Student loans are a topic that comes up often, both in national media and on this site. After reading this week’s reader question, you’ll understand why. Here it is:
We need help. My daughter’s fiancé just disclosed that he thinks he owes over 100K in student loans. He received a notice, and now he is in a panic, has no idea how he borrowed that much. Attended school five years, but four were at a state college; only the first year was a private school. I told him to find all of his papers (not sure if that is possible) and to go Direct Loan and print out all they show he owes. We can then go back to the colleges and compare.
But what if the loan amount is correct? They plan on getting married soon, and I do not want my daughter brought down by his borrowing. I want my daughter and him to find a financial adviser who can help them on this. But we live in a small town in upstate New York. Who can they turn to for help? Thank you. — Worried Mom
I wish Worried’s future son-in-law’s problem was unique, but he’s definitely got company. Some statistics from American Student Assistance:
Student loans were created to be an engine for social mobility, but they are, in fact, limiting young people’s ability to achieve financial success:
- 27 percent of respondents to ASA’s survey said that they found it difficult to buy daily necessities because of their student loans;
- 63 percent said their debt affected their ability to make larger purchases such as a car;
- 73 percent said they have put off saving for retirement or other investments; and
- The vast majority — 75 percent — indicated that student loan debt affected their decision or ability to purchase a home.
College should improve your life, not ruin it
Before we start on Worried’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. They should harness some of it to make college more affordable.Rather than focusing on making college more obtainable, today’s system is instead geared to make loans more obtainable. The feds provide the loan guarantees, and students and their parents are led to believe that massive loans are simply part of the college experience.
An article on Bloomberg Businessweek called “Student Loans: Debt for Life” quotes U.S. 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 Worried Mom’s future son-in-law.
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.
Now let’s get to Worried’s question. We’ll start with a video I did a few months ago.
Dealing with college debt
From the Federal Student Aid website:
Before you take out a loan, it’s important to understand that a loan is a legal obligation that you will be responsible for repaying with interest. You may not have to begin repaying your federal student loans right away, but you don’t have to wait to understand your responsibilities as a borrower.
While this is true, there are a few programs designed to help those with student debt. I’ll list three, from best to worst.
Pay As You Earn. As of Dec. 21, 2012, the Pay As You Earn program became available. The terms vary based on when you took out loans, but for those who took out loans before July 1, 2014, payments are generally restricted to 10 percent of your discretionary income.
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.Income-Based Repayment Plan. Another program is the Income-Based Repayment Plan, or 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.
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.
Income-Contingent Repayment Plan. A third option is the Income-Contingent Repayment Plan, or ICR Plan. With this plan, what you pay is based on income and family size. Payments are typically higher than those under IBR and Pay As You Earn, but the restrictions are fewer.
To find out if he qualifies for any of these programs, Worried’s future son-in-law should visit this page of the Federal Student Aid website. He’ll need information on the types and amounts of loans he has; he can find information about his federal loans at the National Student Loan Data System site. Private loans don’t qualify.
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 to up to 30 years, although longer payment periods mean more payments and more total interest.
Consolidation could also mean losing benefits that applied to 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 this page of StudentAid.gov.
The best way to deal with college debt
While I’m not a fan of meddling mothers-in-law, including future ones, Worried Mom has a right to be concerned about her future son-in-law for at least two reasons. First, he borrowed a ton of money. Next, and more importantly, he was apparently surprised to learn how much he had borrowed.
Since we don’t know what career this gentleman’s loans prepared him for, we can’t know that his borrowing will outstrip his ability to repay it. If he’s about to embark on a very lucrative career, perhaps his debt will prove inconsequential. But there’s never an excuse to be surprised by the amount of debt one has. Any responsible person, no matter their age or life experience, should always have a handle on what they owe.
That being said, turning a blind eye to student loan debt isn’t rare. Half of graduates were surprised by how much college-related debt they had acquired, according to a 2013 Fidelity survey of 750 new grads.
Which leads me to my first piece of advice: The best way to deal with student loan debt is not to bite off more than you can chew in the first place. The second best thing to do is carefully monitor your levels of debt and have a plan, as specific as possible, to deal with it when the time comes. Because while you can’t be too educated, the exact opposite is true of debt. No matter how passionate the pursuit, there’s no point in starting life hopelessly behind the eight ball.
Of course, that advice comes too late for this future son-in-law. What he should do: Find what relief he can by pursuing the options above. If it’s too overwhelming for him, there are agencies that can help. But caution is key.
Unfortunately, many for-profit companies are willing to provide student loan assistance for an exorbitant price. They may charge hundreds of dollars to fill out the same simple forms you could complete and submit for free. Some may outright lie, and at least one state has sued two companies for fraud.
If you do feel so overwhelmed that it is worth it to pay a third party to manage your student loan debt, be careful about which company you use. Check with the Better Business Bureau and search for online reviews. Above all, be wary of any company insisting you should stop paying your loans while it negotiates your debt. That is a surefire way to default on your loans and, trust me, you don’t want to go there.
Third-party companies may also claim to help with private lenders. Again, there is really nothing they can do that you can’t do yourself, namely: refinance or try to negotiate a forbearance. Private loans offer little flexibility, which is why, if you haven’t taken out any loans yet, we recommend you stick to the federal loan programs.
You can be matched with reputable third-party companies we recommend by visiting the MTN Student Loans Solution Center.
Have you tried to reduce your student loan payments? What did you try and how did it work? Share your experience in the comments below or on our Facebook page.
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The questions I’m likeliest to answer are those that will interest other readers. In other words, don’t ask for super-specific advice that applies only to you. 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.
I founded Money Talks News in 1991. I’ve earned a CPA (now inactive), and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate. Got some time to kill? You can learn more about me here.
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