Recent grads must face up to student loan debt
TERRY SAVAGE email@example.com October 26, 2011 6:50PM
Asia Rapier (on the right) is a student at De Paul University who has a student loan. On the left is fellow student, Edward Ward. She talked about the new proposed changes to federal student loan issues proposed by President Obama. | Al Podgorski~Chicago Sun-Times
Updated: May 3, 2013 12:15PM
With student loan debt making headlines, this is a reminder to spring graduates that you must start dealing with your debt before the six-month grace period runs out. Here’s the universal question:
If I graduated this past spring, what should I be doing about my student loans — especially if I have no job?
First things first. Do not get swept up in the news and forget that you must deal with your obligation under the current rules. Here’s what you must do now if you graduated this past spring — whether you can afford to pay or not. Immediately contact your lenders and set up some kind of arrangement. If you absolutely cannot start paying, ask about forbearance or deferral. But if you have some income now, it’s better to start a repayment plan that recognizes your situation. Go to IBRInfo.org to learn about income-based repayment plan options.
Killer student loan debt
It’s no surprise that student loan debt is entering the political arena. Student loans outstanding exceed total credit-card debt, and will exceed $1 trillion for the first time this year. And that total is growing at a rate of $100 billion a year.
The fault lies, once again, in Congress. In an effort to make college “affordable” for the voters, it expanded the student loan program dramatically in the past 20 years. More student loan money meant colleges were free to raise tuition at more than twice the rate of consumer price inflation every year. In fact, the College Board just announced that the average cost of in-state tuition at a four-year public university rose 8.3 percent this year!
The real killer is the interest rates on student loans. Despite the fact that you can earn less than a quarter of 1 percent interest on 6-month Treasury bills, the government wants you to pay 6.8 percent interest.
The squeeze on federal student loans is even worse than mortgage or credit card debt repayment. You can file for bankruptcy and wipe out credit card debt. You can default and lose your home if you don’t pay your mortgage. And in each case, you can walk away and start over.
If you default on — stop paying — your federal student loans, they won’t go away. Instead they will haunt you until you start collecting Social Security — at which point the government promises to take a bite out of your monthly check to repay your loans!
The portion of borrowers in default — more than nine months behind on payments — rose from 6.7 percent in 2007 to 8.8 percent in 2009, and surely has soared in the past two years. But interest keeps accruing on those defaulted loans.
Too little, too late
Many graduates took advantage of the one-time loan consolidation program to lock in fixed rates several years ago — only to watch rates drop still further. Now, the president’s new program will allow another consolidation — and slightly lower rates for many borrowers. The announcement talked about consolidation of “direct” loans with loans that were made in previous years through private banks, such as Sallie Mae, under the older Federal Family Education Loan program. It’s not clear whether previously consolidated loans will qualify.
The president’s proposal also will lower the minimum payment for new borrowers from 15 percent of annual discretionary income to 10 percent. (Discretionary income is defined as the amount by which adjusted gross income exceeds the poverty line.)
This proposal is a step in the right direction — but not a large enough step. While I believe in the sanctity of a contract as essential to a well-functioning economy, it is totally unfair that those just starting their careers are held to a higher repayment standard than homeowners or credit-card users — or the banks!
And that’s The Savage Truth.