Student Loans Category
Dear Liz: In a recent column, you fielded a query from parents whose son took out student loans in the mother’s name. You wrote, “If your only income is from Social Security and you don’t have any other property a creditor can legally take, you may be ‘judgment proof,'” which means “a creditor wouldn’t be able to collect on a judgment against you.”
I understand this advice was meant for the mom. But could it equally apply to the borrower who benefited from the loan?
In my case, I will be 70 next year and my only income is Social Security. I owe about $80,000 in private student loans and about $80,000 in federal student loans. I can’t afford to pay either loan. Is there hope for me to get out from under this burden by being judgment-proof? Right now, I can’t afford to see a bankruptcy attorney. It is a struggle just to pay the rent and put some food on my table.
Answer: You can’t afford not to see a bankruptcy attorney. Federal student loan collectors have enormous powers to collect, including taking a portion of your Social Security check.
The concept of being “judgment proof” applies to collections of private student loans. Collectors for those loans may be held at bay if you are, indeed, judgment proof. But you really want an experienced bankruptcy attorney to review your situation to make sure that’s the case. Fortunately, many bankruptcy attorneys offer free or discounted initial sessions. You can get referrals from the National Assn. of Consumer Bankruptcy Attorneys at http://www.nacba.org.
Dear Liz: Our son went to an expensive private school and ended up with more than $100,000 in federal and private loans by the time he graduated. My wife cosigned a private loan for $25,000 for the first year, and that was the last we heard of any loans until he graduated with a degree in social services. After he was out of school for six months, we started getting phone calls asking for payment. Turns out he electronically signed my wife’s name to the next three years of his student loans.
Just to keep the creditors from harassing us daily, we pay the interest, which is about $1,100 a month and equals two-thirds of my wife’s take-home pay. (I’m disabled and can’t work; she’s 64 and planning to retire soon.) Our son hasn’t paid a dime on any of the debt and seems to think it will disappear if you don’t talk about it. He makes only $15 an hour. He still takes college classes and he thinks that because he is in school, he doesn’t need to pay anything. But the interest is still accruing monthly.
After my wife retires, how much of our Social Security checks can they come after? Can they come after our house? We will be living on Social Security only as we were never fortunate enough to have employers who offered pension plans. I sometimes feel that we will have no real retirement because of this situation. Any suggestions and advice would be appreciated.
Answer: What a mess. If nothing else, your situation can serve as a warning to other families tempted to buy educations they can’t afford. Taking on six-figure debt for an undergraduate degree, let alone one in social services, is nuts. Generally, students shouldn’t borrow more in total than they expect to earn the first year out of school. Also, most people should stick to federal student loans. Using private loans to pay for college is a lot like using credit cards, although unlike credit card debt, these variable-rate loans typically can’t be discharged in bankruptcy.
It’s not clear whether your son committed identity theft in signing your wife up for additional debt. Some private loans include a clause permitting the origination of subsequent years’ loans in addition to the original loan, said Mark Kantrowitz, publisher of Edvisors Network. You’d have to review the promissory note to see if that’s the case. If not and if your son forged your wife’s signature, she potentially could get released from the obligation — but most lenders will require the son to be convicted of identity theft first, Kantrowitz said.
“When given that choice,” he said, “most families choose to handle it internally rather than see the student convicted of fraud.”
The only good news here is that private student lenders have fewer powers to collect, compared with the federal government. There is a time limit on how long collectors can pursue you because private student loans are subject to each state’s statute of limitations on debt. (There is no statute of limitations on federal student loan debt, which means collectors can pursue borrowers indefinitely.) Private student lenders can file lawsuits against you, but they don’t have the power that federal student loan collectors have to withhold tax refunds and take a portion of Social Security checks.
If your only income in retirement is from Social Security and you don’t have any other property a creditor can legally take, you may be “judgment proof.” That doesn’t mean you can’t be sued, but a creditor wouldn’t be able to collect on a judgment against you. To find out whether that’s the case, talk to an experienced bankruptcy attorney familiar with the laws in your state.
None of this reduces your son’s responsibility for his debt. If collectors can’t come after you, they will start to pursue him in earnest for payment and he’ll learn just how wrong he is about student loan debt. But that’s his problem, and he at least has a working lifetime ahead of him to pay back what he borrowed.
Dear Liz: I went through divorce three years ago (after 20 years being together). I’m now 41 and broken financially and emotionally. I’m wondering if I should sell my small place and move in with my mother or stay broke and tough it out so I can keep my own place. I work part time, which was fine when I was married. Should I return to college and start a new “second half of life career”? I love my job and I’m torn.
What do you recommend? I can’t survive on my income alone and pay my bills. It’s never ending and I’m stressed beyond measure!
Answer: Recovering from a big setback such as a divorce is tough. But continuing to struggle in a situation that doesn’t work makes little sense. You need enough income to cover your bills and save for the future.
If you sell your place and move in with your mother temporarily, you could continue working part time in the job you love while getting a degree that would qualify you for a better, full-time job. You’ll need to make this investment carefully, since you’ll have only a couple of decades for the money you spend (or borrow) to pay off. A two-year degree might make more sense than a four-year course of study, for example.
You’ll want to pick a well-paying job in an industry that’s growing, and you should limit the amount of student loan you take on to no more than you expect to make your first year out of school. The Bureau of Labor Statistics has a list of the fastest-growing jobs, and their median salaries, at http://www.bls.gov/ooh/fastest-growing.htm. Your local community college probably also has a career services center where you could talk to counselors about your options.
Dear Liz: I am about to begin graduate school to get my master’s degree in nursing to eventually become an advanced registered nurse practitioner. I have Googled scholarships, grants, fellowships, and am coming up empty-handed. I am fearfully looking at student loans to finance my degree (it would be about $34,000). I am appalled at the rates on federal student loans, and private school loans or just personal private loans are even worse. Are there any other options that I haven’t discovered? I don’t have any school debt to date, so this is all very daunting.
Answer: Let’s start with the good news: Your education should pay off. Advanced registered nurse practitioners earn a median of $86,625, according to the salary tracking site Payscale. That compares with a median of $55,311 for a registered nurse. There are no guarantees in education, any more than there are in life, but you should be able to recoup the cost of your education fairly quickly.
To find scholarships, you need to know where to look. One place to start is the Fastweb database, which tracks scholarships, grants and other financial aid programs. Fastweb lists the National Student Nurses Assn., the American Assn. of Colleges of Nursing and a variety of smaller programs, many of which are school-specific, publisher Mark Kantrowitz said. If you’re willing to serve in a high-need area, you also can check out HRSA Nurse Corps Scholarship (at http://www.hrsa.gov/loanscholarships/scholarships/nursing/). The ROTC also offers scholarships.
“Many employers of nurses provide signing bonuses or loan repayment assistance programs to help new nurses repay their student loans, since nurses remain in demand,” Kantrowitz noted.
You’re smart to be cautious about education debt, since too many people have overdosed on student loans. However, student loans in moderation can help you get ahead financially if you’re borrowing for the right education.
Since there’s strong demand in your field and excellent pay, you shouldn’t shy away from federal student loans, which offer fixed interest rates and a number of consumer protections, including forbearance and deferral in the event you become unemployed. You would be borrowing far less than you’re likely to make the first year after you graduate, so your payments shouldn’t be burdensome. If you decide to pursue a career in public health or work for a nonprofit, you could qualify for federal student loan forgiveness after 10 years.
Dear Liz: I am a junior in college, and I might have to take out a loan my senior year because of financial cuts in the state. Is it really a bad idea to take a loan for college?
Answer: No, it’s not. You don’t want to overdose on education debt, but a student loan that helps you get the right degree could be the best investment you’ll ever make.
Someone with a college degree will earn on average $2.3 million over the course of a working lifetime, which is $1 million more than the lifetime earnings of someone with just a high school diploma, according to a study by the Center on Education and the Workforce at Georgetown University in Washington. College graduates also are more likely to stay employed. The unemployment rate for people with college degrees is about half of that for people with only high school diplomas.
Of course, you’ll want to make sure there is sufficient demand for your degree to justify the costs of your education, since all college degrees are not created equal. PayScale, a site that tracks salary information, has a report on its site called “Majors That Pay You Back” that monitors median starting and mid-career incomes for various degrees.
You’ve probably heard horror stories about people winding up with massive amounts of expensive student debt. In many cases, these scholars used private student loans, which have variable rates and lack the protections of federal student loans.
Limit how much you borrow. In general, don’t borrow more than you expect to make your first year out of school. Also, exhaust all available federal student loans before you consider a private loan. If you can work a part-time job or increase your hours to avoid a private loan, do it — but don’t work so many hours that you can’t complete your schoolwork.
A loan that helps you complete school would be far better than dropping out now, since the economic payoff from a college education requires that you actually get your degree.
A few months ago I gave a verbal spanking to a woman who equated college loans with handouts. She wondered why people didn’t just delay college for a year and earn enough money to pay for their entire education, as she did back in the day.
I pointed out that there weren’t many jobs available to newly-minted high school graduates that paid $60,000, which is about the minimum you’d need to pay for a four-year degree today.
Apparently my reader isn’t the only one having trouble keeping up with the times. A recent New York Times story quoted Virginia Foxx, a Congresswoman from North Carolina who heads a House subcommittee on higher education and work force training, saying she was bewildered why people went into debt instead of working their way through school the way she did.
Here’s what Times writer Ron Lieber pointed out:
But students nowadays who try to work their way through college without parental support or loans face a financial challenge of a different order than the one that Ms. Foxx, 69, confronted as a University of North Carolina undergraduate more than 40 years ago. Today, a bachelor’s degree from Appalachian State, the largest university in her district, can easily cost $80,000 for a state resident, including tuition, room, board and other costs. Back in her day, the total was about $550 a year. Even with inflation, that would translate to just over $4,000 for each year it takes to earn a degree.
A plucky, lucky few manage to get through college with no loans or parental support. But many of those who try wind up dropping out, unable to balance the work hours required with the demands of school.
If you’re one of those who may be stuck trying to pay your own way, Zac Bissonnette’s book “Debt Free U” can provide helpful guidance. If you’re a parent or a policymaker, however, you should check your views about the viability of kids’ working their way through college with today’s realities.
Dear Liz: My daughter co-signed a student loan for a friend who failed to pay the debt. Now my daughter cannot refinance her home because this loan appears on her otherwise very good credit reports. She has been getting calls from a collection agency.
I called the agency to discuss what it would cost to get her released from all liability regarding this loan, and they gave me an offer of $13,000 to satisfy the debt, which is now $35,000. I countered with $9,000, since the original loan was just $15,000, but they refused. My daughter is unhappy about paying anything, since her ex-friend is a gainfully employed attorney. Is it good business to pay what the collection agency is asking, or should I continue to negotiate?
“Lenders almost never settle for less than the outstanding principal balance of a defaulted student loan, so that may be the best she can get,” Kantrowitz said. “It may be the case that they are offering her a low settlement amount to release her from her obligation and then will go after her former friend for the remaining debt. When there are two borrowers on the hook, one borrower reaching a settlement does not cancel the debt. It merely releases that borrower from her obligation.”
Your daughter should have the settlement offer reviewed by an attorney, Kantrowitz said. The attorney should verify that the collection agency has the authority to settle the debt, and any agreement should list all of the loans involved.
“I’ve seen cases where a borrower thought she was getting a settlement of all the loans,” Kantrowitz said, “but the settlement was just for some of the loans.”
Ideally, the settlement agreement would require the lender to stop reporting the default and delinquencies to the credit bureaus, which would remove the stain from her credit reports. Not all lenders will agree to such a condition, Kantrowitz said, but removal would be better for her credit than simply having the debt reported as “satisfied.”
Also, the agreement should require that the lender provide a “paid in full” statement to your daughter as proof her debt has been settled, Kantrowitz said.
“She should keep this statement forever,” Kantrowitz said, “as defaulted loans have a tendency to resurrect themselves from time to time, [such as when] a bank reloads their database from old backup tapes [or] someone reviewing old records discovers the original promissory note.”
An attorney also could advise your daughter about taking further steps, such as suing the former friend for repayment or reporting the issue to the state bar, which has standards of professional conduct that may be violated by an unpaid debt.
Dear Liz: I read your response to the person questioning the rationale behind taxpayer-supported federal student loans. Your response was well written, but do you have any information about how much money is owed to the government for student loans and what percentage of all the loans are actually paid back in full? You mentioned that the government can garnish wages and Social Security checks and seize tax refunds, but does the government follow through and hold these people accountable? Does the government have personnel to do this or is this just a threat?
Answer: Millions of unhappy student loan borrowers can assure you the government’s considerable powers to collect defaulted student loans are much more than a threat. In addition to its own collection activities, the U.S. Department of Education also hires a number of private collection agencies to help recoup what’s owed.
As a result, the government collects more than 100 cents on every defaulted dollar once accumulated interest and penalties are included, according to the Education Department’s most recent report. On a net present value basis — when future collections are discounted back to today’s dollars — the government recovers about 80% of the defaulted debt.
Decades ago, it was possible to skip out on federal student loan debt without serious consequences. Public outrage over that fact led to much stronger collection efforts. That has resulted in the federal government recovering about $10 billion in defaulted student loan debt every year, said Mark Kantrowitz, publisher of the FinAid.org and FastWeb financial aid sites.
Dear Liz: I am the single mother of four daughters, including one who has a serious heart condition that causes $10,000 to $30,000 in out-of-pocket medical expenses each year. These medical bills have caused me to file bankruptcy twice, but the bankruptcies have not wiped out my student loans.
I have qualified for minimum payments and deferments a couple of times but have been on a payment schedule the vast majority of the time. The interest grows faster than I can keep up, and I keep getting deeper into the hole. I am now 51 and have over $45,000 in student loans. After a year and a half of being unemployed, and depleting my retirement funds to pay for COBRA health coverage, I finally found a job — I am making $30,000 a year working for a nonprofit as a social worker — but I still can’t make any progress on these loans.
The only program I can find is one in which I have to make payments, no matter how little I have, for the next 10 years if I continue to work for only nonprofits. No one can explain to me why all the money I have already paid, plus only working for nonprofits, plus my volunteer service over the years, doesn’t count for something. I am holding my breath hoping you might have some suggestions to share.
Answer: The Public Service Loan Forgiveness Program you discovered is actually a fairly recent development. Before 2007, people in your situation didn’t have an option to have their balances erased.
It’s unfortunate you didn’t know about the program earlier, since if you’d signed up when it first became available you could be partway through your required payments by now and only a few years away from having your balance forgiven.
But better late than never. The program is ideal for those who have big federal student loan debts and small incomes. If you sign up for the “income-based repayment” option, your monthly payments will be limited to 15% of your “discretionary income,” defined as the amount of your income over 150% of the poverty line for your family. Since the poverty line for a family of five is $27,010 in 2012, your required monthly payment may well be zero. Even if your household is smaller, payments under the program typically are less than 10% of your gross income, said Mark Kantrowitz, publisher of the FinAid and Fastweb financial aid sites.
If you didn’t have a public service job, your required repayment period would be 25 years — so you are receiving some credit for your service. Public service jobs include, among others, those in public safety and law enforcement, military service, public health, public education, public interest legal services, social work in public or family service agencies and jobs at tax-exempt 501(c)(3) organizations. Government employees also are considered to have public service positions, although interestingly enough, time served as a member of Congress doesn’t count.
Dear Liz: Your answer to the parents with $200,000 in student loans for their daughters’ educations was interesting — and cautionary. I wonder, since they mentioned refinancing their home, why not explore using their equity by selling the home and renting?
Depending on the amount they have in the home, they might be able to fund more retirement as well as reduce the loan balance. Also depending on the size of the mortgage, they might be able to rent for the same monthly amount or less. Presumably, their house was big enough for four, but now they could “live well with less.” And be more flexible.
Answer: The writer did mention getting a new mortgage, but didn’t say whether it was a refinance or a modification, or whether the couple had any equity in the home. Although a conventional refinance requires considerable equity, a mortgage modification or a refinance made through the government’s HARP program would not require that they owe less than the house is worth.
If they do have equity, it would be worth considering using at least some of it to alleviate their debt burden and supplement their retirement funds. If they don’t have equity, selling the house might still be an option if they could substantially reduce their living costs. Given that their income plunged by more than half, they would be smart to cut their expenses as far as possible to free up money to save for retirement and pay their debts. Taking such a big step down in their lifestyle might be painful, but it’s often to better to do so now rather than risk being old and broke.