We’re told over and over again that student loans are good debt. The conventional wisdom says that, like a home loan, student loan debt will turn into an asset. But what happens when it doesn’t turn out that way? What happens when people take on tens of thousands of dollars in loans that may take decades to pay off?
Increasingly, they fall behind on their loans or default. The U.S. Department of Education recently reported that the national default rate on federal student loans rose slightly, to 5.1 percent, in 2004, the latest statistics available, from the previous year’s record low of 4.5 percent. The default rate represents the percentage of borrowers who began repaying their loans between Oct. 1, 2003, and Sept. 30, 2004, and who defaulted before Sept. 30, 2005.
Although the default rate is low compared with the all-time high of 22.4 percent set 14 years ago, the latest increase is still a signal that shouldn’t be ignored. Since the 1990s, the number of students who graduate with more than $25,000 in loan debt has tripled, according to the student Public Interest Research Groups, which along with several state student associations last year launched the Student Debt Alert project.
The rising student loan levels are so troubling, it’s time we stop saying this is good debt.
“Having over $100,000 in student loan debt is not fun,” wrote one reader, a new lawyer who joined me during a recent online discussion. “Do I regret going? No, but it certainly didn’t pan out the way I thought it would. I am working like a fiend, not getting paid what most people think lawyers make, and struggling daily with money and budgeting. There are hundreds, from my class alone, who are in the same boat.”
Sinking in debt, borrowers want to know their options. They look deflated when I tell them: Pay it as originally agreed over 10 years and live below your means, or stretch the payments over as long as 30 years.
And no, bankruptcy is not an option. If you have a federal student loan, it can’t be discharged in bankruptcy. If you have a private student loan, it’s still not a viable option unless you can prove that paying it would result in “undue hardship,” a test that is nearly impossible to meet.
There is some relief, even if temporary. Depending on the loan, there are several options, such as a graduated repayment plan, whereby loan payments start out low and then increase, typically at two-year intervals.
Some loans have an income-contingent option. That gives you the flexibility to pay off the loan based on what you earn. Each year, your monthly payments are calculated based on your adjusted gross income, family size and the total amount of your loans.
If you are experiencing an economic hardship, you may be eligible for “deferment.” Under this option, you still have to pay back the loan, but you can postpone payments for a while. Interest on the loan or loans will not accrue during the deferral period. Another option is “forbearance,” in which you can stop making payments for a set period of time. Unlike with the deferment option, interest continues to accrue. But forbearance is easier to get.
What if you have the cash? Should you pay off your loan? That’s what a number of people wanted to know during the online chat. Take a look:
· “I am a 30-year-old single female, who owns a condo, has no credit card debt, donates to charity, maxes out her 401(k) and has $10,000 in emergency savings and $2,000 in regular savings. I also have $49,000 remaining on my law school loans, which were over $140,000 when I graduated. Should I take $10,000 of my emergency savings and put it toward the loans?”
“I’m about to receive $30,000 of the life insurance money that my father requested I use to pay off the student loans. I have $39,000 in loans with interest rates below 3.5 percent. Should I invest it and pull from what grows to continue to make the regular payments? Or should I just pay off a massive chunk of the student loans?”
· “Would it be more beneficial to take out a student loan to complete my master’s degree, or to take the money from my Vanguard fund? I need around $5,000 for the semester. I’m 24 and have about $10,000.”
As to the first woman’s question, I would not totally deplete my emergency stash of cash, but I would take about half of it and put another dent in that debt.
For the second questioner, should you invest money you inherit or pay down your student loan? Your father did know best. Pay down the debt.
And is it beneficial to take out a loan when you can pay cash for your education? No. It’s only beneficial to the lender.
I think all the questions, on some level, stem from the belief that student loan debt is good debt. It’s not. Debt is bad, even when necessary. Conventional wisdom should follow this old Chinese proverb, “A good debt is not as good as no debt.”
Tags:
Bankruptcy,
conventional wisdom,
default rate,
federal student loan,
federal student loans,
home loan,
Lesson for Students,
research groups,
student associations,
student debt,
student loan debt,
The Best Debt Is None,
u s department,
u s department of education
Debt consolidation services are companies who specialize in helping you free yourself from the burden of debt. If you have debt that seems to pile up more and more each month, bills for which you can’t even afford the minimum payments, and the trend has been continuing for a long time with no end in sight, then a debt consolidation service may be just what you need to help you out of the tangle of debt you’re in.