|Art by Greg Hinkle|
It seems like a lot of the information on the Internet is useless for a huge chunk of new graduates with student loan debt. Most advice has been geared toward those with federal loans which are much more manageable, but since undergraduates are only allowed to take out $5,500-$12,500 per year in federal loans, private loans have become a necessary option for many. In 2007-2008, about 14% of undergraduates had private student loans (nearly 3 million students in all) while 81% of all student loan borrowers taking out more than $40,000 have private student loan debt; the repayment options for these students are limited to say the least. For the beginners, here’s a breakdown of the key elements:
- Federal Student Loans: The best option for financial assistance after grants and scholarships. These loans offer some pretty sweet repayment options (when considering the alternative), and while the feds can garnish your wages for not paying, you hopefully won’t get to that point because of said sweet repayment options. Federal loans include Stafford Loans, Perkins Loans, Plus (Parent) Loans, and Consolidation Loans.
- Private Student Loan: A last resort, but a necessary evil. These loans come from private banks and credit unions. While it’s harder for private lenders to get you to pay, the chances of defaulting are much higher. Consequences kids. Know them.
- Federal Lenders: Direct Loans are the federal guys. You can defer the loan payments until you’re blue in the face, but if you are low on income, the best option is to start with an income based repayment plan immediately. After 25 years of payments, your debt is wiped clean.
- Private Lenders: Each company has different policies and terms. Sallie Mae is the biggie here. They won’t negotiate with you until you're close to or already have defaulted. Until then, the advice they will give you will consist of “Um, can’t you just get a better job? No, well, can’t your parents help you? No? Can’t you just get a better job?”
- Loan Forgiveness: Yeah, it's really only an option for Federal loans. Programs exist for partial or total loan forgiveness if you work in the public sector or enlist in the military, for example. (here and here)
- Subsidized vs. Unsubsidized Loans: For subsidized loans in deferment, interest does not accrue, for unsubsidized loans in deferment, interest does accrue. Unsubsidized loans are a good option for those who can start paying immediately (you have the option of starting payments while still in school) because the interest rates are lower than subsidized loan interest rates once you graduate.
- Deferment vs. Forbearance: Do what the Iranians call, “putting it behind your ear.” Deferment/Forbearance is when you put off paying your loan for a certain period of time. Deferment comes into play for students still in school (for Federal and Sallie Mae loans), while forbearance (which often requires a payment) is primarily used for those no longer in school. The thought is, you put off the payment until you can afford it, but you can only do this for so long with a private loan. Also, forbearance payments (yes, you usually have to pay) do not go toward the balance of your loan and the loan will continue to accrue interest. Now, lets rub some salt in my eyes.
- Default: You’ve maxed out your forbearance. They found you in your bat cave and now you’re going to have to shave your beard and face the army that has been hunting you down for years. For private loans, you enter default as soon as you miss a payment, whereas for federal loans, you aren't in default until 270 days of non-payment. For federal loans, they can garnish your wages, take your tax refunds, revoke a professional license and take your federal benefit payments. When you default on a federal or private student loan, your case is passed to a collections agency. Often times, lenders will negotiate a lump sum repayment at this point (cause you have all that money laying around, right?). Sometimes, they will sue you. Oh, and it's virtually impossible to declare bankruptcy to discharge student loan debt. Only 29 of the 72,000 people that filed bankruptcy in 2008 were discharging student loan debt. Fun stuff.
What all this means is, if you have private student loans and you can’t afford your payments and have no other prospects, you get to wait for the shit storm. If you default on a student loan, it’s basically like you’ve declared bankruptcy except the debt is still there, destined to kick you in the crotch, but they’ve already castrated you because your credit is ruined; this can have implications on your ability to purchase a car or a house, and because of background checks, it can affect your ability to rent an apartment or get a job. Catch 22, eh?
Let the finger pointing begin! I shall start with the students themselves. They made the choice to go to a school they could not afford. They took the loans out. They signed the papers. It’s their debt and they’re adults now. Deal with it. But is it fair to say most 18 year olds don’t fully understand or have the foresight to understand the implications of taking out a student loan? Even for those who were not fresh high school graduates when they took out their first student loan, I’d wager that most had no idea what it meant. When you decide to go to college and you take out a loan, you understand how much money it is, but it doesn’t matter because your college degree is an investment and it will pay off in the end. Right?
Maybe their parents should have better equipped them for this; after all, a lot of them knowingly co-signed the loans. But it seems that you need a masters in finance to understand everything, so it's no surprise people are defaulting. Even financially savvy parents don’t always understand that the job market is different than it used to be and a bachelor’s degree doesn’t count for much anymore. Besides, they only want what’s best for their kids, and what’s best is a solid education. Right?
Maybe it’s the school’s fault for not equipping their students with the skills necessary to get a good enough job to support themselves. Hell, a lot of financial aid offices are worthless when it comes to helping you find a job, let alone to counseling graduates on paying back student loan debt (I’m looking at you Academy of Art University). For-profit schools often have the highest proportion of graduates in default, but are they really to blame for students living beyond their means?
Maybe the lender is responsible. Just a few clicks on a website and your college education is paid for. The lenders don’t do enough to make sure the student fully understands what they’re getting into. Plus the interest rates are astronomical, often more than doubling the total cost over the lifetime of the loan. Maybe the lender needs to create more repayment options and not wait until a loan is about to default to negotiate, because unlike home loans, you can’t give this one back… but can you really blame the lender? After all, it was the students who signed the papers to begin with. Le sigh.
This is not an isolated issue. In 2008 67% of all graduates had some kind of student loan debt, with an average of about $23,000, and 1 in 10 graduates had over $40,000 in student loan debt, which represents a 9 fold increase in 15 years. It has been estimated that there is about $730 billion in outstanding student loan debt (both private and federal) and only 40% of the debt is being actively repaid; the student debt level is expected to top $1 trillion dollars by the end of the year. Student loans are too easy to get and often too hard to pay off. The graduates entering the workforce now are the ones who will shape our future economy. So as a society, what are our options? How do we fix this?
It’s important for me to address the obvious here. I know there are lot of Americans that are dutifully making their student loan payments and some might be disgusted by the fact that their peers are trying to “get out of it,” but it’s not a simple case of “work hard, get a job, take care of your shit.” While some students chose practical majors, others did not and no matter how you slice it, there’s no way to undo that decision. Some students worked their butts off and landed a stable job, others worked equally hard and came up empty. Some students were fabulous at networking and had some connections that helped them along their path, others weren’t so lucky. Life isn’t fair, but is it fair to allow a generation to sink into impossible and unprecedented debt at the precise moment that they should be building their careers and starting their lives? We want to get out of this recession, right?
People may disagree with me on this next point, but here it is: Not everyone should go to college. It really isn’t for everyone. Some high school graduates are better suited for trade school while others are better off entering the work force right away. We’ve got a whole generation of people being told that they’re special and that they can do anything they want if they put their minds to it. The problem is, a lot of kids don’t know exactly what they want or how to get there (and half don't even want to put the work in). Even when you do have clear idea of your goals, most kids would say college is the first step. And what do you do when you don’t know what you want out of life? You go to college. You’ll find a job when you’ve graduated because you’re smart and resourceful, and special, but what happens when your advanced degree ends up not paying you enough to support your $1600/mo loan payments? And worse, what happens when you graduate and realize, oops, maybe I didn’t need to go to school after all? I can’t find a job that pays me more than minimum wage and I’m completely broke, I don’t want my degree anymore. Can I give it back now? Sorry, you’re stuck with this kiddo.
I don’t know what the solution is. Would clearing student loan debt help? Sure, but stopping there would be like putting a band-aid on it. The higher education machine and loose lending practices need a major overhaul. Beyond this, I think we need to change the way we look at higher education. Hell, I’ll be the first person to tell you how much I value my college degree, but unlike a lot of people out there, I was lucky enough to have my parents pay for it. I wish it were that easy for everyone - I honestly don’t know if I’d value it as much if I had an enormous amount of debt to go with it.
Image Credit: Art by Greg Hinkle (Created for Im_Shay)