When Angela Moore looks into her future, she sees checks for
$500, $147, $280 and $250 piling up like leaves in a forest. Those
are the amounts she could be paying every single month on her four
student loans, which total $92,000, for the next several decades.
If she postpones payments, the amounts she owes will go up. If she
skips them, she could ruin her credit and end up in court.
Moore, 26, graduated with a bachelor's degree from the
University of Hartford in 2009 with $25,000 in federal student
loans and $67,000 in private loans. She devotes about half of her
paycheck to those bills and resorts to credit cards to cover other
expenses. Says Moore, the first in her family to graduate from
college, "It's heartbreaking to have a college degree and not be
able to pay for normal things because I have to pay student
loans."
Moore works at an orthopedic surgeon's office, the same job she
had in college. She would like to move on someday but can't afford
to make less than her current wage of about $18 an hour. Nor does
she see an obvious way out of her predicament. "If you're in that
much debt and have a house or car, you at least have something you
can give back. I have a piece of paper. I have nothing to give
back."
Meet the young and burdened. Of borrowers who graduated from
four-year colleges in 2008, 10% walked away with $40,000 or more in
student debt, almost three times the number of students who
borrowed at that level in 2000, according to the Project on Student
Debt, an advocacy group. The default rate for students who entered
repayment between fiscal year 2006 and fiscal year 2007 was 6.7%,
the highest since 1998.
You'd think bankruptcy would be a solution to massive student
debt, but for most people, it is not an option. You must
demonstrate to a judge that repayment would cause "undue hardship,"
a term interpreted by some courts to mean the "certainty of
hopelessness," according to Deanne Loonin, of the National Consumer
Law Center. This strict standard applies to both federal and
private student loans. Proposed legislation in Congress would
change that standard for private student loans, making them
eligible for discharge under the more lenient rules that apply to
credit-card and other consumer debt.
Meanwhile, federal loans offer programs that let you reduce
payments or even qualify for loan forgiveness. As for private
loans, some lenders are offering deals to borrowers rather than see
loans go south.
Cut a deal with a lender.
A few years ago, lenders were rushing to offer private loans to
students, including those who were less than creditworthy. Now,
borrowers who couldn't afford the loans in the first place are
defaulting in droves, says Joshua Cohen, a Hartford-based lawyer
who specializes in debt. "The industry is either going to take a
bath or start coming after people."
Some lenders hope to avoid both scenarios by offering
interest-only repayments or other arrangements that lower payments
for a time. "It does us no good to have a customer with a loan he
or she is unable to repay," says Patricia Christel, of Sallie Mae,
the giant student-loan company. Check your promissory note to see
whether it includes such provisions. "It's very case-by-case," says
Loonin. If it does not, try to negotiate a plan with your
lender.
If you don't reach an agreement, ask the lender for forbearance,
in which you make no payments at all for three-month increments,
usually for no more than a year (interest continues to accrue).
Lenders are less willing than they once were to sign off on these
deals, but they may do so if they believe the break will get you
back on track. "The important message is, contact your lender
sooner rather than later," says Tim Ranzetta, of Student Lending
Analytics.
With federal loans, you can be past due for months before going
into default. With private loans, you generally fall into that
category as soon as you miss one payment. A collector will start
calling, and eventually a third-party collection agency will take
over the loan. (The Fair Debt Collection Practices Act protects you
from abusive collection practices. See
6 Ways to Fend Off Debt Collectors
.)
Unlike the feds, who have the authority to tap your resources,
private creditors must go to court to collect debts. "Until then,
there's nothing they can do," says Cohen. Defaults are subject to
your state's statute of limitations, typically six years. If you do
get sued and lose, the creditor can garnish your wages, put a lien
on your house and wipe out your bank account.
Pick a plan from Uncle Sam.
Federal loans, which include Perkins loans, Stafford loans and Grad
Plus loans, provide more options. (The Perkins loan repayment
provisions differ somewhat from the other two; call your school for
details.) For Staffords and Grad Plus loans, the
standard plan
gets you out from under after 120 equal monthly payments over ten
years. If you can't afford those payments but expect to have a
higher income in a few years, you can choose the
graduated plan,
through which you make lower payments in the first few years and
higher payments later over the ten-year span. Because you pay less
at the beginning, you pay more interest overall.
If you owe at least $30,000 in federal loans, consider the
extended repayment plan,
which lets you stretch monthly payments as far out as 25 years, for
lower monthly amounts but at a higher cost. Or you can consolidate
your federal loans through the federal Direct Loan program and
extend your payments to 12 to 30 years, depending on the amount you
owe. (For details, see
www.loanconsolidation.ed.gov
.)
Borrowers whose federal debt outstrips their annual income
should look into the
income-based repayment plan,
which is "like gold" for those who qualify, says Edie Irons, of the
Project on Student Debt. This program, which improves on two other
income-based programs, can reduce your payments to as low as
zero.
You probably qualify if your total debt exceeds your annual
income (see the calculator at
IBRinfo.org
). After 25 years, any remaining debt is forgiven; you owe tax on
the forgiven amount. If you enter the income-based repayment plan
and then get a big bump in salary, your payments from that point on
are calculated according to the standard plan.
Cops, public defenders, public-school teachers and others
working full-time in the public sector qualify for cancellation of
any remaining debt after 120 payments, made on or after October 1,
2007. To get this deal, your loans must be with the federal Direct
Loan program, as opposed to the now-defunct program (known as FFEL)
offered by private lenders. You can consolidate FFEL loans into the
Direct Loan program. The forgiven amount is tax-free.
You have the right to defer federal-loan repayments for up to
three years if you are unemployed, experiencing economic hardship,
attending school at least half-time or serving on active duty in
the military. The feds pick up the interest during the deferment on
subsidized loans but not on unsubsidized loans. Call your lender
for details.
If deferment isn't an option, ask your lender for forbearance.
With a federal loan, you can suspend payments for up to three
12-month periods. Depending on the amount you earn and owe, you may
be legally entitled to this deal. If not, ask anyway: It's in the
lender's best interest to give you time to get on your feet.
Interest accrues during forbearance.