The Savings Game: Getting out from under student loan debt
Recently, a young woman named Kelli Space made headlines for setting up a website at TwoHundredThou.com begging the world to help with her student loan debt.Kelli was the first in her family to go to college, which may explain why nobody warned her about the dangers of student debt. Her loans, both federal and private, for her undergraduate degree at Northwestern University total $200,000.
That’s enough to buy a first house, or almost ten times the $24,000 that the average graduate takes home with their diploma. So far, Kelli’s collected a few thousand dollars in donations and a lot of negative feedback for asking for a handout. But I have a few words of advice for her and anyone else in over their head with student loans.
1) Don’t panic and don’t disappear.
It is easy to “forget” about your student loans, especially while the six-month grace period is still in effect after graduation, but this is a really bad idea long term.
Don’t get into a situation where you are missing payments or sending in less than is owed. If you go into delinquency (up to nine months of late or missing payments) or default (declared after nine months of failure to pay) you will trigger large fees, punitive interest rates and penalties -- and eventually they will find you.
The federal government is authorized to seize part of your wages without taking you to court, take your tax refund, or even federal disaster relief and disability payments to pay off old federal student loans. Both federal and private student loans are all but undischargeable in bankruptcy. In a worst-case scenario, it is better to put a monthly student loan payment on your credit card, and owe it to the credit card company rather than the student lenders.
2) You’ve Got Options.
Not enough graduates and their families know about Income-Based Repayment. This new program gives every borrower the right to manage federal student loan debt and even have it forgiven over time. Let’s say that Kelli was an independent student and borrowed the maximum $57,000 in total federal loans and is currently earning $30,000 a year.
Under Income-Based Repayment her monthly payment would go down to $171.94 from the current $655.96 under a standard 10-year repayment plan. The payment would stay pegged to her income over time. Any remainder after 25 years would be wiped clean.
3) Read the Fine Print.
Even if Kelli borrowed $57,000 in federal loans, that means that $143,000 of her loans are private, from a bank like Key Bank or Sallie Mae. Private student loans are a lot nastier than federal student loans, which is why I recommend keeping them to a minimum. The interest rates are much higher, and these lenders have no obligation to bargain with you over a repayment plan. However, if you read the fine print of your agreement, it may mention something about “forbearance” or “graduated repayment.” Call your lender and see if you can negotiate a manageable monthly payment that doesn’t inflate your total repayment amount with too-high interest payments. In an age of high rates of student loan default, they may be more willing to negotiate with you.