Student Loans: Managing Your Debt and How New Laws May Affect You
It’s the time of year when college freshmen are packing up and moving into their college dorms. It’s also the time when recent graduates are realizing that they’re out of the college world and face finding a job and beginning to pay off any debt they’ve accumulated.
Stories in the news lately also have many wondering if the student loan bubble is the next to burst and what new legislation may do about it.
Below are some common questions and some helpful tips to assist in navigating through this sometimes overwhelming topic.
I have to face it – I can’t afford to pay for college on my own, so I know I’ll have to take out loans to cover it. I’ve heard so much discussion about the difference between private and federal student loans – what’s the difference?
First, know that you’re not alone. The majority of students will have to take on debt to be able to attend college – which most see as a requirement for earning a living wage nowadays. That being said – here’s how the differences break down:
Federal Student Loans:
These are loans backed by the Federal Government and are usually the way most students will want to go for several reasons – the biggest of which is that the interest rate on these loans is fixed – which means the rate you get when you take out the loan is the rate you will always pay. In addition, these loans are usually easier to get. Repayment is also different for federal loans as they can be stretched out for a longer time with lower monthly payments. Also new legislation caps the amount of the payment to a percentage of a borrower’s monthly income. There are three primary types of federal loans – (1) PLUS loans – taken out by the parent for the child’s education; (2) Perkins Loans – for students with exceptional financial need, and (3) Stafford Loans – taken by most students for both graduate and undergraduate loans the amount of which is based on your level of school.
Private Student Loans:
These are loans through private banks or other financial institutions. Typically these are harder to get and have variable interest rates. This can be tricky because some loans (though generally not most of them) may appear at first blush to have a relatively low interest rate. The catch comes when the interest rate resets quarterly based on the prevailing interest rates banks charge each other. These loans also usually do not offer the flexibility with payment terms a federal loan does either so the payment time frame can’t be extended to get you a lower monthly payment.
I graduated in the spring and have been unable to find work. I know I have to start paying back my student loans, but I’m not sure I’ll be able to. What options do I have?
Since you’re a recent graduate, you’re likely not THAT behind on payments. As long as that’s the case, you will likely want to investigate either deferring your loans or placing the loans into forbearance.
Basically deferring a loan allows you to postpone the payments of the loan because of some circumstance (returning to school, hardship or unemployment). During the time your loans are deferred the interest will not accrue. As long as you and your loan meet the specific criteria and YOU ARE NOT MORE THAN 270 DAYS LATE you should qualify for a deferment. Forbearance of loans allows you to temporarily stop making payments or reduce the payments. The catch with forbearance is that interest WILL accrue – so that may work against you. As with deferments, your eligibility will depend on the type of loan you have.
You may also want to investigate Income Based Repayment plans which would be appropriate when you have a large amount of debt and your income is modest. These plans will cap the monthly payment amount to around 15% of your income. This amount will change though, based on your income and the size of your household.
My job was reduced to a part-time status two years ago and I’ve recently lost the job completely. I haven’t made payments on the loan in over a year. Is there anything I can do?
You are officially in default if a payment due monthly has not been made for 270 days. Essentially you have two options – consolidation and loan rehabilitation.
Consolidation is basically lumping all of your loans together and entering a new payment agreement. Once you consolidate your loans, you start at the beginning again, becoming eligible for new loans, grants, and even deferments. You will no longer be listed as currently in default on your credit records, and no longer subject to tax intercepts, garnishments, or other collection efforts.
You must be careful about consolidating with a private lender though, because you won’t get the same protections (deferments, options for payment plans, etc.) that you would have with a federal consolidation.
Loan rehabilitation is another way to take the loan out of default.
To qualify for rehabilitation, you have to make nine monthly payments within 20 days of the due date during a period of 10 consecutive months. The 9 out of 10 rule basically allows you to miss your payment one month, but still be eligible to rehabilitate. The Perkins program has separate rules. To rehabilitate a Perkins loan, you must make nine payments in a nine month period. The entity holding the loan must attempt to find a lender to purchase the loan after you have made the required payments.
Once rehabilitation is complete, the loan is removed from default status and you are eligible for new loans and grants. The default should be removed from your credit record. In most cases, however, the other negative history will remain until it gets too old to report.
Can a student loan debt be forgiven or will bankruptcy cancel the debt?
To have a loan debt forgiven you will need to show:
- you attended a school that closed
- you didn't get a refund when it was due
- your school falsely certified that you’d benefit from the education and you don't have a GED or high school diploma
- you work in certain occupations after graduation (like teaching or some public service jobs), and
- you are disabled or die.
The only way a student loan debt can be included in a bankruptcy is to show undue hardship and that the debtor has made a reasonable attempt to pay the debt. New laws enacted in 2005 apply this test to both private and federal loans.
What are the most recent changes regarding student loan legislation?
Congress reached a deal in late June to prevent the rates on federal student loans from doubling. Good news for sure – but the rates are only good for one year. This time next year we will be talking about this again.
- This is a painfully complicated process and you can’t rush through it. Take your time and read EVERYTHING carefully. Get help from your college financial aid office if needed.
- Parents who are obtaining loans for their children or who are co-signing loans for them MUST understand that you are also taking on additional debt. This now affects YOUR credit as well.
- Only borrow what you need. Many people get into trouble because they borrow more than what is needed for normal expenses like tuition, room and board. If you are able to pay for books on your own – do it. It lessens the burden in the long run. If you find you have borrowed more than you need – RETURN IT!
- Investigate any and all grants and scholarships – this is free money and will reduce the amount you have to borrow. If it’s out there - take advantage of it.
As always, for any questions involving finances, student loans or debt collection matters, contact the Allegheny County Bar Association’s Lawyer Referral Service at (412) 261-5555 or visit www.PittsburghLawyerFinder.org.