Ask Liz Weston

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.

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.

The average family starts saving for college as their child begins preschool, but only 29 percent say they are on track to reach their savings goal, according to a recent survey by student lender Sallie Mae.

Families saved an average $2,676 annually for their children’s education, for a total of $13,827, the survey found. That represents 3.6 percent of their annual household income. However, households earning under $50,000 annually set aside far more than that, saving 7.5 percent of their income, annually, for college.

The survey was conducted from March 20-April 17, 2009, by the Gallup Organization, which conducted more than 1,200 interviews by phone with parents of children under age 18. Some of the survey’s other findings:

• “529” college savings plans are gaining in popularity.  Parents with children under age 7 were twice as likely to use 529 plans (43 percent) compared to parents of teens (20 percent.) Overall, 33 percent of parents used these plans.
• 66 percent of parents said if employers matched contributions that would encourage them to save for college. Another motivator? Parents said a tax benefit (44 percent) would help them save more. (And I can’t leave this one out: 25 percent of parents said a shopping rewards program would also motivate them to save more for college.)
• Families in the Northeast saved the most with an average of $15,846. The West was a close second at $15,589. The South had an average savings of $13,722, and the Midwest had the lowest with an average of $9,693.

College costs are still increasing faster than inflation, so families who want their kids to get a head start in life should be contributing to college savings plans if at all possible. Anything you save could help reduce your child’s future debt load. For more, read:

• If you can save for college, you should
• College plans for the rich, poor and in-between
• Cram for college costs in 5 years or less
• Can colleges keep promises of aid?

Dear Liz: My question is whether I should file for bankruptcy or try to settle my debts.

I owe about $50,000 on credit cards, $120,000 in student loans and $701,000 on my home. I have stopped paying on my credit card debt because my issuers increased their rates and were unwilling to work with me, so I am unable to pay even the minimums they now require. My mortgage is being modified, although it has been four months since the process started and I have received a notice of default, which is the first step in the foreclosure process.

I am unsure what to do, but I do know I don’t have anywhere else to go. I have to provide a safe haven for my children and disabled parents. What’s your advice?

Answer: You need to talk to a bankruptcy attorney, pronto.

That doesn’t mean filing for bankruptcy will necessarily be the right choice. You won’t be able to eliminate your student loan debt. If your income is too high, you’ll be put on a payment plan instead of being able to erase the credit card debt.

But it may well be the best of bad options. Debt settlement is typically available only for credit card debt, and you would need a sizable lump sum of cash to persuade your issuers to negotiate.

And even if you get a mortgage modification, your housing problems may not be solved. Borrowers too often agree to a modification of a debt that never has been, and never will be, affordable. That’s why so many mortgage modifications have resulted in default and foreclosure.

What you need is an educated third party to look at your finances and explain your options to you.

photo credit: Lensaku

So you just graduated into the worst recession since the Great Depression with a boatload of debt and no job.

My question is: why are you still here?

There will never be a better time in your life to travel the world than right now. You’ve got months until your first loan payment is due, the world is on sale thanks to the downturn, and you’re young enough that hostels, third-class railway cars and street vendor food don’t scare you.

So go.

Got no money? Get a crap job for a couple of months, stock shelves or flip burgers or whatever, and then go. Pick regions where your money goes farther–South America, Indonesia, India. You may well be able to live for far less than you can at home, while expanding your horizons, meeting new people and having the adventure of a lifetime.

Then go. Just go.

You have the rest of your life to get ahead, climb the ladder, pay the bills, work the overtime. You have this special time, right now, to wander the earth while you’re young, curious and healthy. Your mind is open to new experiences and new people. It’s time to make the memories and friendships that may last the rest of your life.

So. Just. Go.

It’s kind of a wonderful dilemma: there’s so much personal finance writing going on that it’s easy to miss some great stuff. Here are some picks for what I liked in the past few days:

1. Want to find more bargains? Use Twitter. Writer Melinda Fulmer offers some great folks to follow to find coupons, deals and freebies. CLICK HERE to learn more.
2. Instead of a mental health day, the New York Times’ Ron Lieber took a fiscal health day and tackled a laundry list of financial tasks. CLICK HERE to see what he accomplished as well as some great suggestions and links.
3. Social networks are a great way to share information, but Smithee at Consumerism Commentary raises a good point that broadcasting the fact you’re on vacation may not be such a great idea. CLICK HERE to read about the perils.
4. If you’re struggling with massive debt and have questions about what to do, you might want to check out Steve Rhode’s site GetOutofDebt.org. I met Steve back in the days when he ran MyVesta, a consumer credit counseling service, and he has deep knowledge of the world of credit, debt repayment, debt settlement and bankruptcy. We don’t always agree, but I think he gives straight answers based on his considerable experience rather than the dogma, cheerleading or press-release twaddle you might find elsewhere. CLICK HERE to start checking out his site.
5. I constantly tell people not to borrow more for an education than you expect to make your first year out of school, but researching that figure can be tough. A new peer-to-peer private lending service, People Capital, is attempting to estimate your future earning power via a new calculator in beta. The site hopes this Human Capital Score will fill in for folks who have no credit score to determine who’s a good risk for repaying a loan and who’s not. CLICK HERE to read a Smart Spending blog entry about the calculator, then follow the links.

How do you know if a graduate degree is worth the cost? I’m one of four experts who take a shot at answering this question at the New York Times’ Room for Debate blog.

My take:

In some fields, such as business or engineering, a graduate degree typically boosted income by more than enough to justify the cost. In others — the liberal arts and social sciences, in particular — master’s degrees didn’t appear to produce much if any earnings advantage.

If you have to borrow to pay for extra schooling–as the majority of graduate students do–you should research your likely earnings your first year out of school and use that as your guide for how much to borrow.

For more, read:

• What is a master’s degree worth (link to NYT.com)
• How much college debt is too much?
• 4 fixes for the student loan trap
• How did student loans get so sleazy?

Dear Liz: You recently mentioned a study by Alan Krueger of Princeton University and Stacy Dale of the Mellon Foundation. You correctly state the main result of this study without reporting an important secondary finding that contradicts your advice. Yes, Krueger and Dale found that students who were accepted at a highly selective college but chose to go elsewhere did just as well in life as those who went to a highly selective college.

But they also reported an important exception: students from lower-income families, whose earnings were substantially greater if they went to the highly selective college. Since students from lower-income families are precisely the students most likely to need loans to attend college, it follows that for them taking out loans to attend a highly selective college would be a good investment.

Do you think Supreme Court Justice Clarence Thomas or nominee Sonia Sotomayor would be where they are now if they hadn’t accepted the financial and academic challenge of attending highly selective colleges?

Answer: You make a good point about the study, but it doesn’t fit today’s financial aid realities. The person who wrote asking for advice had been accepted to her “dream school” but faced the prospect of borrowing to pay for most of her school expenses. That indicates either that she was not from an economically disadvantaged background or that it wasn’t an Ivy League school that accepted her.

Many Ivy League schools now waive tuition entirely for low-income students, and others provide enough in grants to minimize the need for loans, particularly the pricey private loans that she would have to tap once she exhausted low-rate federal loans.

So my advice remains the same. Rather than borrow $200,000 to pay for an undergraduate business degree, with the likely prospect of borrowing more to get her MBA, she would be better off pursuing an affordable undergraduate education and then borrowing to attend a “dream” graduate school. Sacrificing to attend college is one thing. Lashing yourself to a lifetime of expensive debt is quite another.

Dear Liz: I was disappointed with your answer to the person who wanted to settle student loan debt for less than what he owed, even though he had a windfall that would allow him to pay the balance in full. This person presumably benefited from the education that these loans provided and now could afford to pay them back. Why did you offer advice that would allow him to avoid that responsibility?

Answer: As you’ll recall, the writer originally borrowed $50,000 in federal student loans almost two decades previously but had received an annual forbearance ever since. Forbearance indicates the writer suffers some kind of ongoing, demonstrable hardship such as poor health, partial disability or inadequate income.

The unpaid balance had swelled to $155,000 because of interest and fees. Although the windfall would allow him to pay the debt in full, it wasn’t clear whether the problem that caused the need for the forbearance had disappeared. If not, then conserving some of the windfall might be a prudent option.

There are those who believe that paying the full balance of any debt is a sacred obligation, no matter how much damage such an action may do to a person’s financial future. Others would allow that there are shades of gray and that past and future obligations must be weighed against each other.

In any case, the writer isn’t going to be able to settle the debt for pennies on the dollar, as he might be able to do with other bills, such as credit card debt. Settling student loan debt is tough, because the Department of Education has many tools to force borrowers to pay.

As the previous column noted, what the department might be willing to do is forgive some of the accumulated interest and fees, according to student loan expert Mark Kantrowitz of FinAid (www.finaid.org).

Kantrowitz’s advice was to find out how much the department paid to acquire the loan when it was consolidated, offer to split the difference between that figure and the current balance, and then accept the department’s counteroffer.

If you still have variable rate federal student loans and haven’t consolidated, your procrastination is about to pay off.

Rates on Stafford and PLUS loans originated before July 1, 2006 are about to fall to historic lows, according to Mark Kantrowitz of FinAid.org. On July 1 of this year, rates on these loans will drop almost two percentage points. The new rates:

* Stafford Loan (In-School/Grace Period): 1.88%
* Stafford Loan (Repayment Period): 2.48%
* PLUS Loan: 3.28%

Borrowers who consolidate after July 1 will lock in the following rates for the life of their loans:

* Stafford Loan Consolidation (In-School/Grace Period): 2.00%
* Stafford Loan Consolidation (Repayment Period): 2.50%
* PLUS Loan Consolidation: 3.38%

So if you have these loans, and haven’t consolidated, get your application in to the Federal Direct Loan Consolidation program after July 1. Procrastinating any more doesn’t make much sense. You can wait a year until to see if rates drop lower, but that isn’t very likely, Kantrowitz notes.

If you’ve got a lot of debt, consider choosing a longer loan term when you consolidate (15, 20 or 30 years instead of 10) to lock in these remarkably low rates. Use the money you save to pay down other, higher-rate debt.

These rates don’t apply to Stafford or PLUS loans made after July 1, 2006, or to Perkins loans, all of which are fixed. You don’t want to include Perkins loans in any consolidation, Kantrowitz notes, since you lose the subsidized interest and forgiveness benefits these loans provide.