages or take your tax refund or part of your Social Security benefits.
But if you are having trouble paying back what you owe because you’ve lost your job or have some other financial difficulty, you have options. Of course, it’s always best to take corrective action before you’re officially in default. For federal loans, it generally takes about nine months of missed payments. But you can go into default on a private loan as soon as one payment is missed, though the rules vary by lender. And collection charges are usually steep.
“The good news on the federal loan side is that there are a lot of options for borrowers, particularly those who are in shorter-term financial trouble now,” said Deanne Loonin, director of the National Consumer Law Center’s Student Loan Borrower Assistance Project. “The private loan side is where we don’t have or are unable to give a lot of general information because there just aren’t as many rights.”
You first need to figure out what types of loans you have: federal, private or a combination of both. You can find out by calling the lender, accessing the National Student Loan Data System of federal loans, or FinAid.org’s Web site. Below are several options for both loan types.
Defer or Forbearance All federal loans have a grace period of six months after graduation. But an unemployment or economic hardship deferment and forbearance can each buy up to three years, for a total of six years of relief. Deferments are preferred because the government generally pays interest on subsidized federal loans, though you’re still responsible for interest on unsubsidized and PLUS loans. With a forbearance, you are responsible for all interest (even on subsidized loans), which is added to the loan balance.
“Students may not fully appreciate just how much that increases the size of the loan,” Mr. Kantrowitz said. “That’s why deferments and forbearances should mainly be used as a method to solve a temporary problem.”
A six-month deferment is reasonable: it would add $345 to the balance of a $10,000 loan with a 6.8 percent interest rate.
Extend Term If you have taken a lower-paying job but expect to find a more lucrative one later, you may simply extend your loan’s term from, say, 10 to 20 years, though doing that may double your interest costs. You can go back to your original term the next year and there’s never a penalty for paying off principal early.
Alternate Repayment If you have taken a low-paying job and don’t expect your salary to jump significantly, experts suggest one of the alternate repayment plans. Starting on July 1, all federal loan borrowers will be able to consider the “income-based repayment” program, which limits your monthly payment to 15 percent of discretionary income (or income above 150 percent of the poverty line) and forgives the remainder after 25 years of payments. For government or nonprofit employees, any remaining debt will be forgiven after 10 years. And if you earn less than 150 percent of the poverty level, you won’t owe any money — and it will count as a repayment, said Lauren Asher, acting president of Project on Student Debt. To qualify, your debt needs to be high enough relative to your income.
The income-contingent repayment plan is a similar program, but the payments are usually a bit higher.
There is a major caveat for both plans. If you do find a higher-paying job, and your payments didn’t cover all of your interest, those costs are tacked onto the loan amount.
There are fewer options with private loans, and borrowers are generally at the mercy of their lender and the loan contract.
Ms. Loonin said that some lenders might offer flexible repayment plans if you’ve encountered hard times and you’re not too far into trouble. Most private loans will also provide forbearances, but with a one-year limit. Many lenders will charge about $50 for each loan for the privilege.
Private lenders don’t have as much power as the federal government to collect, but your credit will be damaged.