The federal government will follow you for ultimate repayment of most of your student loans.
Updated: May 3, 2013 12:14PM
Q. Our son graduated from college in 2008, and our daughter graduated this year. We had planned for them to pay off their federal student loans, and we would pay their Sallie Mae loans until they had good-enough jobs to pay both. Meanwhile, they only have low-paying jobs, and our financial circumstances have changed. Can you help us find a planner who understands student loans and how to deal with them?
A. Student loans are like quicksand -- much easier to get into than to get out. The problem of repaying student loans is getting more critical as the effects of the recession linger. The default rate on federal student loans is 7.0 percent for borrowers who entered repayment in 2008, up from 6.7 percent last year.
It's unfortunate that even bankruptcy cannot lift the burden for graduates. The federal government will follow you for ultimate repayment of most of your student loans -- even eventually taking some of your Social Security benefits.
Private lenders must follow the same collection procedures as unsecured credit card issuers, including a statute of limitations set by each state. However, private lenders also have a special protection in the bankruptcy courts as a result of the 2005 bankruptcy legislation, making it almost impossible to discharge private student loan debt through bankruptcy.
*StudentLoanBorrowerAssistance.org -- the website of the National Consumer Law Center. Start here to find the most comprehensive information about your rights, as well as contacts for legal advice.
*Projectonstudentdebt.org -- a site that tracks the public-policy issues and gives resources for borrowers.
*Studentaid.ed.gov -- The Department of Education site will explain deferral and other programs for federal student loans.
*IBRinfo.org -- For more on the federal Income Based Repayment plan below.
Before you start your search for knowledge and help, here are some basics you need to know about dealing with repayment of both federal and private student loans.
Federal student loans. Starting this year, all new federal student loans will be made directly through the government, but in the past, they were made either directly from the government or through private lenders such as Sallie Mae.
If you're having problems repaying your federal student loans, be aware that last year the government launched the Income Based Repayment plan to help graduated students manage their debt. Basically, this program allows federal student loan borrowers, with outstanding debt that is more than they earn in a year, to cap loan payments at a reasonable share of income. After 25 years of affordable payments, the balance is forgiven. (Or after 10 years if you're working in a public-service job.)
Private student loans. While federal student loans do offer some helpful repayment options, if you have a private loan (which may have been made by the same lender as your federal loan), you have few alternatives. Worse, there are many ways for private lenders to raise your interest rate, charge excessive fees, and even declare you in default for unrelated issues that show up in your credit report. And if there was a co-signer on your private student loan, that person may be liable, even if the original borrower dies or is permanently disabled.
Since there is no cap on interest rates for private student loans (although some specific loans may have caps), most are variable-rate loans. And if your credit rating changes, you could find your rates skyrocketing, even during this period of low interest rates.
There may be some hope in the future. A House Judiciary subcommittee just passed the Private Student Loan Bankruptcy Fairness Act (H.R. 5043). If passed by Congress, it would require that private student loans once again be treated like other consumer debt in bankruptcy, rather than like unpaid criminal fines! And the new Consumer Financial Protection Bureau is expected to have an ombudsman dealing specifically with student loan issues.
But in the meantime, the situation for private student loan borrowers is a tough one. The best answer is to study the loan documents carefully. In cases of real need, you can try to contact the servicer and negotiate a lower payment or interest rate.
If parents are on the line as co-signers (and most are), they can try to refinance their mortgage to a low fixed rate, pulling out any available cash to pay down these loans before the variable rates soar.
We place higher education as a priority, but, sad to say, when it comes time to pay for this important national resource, we leave our graduates at the mercy of the toughest collection laws. It's one thing to default on a credit card debt. It's quite another to make it through college only to find your future destroyed by a debt that can't be repaid with a good-paying job.
And that's The Savage Truth.
Terry Savage is a registered investment adviser.HOW YOU CAN PICK TERRY'S BRAIN
In this column, I'll respond to your most frequently asked questions on a regular basis. You always can submit individual questions on my Sun-Times blog reached on the home page at www.TerrySavage.com.