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College

Monday’s need-to-know money news

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Today’s top story: Electric scooter haters could be missing a chance to save money. Also in the news: Picking the wrong money goals, how and when your student loan interest rate may change, and 4 essential tips when teaching young kids about finance.

Are Electric Scooter Haters Missing a Chance to Save Money?
Better for the environment and your wallet?

Are You Picking the Wrong Money Goals?
What you should be focusing on.

Know How and When Your Student Loan Interest Rate May Change
Don’t be caught by surprise.

4 Essential Tips When Teaching Young Kids About Finance
Lifelong lessons.

Is Debt-Free College Really Possible?

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A reader in her 70s once asked me why kids today don’t do what she did: Work for a year after high school and save up enough to pay for a bachelor’s degree.

If you just busted out laughing, then you’re familiar with how high today’s college costs are compared with five or six decades ago. Even with substantial financial aid and one heck of a work ethic, it’s hard to imagine a high school graduate earning enough in a year to pay for four (or usually five or even six) years of college. The average annual sticker price for a public university is close to $20,000, while private schools average over $40,000.

In my latest for NerdWallet, a debt-free college reality check.

Settling co-signed student loan debt

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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?

Answer: That sounds like a pretty good offer, said financial aid expert Mark Kantrowitz, publisher of the FinAid and Fastweb websites.

“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.

Kids, ignore your elders: college is worth it

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CollegeOld folks can offer wisdom about many things, but you might not want to trust them when it comes to 21st century economics.

I’m hearing too many older people espouse the view that college degrees aren’t as valuable these days because more people have them. They need an Econ 101 review. It’s true that the price or value of something may drop if the supply increases—but only if the demand for that thing does not increase as well.

In the case of college degrees, demand has risen dramatically. Part of that is because so many jobs that didn’t require degrees have been made obsolete by technology or been outsourced overseas. (When Grandpa says he knows lots of people who made good livings without post-high-school training, ask him what they did—and if those factories and union jobs still exist.)

But employers are pickier as well, using college degrees as a screening device for jobs that in the past didn’t require them.

It’s true that incomes for college graduates dropped during recent economic hard times and unemployment rose. But the situation was a lot worse for folks without a college degree, according to a Pew Charitable Trust report released yesterday.

Back to supply and demand: The demand for post-secondary educations helped push up the net cost of college during the 2000s. The College Board says the net price of college tuition (the sticker price minus financial aid) rose 75% between 2002 and 2011.

But now demand seems to be softening, according to a Moody’s Investor Service report, thanks to a tough economy and a smaller pool of high school students. As a result, more schools are freezing tuition costs or at least holding down the increases and offering more financial aid. That’s good news for those heading off to college in coming years.

None of this means a college degree is worth any price. Too many families are overdosing on debt to get educations they really can’t afford. Getting a good value also requires college students to pick their majors carefully, since some degrees are worth a lot more than others.

But college degrees are and will remain all but essential in the 21st century if you want to get ahead financial, or even just remain in the middle class. That wasn’t true in Grandpa’s day, but it’s true now.

“Compassionate review” may lead to student loan discharge

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Dear Liz: We have a family member who recently was approved by Social Security for a complete disability claim. This person will never work again but has an outstanding student loan. The lender has a formal mechanism to apply for loan forgiveness, but is refusing to accept medical documentation of the disability. What appeal process is there and how can we force them to act? Do we need to retain legal counsel and incur additional expense to enforce a legal process and achieve loan forgiveness?

Answer: Federal student loans offer a “total and permanent disability discharge” that forgives outstanding education debt. You can find the rules and an application at DisabilityDischarge.com.

The rules for private student loans, however, vary by lender. Four lenders — Sallie Mae, New York Higher Education Services Corp., Discover and Wells Fargo — offer a discharge for total and permanent disability that is similar to the federal one, said Mark Kantrowitz, publisher of the FinAid.org and FastWeb.com financial aid sites. The Sallie Mae discharge is also provided on loans made through lenders that market the Sallie Mae loans, such as Commerce Bank, Fifth Third Bank and Regions Bank, Kantrowitz said.

Other lenders do not offer such a discharge, but all have a compassionate review process for their private student loans, he said.

“Borrowers in a difficult financial situation, or their family or other representatives, should contact the lender that holds the loan directly,” Kantrowitz said. “The call center staff are not always familiar with the compassionate review process.”

Lenders are generally more likely to cancel some or all of the debt, or at least reduce the interest rate, in a situation that permanently affects the borrower’s ability to repay, Kantrowitz said. They are less likely to make an adjustment when the loan was cosigned and the cosigner is capable of repaying the debt.

“But it varies,” Kantrowitz said. “I’ve seen some cases in which the borrower was military and killed in action where the lender forgave the loans even though the cosigners were capable of repaying the debt. Another example involved a mother whose daughter dropped dead on an athletic field and the mother’s anguish was palpable in the letter to the lender.”

Debt cancellation comes with another issue: taxes. Forgiven debt is typically treated as taxable income by the IRS. Your family member may be able to avoid the taxes if he or she is insolvent, but a tax professional should be consulted.

Why college is more expensive now

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Dear Liz: Thank you for your response to the reader who complained that college students who received student loans were getting a handout. You did a great job of highlighting the challenges today’s students face, but you didn’t talk about the main underlying cause. This is the defunding of state universities by state governments. In Oregon, for example, the state has gone from funding over 50% of the costs to current funding of 6%. The difference has been made up by tuition hikes and increasing the proportion of out-of-state (and foreign) students who pay much higher tuition. This is part of the reason that students are crowded out of classes. In Oregon, the medical school found it was better off giving up all state aid and going it alone. Other universities in Oregon are considering taking the same action. Schools founded with state money and supported for years with tax money will no longer be operated for Oregon students. They will be more like private schools, perhaps moving out of the reach of middle-class students. So the answer to the reader is that she did get government help to get through school, help that is now curtailed so students have to finance it themselves.

Answer: The reader didn’t specify what type of college she attended. But the withdrawal of state government funding in recent years has definitely made public college educations more expensive for many students. Meanwhile, many private schools have expanded their financial and merit aid budgets so that some students can attend a private college at a lower net cost than what they would pay for a public school.