Here’s a question from a reader in an all-too-common position these days: drowning in student loan debt.
I have a little bit of credit card debt, but it isn’t that bad. What really hurts is all the student loans that I have.
Unfortunately for me, I was the first of my siblings to go to college and so my parents and I were very new to getting financial aid and all of that. I ended up having to pay for almost my entire education with student loans. Now more than half my paycheck goes to paying them off and I don’t feel like I am making any sort of a dent. I am trying to find the best way to pay them off without going completely broke.
I think my student loan debt is around $126,000 and I have several different companies that I have loans with, The Department of Education, Wells Fargo, AES, and ACS. I’ve tried to figure out consolidation on my own but it is all very confusing. Do you have any tips for me?
I’d appreciate any advice you can offer!
I wish Becky’s problem were unique, but she’s definitely got company. Some statistics from American Student Assistance:
- Of the 20 million students attending college each year, close to 12 million – or 60 percent – borrow money.
- Total outstanding student loan debt is around $1 trillion. The Federal Reserve Bank of New York reports $902B while the Consumer Finance Protection Bureau reports $1T.
- The average student loan balance for all age groups is $24,301. About one-quarter of borrowers owe more than $28,000; 10 percent of borrowers owe more than $54,000; 3 percent owe more than $100,000; and less than 1 percent, or 167,000 people, owe more than $200,000.
College should improve your life – not ruin it
Before we start on Becky’s question, a little editorializing…
While we’re all responsible for the consequences of our actions, I believe part of the blame for so much debt rests with America’s higher education system. Fact is, college shouldn’t cost so much, and more should be done to educate students and families about avoiding this sort of massive borrowing.
For example, thanks to technology, it’s relatively easy to shave tens of thousands from the cost of college. Online learning is one. From a 2010 story called College for $1,000 a Year?…
Straighterline is a company that provides college classes online for a tiny fraction of typical college costs – for example, you can take courses for either $99 a month plus $39 per course, or a flat rate of $999 for 10 courses – essentially your entire freshman year. You don’t have to ace Algebra 101 to see the savings: that’s up to 92 percent off what you’d pay on average for a year of college at a public or private institution, and done at your own pace.
Straighterline isn’t an experiment. It’s one of several for-profit companies that have found a way to profitably exploit a bloated, radically overpriced higher education system still clinging to the status quo. Our nation’s universities incubate much of the technology and innovation that’s changing our world: Why can’t they harness some of it to make college more affordable?
The answer is they don’t have to. Because rather than focusing on making college more obtainable, the system is geared to make loans more obtainable. The Feds provide the guarantees and students and their parents are led to believe that massive loans are simply part of the college experience.
In an article on Bloomberg/Business Week called Student Loans: Debt for Life, they quote Education Secretary Arne Duncan: “Obviously if you have no debt that’s maybe the best situation, but this is not bad debt to have. In fact, it’s very good debt to have.”
Tell that to Becky.
Our universities should take some of that on-campus brain power and refocus it on serving students instead of supporting a system that’s obviously collapsing under its own weight. The high cost of higher education is a national disgrace.
Thanks for allowing me to blow off a little steam – now let’s get to Becky’s question.
Dealing with college debt
From the Federal Student Aid website:
Remember, federal student loans are real loans, just like car loans or mortgages. You must repay a student loan even if your financial circumstances become difficult. Your student loans cannot be canceled because you didn’t get the education or job you expected, or because you didn’t complete your education…
While this is true, there are a few programs designed to help those with student debt. I’ll list three, from best to worst.
As of Dec. 21, 2012, the Pay As You Earn program became available for those who started taking federal Direct Loans after Oct. 1, 2007 and received a disbursement on or after Oct 1., 2011. If you meet the date and other qualifications, the program restricts monthly payments to no more than 10 percent of your discretionary income, defined as your adjusted gross income, minus the poverty guidelines for your family size.
Since Becky is now expected to pay nearly half her income in loan payments, she should definitely see if she qualifies by visiting this page of the Federal Student Aid website. She’ll need information on the types and amounts loans she has; she can find it for her federal loans at the National Student Loan Data System site. Private loans don’t qualify.
Other advantages: If you meet certain requirements, like paying on time, remaining balances can be forgiven after 20 years. Also, under the Public Service Loan Forgiveness Program, if you get a full-time job with a qualifying public service organization, your remaining loan can be forgiven with 10 years of on-time payments.
The program that preceded Pay As You Earn is the Income-Based Repayment Plan (IBR). If you qualify, total payments are restricted to 15 percent of your income. Most federal loans qualify for this program; private loans don’t. You can read about the qualifications, see if you qualify, and see what your payments would be at this page of the Federal Student Aid website.
The differences between Pay As You Earn and IBR:
- To qualify for Pay As You Earn, you can’t have owed anything on federal student loans as of Oct. 1, 2007 and you must have received a disbursement of a Direct Loan on or after Oct. 1, 2011. IBR doesn’t have that restriction.
- Only federal Direct Loans are eligible for Pay As You Earn; both Direct and Federal Family Education Loans are eligible for IBR.
A final possibility is the Direct Consolidation Loan: As the name implies, this means just rolling all your various federal loans into one. Then you have one monthly bill at a fixed interest rate. You can also get lower payments by extending the repayment period up to 30 years, although longer payment periods mean more payments and more total interest.
Consolidation could also mean losing benefits from the original loans, like the possibility of loan cancellation in exchange for qualifying work. In short, when you take out a Direct Consolidation Loan, that’s it. You can only do it once and your old loans, along with their terms, potential rebates, and other benefits, are gone.
To learn more about this program, check out the StudentAid.gov Consolidation Checklist.
Got a money-related question you’d like answered?
Drop me a line! Just try to make sure your question would be of interest to our other readers – don’t ask for personal or super-specific advice. And if I don’t get to your question, promise not to hate me. I do my best, but I get a lot more questions than I have time to answer.
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