Few options for massive student loan debt
Dear Liz: I really screwed up. I decided I wanted to go to a private college and am now saddled with $145,000 in private student loans and $30,000 in federal student loans. I am working on my master’s degree and am about to have a child. I’m looking at payment options for when I graduate and am very scared for my family’s future. I can’t afford to pay $1,000 or more a month in student loans and I really want to buy a house so my family can have a home. What should I do?
Answer: You may have to give up your dream of homeownership. Maybe not forever, but probably for a long while.
The amount of debt you took on is staggering. In general, people shouldn’t borrow more for an education than they expect to make the first year out of school — and there aren’t many jobs that pay $175,000 at entry level.
Your options are few. You typically can’t erase student loans in bankruptcy, and there is no statute of limitations on the debt, meaning your lenders can pursue you until you’re dead.
You may be able to qualify for forgiveness on your federal student loans. People who work in public service jobs for 10 years can have the remaining balance forgiven, while those who work in other jobs can get forgiveness after 25 years. For more, visit FinAid.org and search for “loan forgiveness.”
In any case, you should pay only the minimum on your federal loans and put as much as possible toward the private student loans, which have variable rates and less flexible repayment options. You’re learning this too late, but paying for college with private student loans is a lot like using credit cards, except you don’t have the possibility of wiping out the debt in bankruptcy.
Student loan debt may limit mortgage
Dear Liz: I recently completed a master’s degree in counseling and am now paying student loans. I am punctual and consistent in my payments. How does having a $30,000 outstanding student loan look to home lenders? We recently sold our home and are planning to purchase another.
Answer: Student loans are installment loans that typically have a positive effect on your credit scores, but your payments on these loans may affect the size of the mortgage you can get.
Many lenders these days have returned to traditional lending standards and don’t like to see total debt payments exceed a certain portion of your income (typically 36%, though some go as high as 43%). If the minimum payments on your loans and the mortgage on your desired home would push you over the lender’s limit, you may need to consider alternatives, such as a cheaper house.
That’s probably a smart course anyway, since taking on too much debt can make it tough to meet your other goals. A big mortgage, plus all the related costs of homeowning, could prevent you from saving enough for retirement, emergencies or fun stuff, like vacations.
Wrestling with student loan debt? Know your forgiveness options
Dear Liz: I went to a very expensive art school at 17 and my education was funded totally by loans. I take full responsibility for what I owe, but because I had to defer payments a number of times throughout the years I now owe about $73,000 and I don’t know how I will ever get out from under this debt.
I am a 38-year-old mom at this point with two small kids and I am saving for their education. There are programs to help young, single people but nothing for people like me, and it is frustrating. Why aren’t there any services to help old people like me who want to pay but need help because we have other financial responsibilities at this point?
Answer: By “programs to help young, single people,” you’re probably referring to the various forgiveness programs that reduce or erase federal student loan debt when the borrower teaches in inner-city schools, serves in the military or volunteers for the Peace Corps, among other options.
But Congress recently created new possibilities for federal student loan forgiveness. People in public service jobs — teachers, police officers, firefighters, social workers and others — can have their remaining debt erased after 10 years of on-time payments. Even people who don’t work in public service can get forgiveness after 25 years.
The people most likely to benefit from these programs are those with low incomes and high debt who opt for income-based repayment plans, which cap payments at 15% of your monthly discretionary income.
The financial aid website FinAid.org has information. (The recent student loan overhaul will reduce required payments to 10% of monthly discretionary income and allow loan forgiveness after 20 years, but only for students who take out new loans after July 1, 2014.)
If you have private rather than federal student loans, forgiveness is not an option and your choices for affordable loan plans are fewer.
Either way, you can’t afford to continue ignoring this debt. Student lenders have strong powers to collect. They can attach your wages, seize your tax refunds and even go after future Social Security payments.
You must figure out a way to pay this bill, even if it means saving less or not saving at all for your children’s educations.
This college education may not be affordable
Dear Liz: My daughter is a sophomore at a very expensive college, and federal loans cover only $6,500 of her costs. She has taken out two private student loans with me as a cosigner, one at 6.5% interest and the second at 9.9%. I need $15,000 more for this semester’s tuition. I am an unemployed single mother but cannot get much financial aid. She is an above-average student but cannot find any awards or scholarships.
Answer: Your daughter may need to look for a less expensive education, since it appears neither of you can really afford the one she’s getting.
Unlike federal student loans, private student loans tend to be expensive, with variable rates and less flexible repayment options. Borrowers can easily find themselves taking on far more debt than they will be able to repay after graduation, yet this debt typically can’t be discharged in bankruptcy — it can follow your daughter for life.
A better option, if you must borrow, is for you to take out PLUS loans. These are federal loans for parents and graduate students that allow you to borrow the difference between your daughter’s college costs and any financial aid, including federal student loans, she gets. The rates are fixed at 8.5% or less.
PLUS loans do require a credit check. If you don’t pass — you’re 90 days or more overdue on a bill or you’ve had a bankruptcy in the last five years, for example — your daughter’s eligibility for student loans would be increased somewhat to help compensate.
But both of you should be thinking about alternatives. You really shouldn’t borrow money if you don’t have a way to pay it back. When you’re unemployed, taking on $15,000 a semester in debt is pretty foolish.
If her school won’t reconsider her aid package in light of your unemployment, she should be researching less expensive schools to which she could transfer her credits.
Student loans in collections? Here’s where to find help
Dear Liz: I’m in default on my student loans.
I don’t know how many there are, I don’t know who owns them, and I don’t know how to start paying them off. I’ve had a debt-collection agency threaten to cut my throat and to hurt me in other physical ways if I didn’t pay.
I’ve talked to the Department of Education, which doesn’t seem to know who owns the loans because the secondary lenders have since turned all the debt over to collection agencies.
I’d like to begin repaying my loans, but I have no idea who to pay and I certainly don’t want to pay the company that threatened me with violence.
This is killing my credit. What to do?
Answer: At the very least, you should complain to the Federal Trade Commission about this rogue collector. Any kind of harassment, including physical threats, is forbidden under the Fair Debt Collection Practices Act. You can find the FTC’s guide for consumers HERE.
You can use the resources at FinAid.org’s Lost Lender to try to track down your lenders. The FinAid website recommends two services to find loans, both based on the National Student Loan Data System, said Mark Kantrowitz, the site’s founder.
Another possible source of help, Kantrowitz said, is the financial aid office at your college.
If you have any federal loans, you can dig them out of default by making nine out of 10 consecutive on-time voluntary payments, Kantrowitz said. Then you’ll be able to consolidate them into the Direct Loan program. This will also remove the default from your credit history.
After you consolidate those loans, Kantrowitz suggests switching them to an income-based repayment if you can’t afford to pay the full amount due under standard repayment. For more tips, CLICK HERE.
If you run into a wall, either finding your loans or working out repayment, contact the Federal Student Aid Ombudsman or (877) 557-2575.
If you have any private student loans, contact the lenders directly about working out a repayment plan, Kantrowitz said. Repayment options for private loans are more limited than those for federal loans.
