17
Paying for a College Education
Invest in yourself, in your education. There’s nothing better.
Sylvia Porter, Sylvia Porter’s Money Book
College is expensive but generally worth it if you pay as you go. Paying double or in some cases triple, however, by putting the cost of a college education on credit to be paid for over the next twenty-five to thirty years borders on the unthinkable.
As you know, I am seriously opinionated about the matter of debt—unsecured, consumer debt. Hang on to your hat. You haven’t read anything yet.
I do not believe that every person able to pass the entrance exam is entitled to an education at the college or university of his or her choice. Just because your son is smart enough to be accepted into Harvard, for example, does not mean he is automatically entitled to attend. There is this little matter of being able to afford it. To say otherwise would be as ludicrous as saying that because he is a good driver he’s entitled to a Ferrari.
I believe that student debt has the potential to be so destructive to a person’s financial life that it should be avoided if at all possible. There, I’ve said it.
Secured or Unsecured Debt?
Many financial experts hold to the position that student debt is secured debt. The collateral, they contend, is one’s ability to earn a better living in the future because of said education. Therefore, it is not unsecured debt. Others simply acquiesce to the student loan system, advising that you borrow all you can, get through school, and then find a way to deal with the debt.
I believe student debt is unsecured debt—there is simply no other way to categorize it. It offers few, if any, realistic escape routes. If things don’t work out the way you, your student, your parents, or whoever has put their neck on the line for repayment planned (“I’ll get a great job and just pay it all back really fast”), you’re stuck. Those loans must be repaid.
There was a time—and not that long ago—when I didn’t have much of an opinion about student loans. Then I made a trip to Nebraska to speak at a women’s conference. Included on my schedule for the weekend was a Friday afternoon session at a local private college to speak to the graduating students about the dangers of consumer debt and strategies to handle their student loans.
The women’s conference commenced on Friday morning, and after the first session, a young woman came up to me in tears. We found a private corner to talk, and she poured out her heart.
I learned that she had graduated from the college I would be visiting later in the day. As a freshman, her plan had been to become an elementary schoolteacher, and she had felt perfectly justified in taking out the maximum student loan each semester. She didn’t think twice about the future ramifications and assumed she’d pay the loans easily when she landed a good job. She figured they’d never give her loans she wouldn’t be able to repay, so she didn’t question the system. She was thankful for the provision.
During the four romantic years (it is a lovely, old campus), she fell in love and upon graduation married her college sweetheart, who also had aspirations of becoming an elementary schoolteacher. Her husband-to-be had nearly the same amount of student debt—nearly $70,000 between them. Upon saying “I do,” her debt and his debt became “our debt.”
She became pregnant within a very short time. He applied for teaching positions, but opportunities were not forthcoming. To keep food on the table, he took a job at a local factory as they awaited the birth of their first child, and her plans to become a teacher made their way to the back burner.
By the time she and I met, she was pregnant with their third child, and he was still at the factory. She said he’d long since given up his dreams of teaching in favor of staying at the factory in this tiny Nebraska town. His salary barely covered their basic living expenses even though he worked as much overtime as possible. His take-home pay, based on minimum wage, put them close to the poverty line.
She told me how her loans had been in forbearance, but payments of $400 a month were now past due—money they absolutely did not have. His loans would come due some months hence, and together their payments would be close to $900 a month. She wept as she told me there was no way out. She spoke of the strain this was placing on their marriage and the family. She said they’d considered filing for bankruptcy until they’d found out all the loans were not dischargeable—even through bankruptcy. She related that the loan counselor had informed her there were only two ways the loans could be forgiven: full payment or death.
I’m sure that during their carefree college days both of these young people didn’t flinch as they signed for loan after loan after loan. What they didn’t allow for in their planning was that life doesn’t always turn out as we plan. Things happen. Babies are born; jobs don’t pan out. Had they not been saddled by this heavy load of debt, their options would have been greatly increased. I had little to offer this woman by way of hope. I suggested that since she had a spare room and a large yard, she might consider opening a day care center. Lots of hard work? Yes, but possibly a way she could work to repay the debt in record time. She could be with her children and at the same time earn additional funds to repay the debt. I never heard back from her, but to this day her story weighs heavily on my heart.
That afternoon, as I addressed the students, I learned that most of the graduating seniors would be leaving school with heavy loads of debt. Few of them had a clue about the terms of the loan repayments. The attitude was that surely the school wouldn’t allow them to get into something they wouldn’t be able to handle. Many of these students, I learned, had purposely taken loans for more than they really needed so they could buy computers, cars, and pay for ordinary living expenses so they “would have more time to study.” One young man was very open about the fact that he had used much of his loan proceeds to pay for an off-campus apartment and to buy a car.
After the session, one young woman—she said she thought she had about $30,000 in loans—lingered to chat. I asked about her plans for the future. She hesitated and then said that since she had a double major in multicultural studies and geography she thought she might like to be a travel agent. My blood ran cold.
First, I know that travel agents don’t make the kind of money required to service $35,000 in unsecured debt (she’d picked up an additional $5,000 in credit card debt).
Second, I couldn’t imagine anyone spending four years in college, selecting a fairly sophisticated double major, and then being satisfied with a job that had no advanced-education requirements. She told me she had decided to come to this particular college because the campus was beautiful and she knew she’d make lots of friends.
My advice to her was that she see this debt as a top priority in her life—that she buckle down to a very frugal lifestyle and work at least two jobs with the goal to pay the loans in full within the next three years. I followed that advice with, “And whatever you do, don’t get married until it is paid.” She blushed a bit and then told me she would be getting married just three weeks hence. Yes, her fiancé was a fellow graduate with about the same amount of student debt.
The director of students drove me back to the conference. With two stories fresh in my mind, I couldn’t help asking her just how dependent this college is on the student loan system. Her answer shocked me. She said that 85 to 90 percent of all students (or their parents) take out student loans of some type. It is a denominational church school, and many people in the Midwest send their children to this school. It is a way they can support their denomination and know that their kids will be in a wholesome environment.
Clearly, this particular private college depends heavily on student loans—as is the case with most of these types of schools, I fear. Without the government-backed loan programs, their student bodies would disappear. I finished that conference with a very heavy heart.
Since my experience in Nebraska, I’ve received hundreds of letters regarding student loans. One came from a young man who had prepared to be a chiropractor. I don’t know how many years it entailed, but he finished with $160,000 in student loans. He passed his state exams and entered the field only to find that he absolutely hated it. After some time of personal struggle, he admitted that what he really wanted to do was teach school. He is now teaching junior high school, living like a pauper, and trying to pay back his huge debt on a teacher’s salary.
Another letter sent my stomach into spasms. This man finished law school with nearly $200,000 of student debt. His plans for practicing law (and quickly repaying the debt, of course) were dashed when he failed the bar exam three times and simply gave up.
Still another letter from a young woman told of her heartbreak. The man of her dreams had broken their engagement. She had nearly $40,000 of student debt, and he could not agree to start their marriage in the hole.
I’ve received countless letters from pastors who cannot pay their student loans on their salaries. Their secret struggles are nearly more than they can bear. Other letters come from people who feel the call of God to be missionaries but cannot be considered by any mission board because of the huge student loans to which they are obligated.
Going to College without Going into Debt
Lest you conclude I am opposed to higher education, let me assure you I am not! While not every person is college material, I firmly believe that every young person should be encouraged and given the opportunity to seek some type of higher education. Education is key to the future of this country. We need to encourage young people to become as educated as reasonably possible.
But I am also convinced it is possible to get an education without taking on massive amounts of debilitating debt. It takes a lot of work, planning, and even sacrifice, but it can be done. And if an education is important enough to you or your student, you will find a way to do it.
Go to a community college. There are more than 1,655 two-year community colleges in the United States—two-year, post-secondary institutions that offer certificate programs, associate of arts degrees, associate of sciences degrees, plus many other programs.1 Even if you are anticipating a four-year degree, you can take prerequisite courses at the community college level—at an amazingly low cost.
What many people do not consider is that the first two years of any college career are packed with basic prerequisite courses. Why not pay $46 a unit at a community college (the current in-state rate in California2) to take the same courses the private university charges $500 for and then enter the four-year college as a junior ready to dive into your chosen field of study? This tactic alone can cut the cost of a four-year college education about in half.
Consider state colleges and universities. Many state schools offer an excellent education for a fraction of the cost of a private school, provided the student meets the residency requirements. When our oldest son went to a state college, we were astonished to find that tuition and all related costs were far less than tuition alone at the private high school from which he graduated.
Live at home. While I agree that the social aspect of college has its benefits, it is not worth going into debt to pay for room and board in a dormitory or all the related costs of renting an apartment. Living in a beautiful setting and making nice friends is not worth twenty or thirty years of heavy debt payments.
Sit out a year or two. As a parent, I understand the fear that if a student doesn’t go straight to college after high school he may never make it. I suggest that an equal fear is that if he does go to college but because he hasn’t a clue what he wants to do, and therefore lacks direction or motivation, the effort is completely wasted. Many times, a year or two of dealing with the real world convinces a young person that getting an education can be the path to a better job. A motivated high-school graduate willing to live frugally at home could in a matter of two years save a tremendous amount of money for college.
Start when they’re babies. Parents choosing to pay for their children’s college degrees should start saving when the kids are babies. That is the most painless way to pay for an expensive education. Save regularly and select the investment vehicle for these funds based on the age of the future collegian.
Up to age twelve, you can afford to be very aggressive with your college fund. Faithfully put your money away, month after month—good times and bad—into stock mutual funds. Reinvest the dividends and don’t worry.
Once your child reaches age twelve, leave your mutual fund account alone but begin depositing your new savings into safer vehicles such as US savings bonds, long-term certificates of deposit, and other Treasury securities. As the college years approach, begin transferring the money in the stock mutual funds into the safer havens. Now is the time to make sure the money is safe. If you continue investing this money in the stock market, you will not have recovery time if the market takes a plunge. If those babies don’t end up going to college, the funds can be easily transferred into retirement accounts.
Some states now have 529 educational accounts that allow parents to pay for their children’s college educations while the kids are still young, thereby providing a hedge against rising costs. Good idea? Perhaps, but be particularly careful before you jump in. The biggest question is whether the funds are fully refundable. Life is uncertain, and should your child decide not to attend college or should something happen that would preclude him from attending school in the state you now call home, you want to make sure you can get that money back, with interest. My advice is that if you have the money, invest it wisely yourself. Then when the time for college comes, your options will be plentiful. To learn more about 529 Plans, go to SavingforCollege.com, then search for “College Savings 101” at that site.
How to Pay as You Go
Save early. Paying for college with money saved and invested is definitely the cheapest way to go because a great deal of the money you send to the college will come from interest, dividends, and capital gains. But you have to start early to get those benefits.
Use current income. Spending current income—either the parents’, the student’s, or a combination of both—is a more costly way to pay as you go. This will definitely require a change in lifestyle and considerable sacrifice. But when you’re finished, you’re really finished. The education will be paid for in full. Achieving that goal is definitely worth the sacrifices required.
Work for the school. Many private colleges give an excellent discount to the children of college employees. There are lots of jobs on a big campus other than teaching positions. Check it out. You never know what you might find. A number of colleges that I know of offer free tuition to the family members of school employees.
Seek out discounts for pastors and missionaries. Many church-affiliated colleges and universities offer significant discounts to the children of pastors and missionaries. If you fall into one of those categories (or feel a change of profession coming on), make inquiries.
Apply for grants. A grant is a flat-out gift. It is free money, and there is no requirement to repay. The most common is the Pell Grant, money from the federal government to assist low-income undergraduates. But don’t get too excited. The amount of the grant will be small, at best, and will be determined by the family income. It could be as little as $200 or as much as $2,500. If the student is a displaced homemaker (a woman who has left the workplace to rear children and is single as a result of either divorce or death and requires training to return to the workplace) or a dislocated worker (anyone fired or laid off due to downsizing or a self-employed person whose business failed because of a turn in the economy), that grant applicant will receive preferential treatment. The Supplemental Educational Opportunity Grant (SEOG) is available for very low-income undergraduate students and ranges from $200 to $4,000 per year. Many states have grant programs for students who go to state colleges or universities. In addition, many colleges have their own grants based on need.
Take part in a work-study program. A federal program, work-study provides on-campus jobs for students. The college administers the jobs and supervises the workers. Once the student is granted an award, he must work until that award is earned. There is no requirement to pay the money back, even if the student does not graduate.
Look for corporate benefits. Many large corporations have an education reimbursement program for employees who qualify. This can be an excellent way for a student to get a great deal of their college costs paid for. Those seeking graduate degrees might consider a job change to a corporation with such a program before enrolling in graduate school.
Serve in the military. For those young people wishing to serve in the military, an excellent education could be a decided benefit. The military will put you through medical school, for instance, if you enter as an officer and agree to stay for a period of time upon completing your residency.
Apply for no-need scholarships. There are jillions of scholarships available that are not based on need but rather on ability or one’s ethnic heritage—many of which go unawarded every year. You can find exhaustive lists online at sites such as Fastweb.com.
Apply for financial aid. Financial aid is a term the educational system uses to refer to grants, loans, work-study, and scholarships. Even if you desire to pay cash rather than accept loans, you might want to go through the financial aid process to learn if you might be eligible for grants or other aid. You need to apply for financial aid at least one year in advance. I suggest that you take a couple of aspirin before getting started, and you will do yourself a big favor if you eliminate all expectations. Learn more at Fafsa.ed.gov.
A friend, Carol Anne, had a rude awakening while going through this financial aid process when her daughter enrolled at a large, private university. She went through the long and arduous process and discovered to her surprise that her daughter was eligible for aid for all but $5,000 of her first year’s costs.
Her daughter, a brilliant and highly motivated journalism student, decided to go after every possible scholarship to make up the $5,000 gap. Sure enough, she was selected as the national champion for a journalism scholarship to the college of her choice in the amount of—you guessed it—$5,000. How shocked they were to be informed by the college that her financial aid would be reduced dollar for dollar by any scholarship she won on the outside. The college said it wasn’t their fault. They are required to adhere to federal regulations that require all sources of income be taken into consideration. They saw the scholarship as a new source of income.
If all else fails, go as a senior citizen. Many states have college programs for seniors. In Ohio, for example, any senior citizen can go to a state college or university at no cost.3 The only requirement is that there be an opening in the class once all paying students have registered. Classes can be taken for full credit or audited for no credit. Ohio’s seniors have the opportunity to take a single class now and then or earn a degree—even a master’s or doctorate. To find out if your state has any such program, call your state’s department of education and ask about programs for seniors.
If You Must Take Out a Student Loan
In the same way that most people would never be able to buy a home without a mortgage, most people cannot afford a college degree without some amount of financial aid in the form of student loans. I wish that were not the case, but it has become a fact of life. That being said, here are guidelines to follow to make sure student debt doesn’t become a much larger problem for your future than if you had not gone to school in the first place.
Borrow only the amount you absolutely must have to get by. It will be tempting to borrow the full amount for which you are eligible. But that could be more than necessary. Be strong. Say thanks but no thanks. Do not accept more than you need so you can do any of a number of very foolish things with borrowed funds (all taken from the annals of my mailbox):
· invest the excess (this one always amazes me)
· buy an engagement ring (oh, puhleeze)
· buy a computer (the one you have is fine)
· buy a car (can you say “public transportation”?)
· live off campus (dormitory living is an education in itself)
· spring break at Daytona Beach (I’ll pretend I didn’t hear that)
Borrow no more for your education than you will earn in the first year working in the field for which you are preparing. For example, if you are getting your degree to become an elementary schoolteacher in a city where first-year teachers are paid $27,000, your total student debt for your education should not exceed $27,000. That’s a rule of thumb you can rely on.
Begin immediately to make payments even though you have the option to defer payments until you graduate. Student loans issued by the government come in two flavors: subsidized and unsubsidized. Subsidized loans are need based and issued to families and students who can demonstrate a financial need. These loans do not begin to accrue interest until after the student finishes or leaves college. Unsubsidized loans are available to anyone and begin accruing interest the moment you cash the check. However, the government allows the interest to be rolled back into the loan and does not require payment of it until after graduation. This means you could borrow, say, $8,000 but end up owing a great deal more because of the interest. At the very least, begin immediately to pay the interest each month on all unsubsidized loans.
Repay the debt in three years. You will have opportunities to consolidate your loans into one loan so you can make a single payment each month. That’s fine, but know that you can accelerate your repayment, and you should. You do not want to be making these payments for the next ten, twenty, or even thirty years. Buckle down. Continue to live like a starving student so you can get your repayment taken care of in short order.
Know the ropes. The government has over the years introduced provisions that allow for partial forgiveness of some student loans based on income, service, and other life situations. While it’s tough to qualify, this is information you need to know if your name is associated with any kind of student debt.
Income-based repayment, for example, is tied to your gross household income after graduation. If it’s low or you work in public service or for a nonprofit organization, you could qualify to have some of your debt forgiven. But there are requirements having to do with on-time payments over a long period of time and so forth. SavingforCollege.com, Studentaid.ed.gov, and StudentLoans.gov are information-rich sites that will help you stay on top of the laws and regulations for all things student loans.
If you as the parents or your student end up going into debt to fund a college education, do it as intelligently as possible. Know at all times exactly how much you have borrowed, the interest rate, the exact terms, and when the payments will commence. Start repaying at the first moment possible and pay more than is required. Don’t push the limit by accepting the six months of grace you’ll get before starting to repay your debt. Don’t consolidate or rewrite the loans if doing so extends the payback time. Accelerate the schedule so you pay off the loan as quickly as possible. And, of course, never default.
A Word of Advice for College Students
Your college years will definitely be among the best of your life. Make the most of your very expensive education. Don’t select a major because it sounds fun or so you can be in classes with your best friend. If you don’t know what you want to do with your life, get some counseling. You may need to sit out for a few semesters until you do know.
Beware of credit cards for students. You will be amazed to find the major credit card companies hounding you to accept their credit cards. They are going to come after you with a vengeance. They will make you feel mature and responsible; they will offer you huge lines of credit, and they won’t require that you have a job or even that your parents cosign—or even know. They’ll try to convince you that you need a credit card just in case of an emergency or to build a good credit score. It will be difficult to say no, but I encourage you to do just that.
However, let me follow quickly by saying that if you are enrolled in college, you will have an easier time qualifying for your one and only all-purpose credit card. You need to begin building a credit history, and having one card that you manage responsibly can go a long way to giving you a good start.
IndexCreditCards.com maintains a current listing of all consumer credit cards available and categorizes them to make it easy to find the right one. Just keep in mind that when you have a credit card, you need to keep the account active by using the card regularly. You can make a $10 purchase twice a year on the card, then repay it quickly so your account returns to a $0 balance. That’s enough to keep it active, you out of debt, and your credit history positive. Never roll the balance from one month to the next, and never pay interest or fees.
And now for my warning: If you accept a credit card with a big credit limit, I can guarantee you will have lots of emergencies. They’ll come in the form of pizza and airline tickets, clothes and social events. Before you know it, you will have a huge debt, and then you’ll be in big trouble. If you don’t have the money to pay for the things you want, do not go into debt to get them. What makes you think you’ll have the money next month when the bill arrives? Instead, show a little discipline and maturity: save first and spend later.
Any kind of unsecured debt is a negative thing—whether it’s credit card debt or student loans. Never think of a loan as free money, as beating the system, or as getting away with something. You won’t get away with anything, and just thinking that will set you up for a life riddled by debt.
Your college years are the perfect time to practice frugality—another way of saying living below your means. You don’t have a family and young children depending on you. You have a lot of freedom to make your own decisions. It’s a great time to practice making the right choices.
Never spend all that you have. No matter how little you have, save something for later. Learn to be content with what you have. Look for ways not to spend money—don’t be obnoxious about it, just wise and conservative. The standards you set for yourself during these wonderful years will become the foundation for the rest of your life. When you graduate owing no one, your options will multiply. You’ll be free to get a job, serve on the mission field, travel, go to graduate school, and on and on. The possibilities will be endless, and the world will be your oyster.
If, on the other hand, you graduate with huge credit card debt and a mega-student-loan package for which payments will become due sooner than you think, you will feel weighed down and defeated. You’ll have no choice but to take the first job you can find. The carefree college years of fun and freedom will quickly fade as you face the daily grind of living from paycheck to paycheck in bondage to your creditors.
An education is a privilege, not a right. You are not entitled to attend the college of your choice. It is a privilege you must earn and something you should never take for granted. Because you will have made a huge investment in yourself, your degree will become something you value highly—not something your parents made you do.
If you leave college with a diploma and a pile of student loan debt, it could be worse. At least you have the degree. Millions of your fellow students owe huge sums for degrees they never received.
If you find yourself in the unfortunate position of having a load of student debt, take heart. You can conquer it provided you buckle down, face the monster, and put on your game face.
Whether or not you know the status of the loans you have, who the lenders are, or the terms of repayment, a few things are certain: You owe the money, the debt will not go away, the lender will find you, and the consequences for nonpayment will be severe.
The good news is that you can escape from student-debt prison. But first you have to learn everything about the confusing world of student loans.
Know Your Student Loan
Federal student loans. These loans are guaranteed by the federal government. That means the government will reimburse your lender if you default. But don’t think of default as an easy way out. If you default, the government will come after you aggressively and will show no mercy. There are currently fifteen federal student loan programs, and the plans are always changing. The most common are Stafford Loans and Perkins Loans.
Private student loans. These are loans made by banks and other financial institutions without government backing. If you default on a private loan, expect to hear from an aggressive guarantee agent.
Interest. Interest is the commission or “rent” you agreed to pay on the money you borrowed. If you have a loan with an interest rate of 6.3 percent, each year the holder of your loan will add 6.3 percent of your outstanding balance (principal) to the total amount you owe.
The method of adding interest can be confusing. If your loan says interest will be compounded daily, your loan holder will add 1/365 of 6.3 percent to the balance of your loan each day. If compounded monthly, the holder will add 1/12 of 6.3 percent at the start of every month.
Interest that builds up over time is called accrued interest. All loans begin accruing interest the moment the loan is funded. Who pays that interest is the critical issue.
Subsidized. If your loan is subsidized, the government pays the interest while you are in school and during times of deferment. Subsidized loans are granted based on need. Private loans are never subsidized by the government.
Unsubsidized. If your loan is unsubsidized, you must pay interest from the moment the loan is funded. But since the lender doesn’t require you to make payments while you are in school, every month the interest is tacked onto the loan balance. The interest becomes part of the principal—it is “capitalized.” Even though you are not borrowing more money, the balance is growing because of the interest. Unsubsidized loans are not need based. You don’t have to prove you need the money. If you can sign your name, you can get an unsubsidized loan in most cases.
There is no grace period on Parent Loans for Students (PLUS). The repayment period for a PLUS loan begins on the day after the final loan disbursement is made.4
How to Track Down Your Student Loan
Student loans are frequently passed from one financial institution to another without rhyme or reason. It’s easy to lose track of them if you’ve been in school or deferment for a long time. To find out about your loans—even if you are in default—contact the Federal Student Aid Center (http://studentaid.ed.gov/data-center; 800-433-3242) or the Department of Education’s Debt Collection Services Office (800-621-3115). If you have several loans, you could have as many loan holders.
When You Cannot Pay
If you’re in over your head and can’t make payments, don’t panic, but don’t hide either. It’s not the end of the world. You will survive, but you must act quickly to figure out your options.
Loan cancellation. There are circumstances under which you might be able to cancel some or all of your student loans. But don’t get too excited. It is not easy to qualify for cancellation. You have to meet specific conditions that depend on what type of loans you have and when you borrowed the money. You may be able to cancel some or all of your student loans if:
· You are dead. This will be of little consolation to you, but your heirs will want to know that your executor can request cancellation of all of your outstanding student loans upon your death. So can parents who took a PLUS loan for you.
· You became permanently and totally disabled after you got the loan.
· The trade school you attended went belly-up before you could complete the program.
· You serve the United States government wearing a uniform.
· You are a teacher serving certain needy populations, including low-income or disabled students.
· You do not teach but serve certain needy populations in certain capacities and certain professions.
· You perform community service in the Peace Corps, AmeriCorps, VISTA, ACTION, or other volunteer organization.
· You work in certain healthcare professions; you are a nurse or physician in your residency and/or you agree to work in certain areas where healthcare workers are needed.
· You work in law enforcement.
To determine if you qualify for cancellation, call the Department of Education’s Debt Collection Services Office at 800-621-3115. They will send you a cancellation application and instructions on obtaining necessary documentation.
Deferment. This is an authorized temporary postponement of your loan payments. Conditions under which you might be granted a deferment are:
· You return to school and study at least half-time.
· You are temporarily but totally disabled.
· You are unemployed.
· You are suffering economic hardship.
· You are enrolled in a rehabilitation program for the disabled.
· You are a parent with young children, have a very low income, or are on parental leave.
Deferments are never automatic. You must apply for a deferment directly with the loan holder. Interest continues to accrue during deferment. However, if you are deferring a subsidized loan, the government pays the interest during deferment. To obtain a deferment, contact your loan holder for an application, complete it carefully, and make sure you include all required documentation. You will have to prove your case. Follow up to make sure your request is processed correctly.
Forbearance. If you don’t qualify for deferment but are facing hard times, your loan holder may allow you to postpone payment or temporarily reduce your payments. This arrangement is called forbearance. A forbearance is easier to obtain than a deferment. But forbearance is less attractive because interest will continue to accrue while you are not making payments, no matter what type of loan you have. Forbearance is attractive only because it will keep you out of default. The cost of default is much more expensive than the extra interest that accrues during forbearance.
Student Loan Consolidation
This is when a lender combines many loans into a single new loan or refinances one loan with new terms. When you consolidate, you extend your repayment period and lower your monthly payments. Consolidation increases the overall cost of the loan repayment and is rarely advisable.
Most student loans may be consolidated, but there are some restrictions. You won’t be able to put your private loans into federal loan consolidation programs. A few private lenders, such as Access Group, have set up consolidation plans for private loans.
You might consider consolidation if you are so deeply in debt that you cannot keep up your monthly payments or if you can afford larger payments and want to refinance at a lower interest rate under more aggressive payment terms.
You should not consolidate if you can find any possible way to abide by your current terms. Consolidation is usually quite expensive over the long term. With most student loans, if you consolidate, you lose the subsidized feature. Also, you may lose the cancellation option if you consolidate now but later find yourself eligible under one of the cancellation provisions above.
You can consolidate your student loans only one time, so keep this in mind. The interest rate you have upon consolidation is the rate you will have for the duration.
Consequences for Not Paying
If you have not paid for at least nine months and have not arranged for cancellation, deferment, or forbearance, you are no doubt in default. If you do not reinstate your loans immediately, this is what you can expect.
Collection letters. If you have not yet received letters from your lender, don’t get too comfortable. Your lender is using every legal means to find you, including contacting your past employers and your relatives. They are checking utility company records and the IRS. You can run, but don’t think you can hide. It’s only a matter of time.
A report to credit bureaus. A bad credit report will negatively affect your ability to buy a house, get a job, or even rent an apartment in the future.
Garnishment of tax refunds. The IRS and state tax boards can and will intercept your income tax refunds through the Department of Education’s tax offset program. This is the most common method of collecting defaulted student loans.
Garnishment of your wages. Unlike other creditors who must first sue you to garnish your wages, the Department of Education and guarantee agencies are authorized to garnish your wages without a judgment.
A lawsuit. The Department of Education has forever to sue you because there is no statute of limitations. Once they have a judgment, they will move aggressively to attack all bank accounts and liquidate your assets, including your home and personal property.
Student Loans and Bankruptcy
Many students consider filing for bankruptcy to get rid of their student loans. Unfortunately—and despite the cries of bankruptcy lawyers who promise to clear the slate of all your debts—this may be more fantasy than reality. Congress has all but eliminated the ability to erase student loans through bankruptcy.
Have a Complaint?
Due to so many complaints, Congress finally responded by creating a student loan Ombudsman to help student borrowers resolve any complaints. Call 877-557-2575 or visit Ombudsman.ed.gov.