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Student Loans

Student loans may be better than home equity borrowing

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Dear Liz: I am almost finished with my associate degree at my local community college and will be starting my undergraduate degree in January. I have been lucky enough to accrue no college debt so far but know I will when I start my bachelor’s degree. I am considering taking out a home equity loan to cover this cost, borrowing around $10,000. I got a great deal on my house and it continues to grow in value even with this economy. Your thoughts on this?

Answer: Home equity loans are actually more expensive than most federal student loans. Home equity loan rates for people with good credit range from 7% to 9% in many areas, while the current rate for direct, unsubsidized federal student loans is 5.41%. Furthermore, home equity loans aren’t as flexible and have fewer consumer protections than federal student loans.

You may initially get a lower rate on a home equity line of credit, but these variable-rate loans easily could get more expensive as interest rates rise.

Not only do federal student loans offer fixed rates, but they provide many affordable repayment options plus deferrals or forbearance if you should lose your job or run into other economic setbacks. You don’t have to demonstrate financial need to get federal student loans, although people with such needs can get subsidized loans with a lower interest rate. Your college’s financial aid office can help you apply.

Wednesday’s need-to-know money news

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Offering AdviceGetting creative with your down payment, must-have documents for estate planning, and common mistakes to avoid when buying your first home.

5 Creative Ways to Come Up With a Down Payment
None of which involve selling a kidney!

3 Retirement Planning Tactics to Adopt Before You Hit 60
These tactics will make the transition to retirement go more smoothly.

Documents that Should be Part of Everyone’s Estate Plans
These documents are a vital part of any estate plan.

9 ways to cut your student loan debt
Reducing student loan debt isn’t impossible.

5 First-Time Homebuyer Mistakes to Avoid
These common mistakes could have long term repercussions.

Retiree burdened with unpayable student loan debt

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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.

Parents, get your kids to college–but don’t give them a free ride

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Paid education. Graduate cap on bank notesUSA Today reported that more families are considering cost when choosing a college:

The survey by Discover Student Loans, to be released Thursday, found that nearly half of adults are limiting their child’s college choices based on price. And with rising student loan debt and a job market that continues to greet college grads with not-so-open arms, the ability to find employment has become a top factor in deciding what to study. The number of adults who say earning potential is more important to their child’s education than what they major in is up, at 42% vs. 38% last year, the survey shows.

All I can say is: What’s going on with the other half that cost isn’t a factor? I can’t imagine all those parents have the savings necessary to fund four or five years of undergraduate study. (And even if they do, they probably shouldn’t foot the whole bill…more on that in a minute.)

The idea that economic considerations shouldn’t sully the college decision process is absurd. If you aren’t borrowing money to pay for school, then maybe your employment prospects can take a back seat to the joy of learning. If you are borrowing, though, it’s crucial that you pick a) a school you can afford and b) a major that will resort in gainful employment that pays more than what you would have made had you skipped college. You want to ensure your investment of borrowed money gives you a return that’s worth the cost.

I’ve written a lot about how important it is that your kids get post-secondary education in a world where there’s an increasing divide between those who have college degrees and those who don’t. (For more, read “Ignore the talk: college is vital,” “Should you pay for kid’s college?” and “Should your kid skip college?“) And I’ve argued that parents need to help pay for this education if they possibly can, since letting your kids try to go it alone is often setting them up for failure (read: no degree and tons of student loan debt).

But there’s evidence that giving kids a totally free ride is a bad idea. Parental help is associate with higher “completion” rates–kids actually get the degrees they go to college for–but lower grades. The column I wrote about this has a somewhat misleading headline (“Why parents shouldn’t pay for college“), since refusing to help if you can puts your kid at a severe disadvantage.

Still, the column hit a nerve. It was the most-shared article on MSN Money yesterday. It should provide some comfort to parents who can’t afford to pay the whole bill for college–but I hope it doesn’t provide comfort to those who can help, but won’t.

 

 

 

Thursday’s need-to-know money news

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Are cash-back rewards worth the expense, cheap ideas to close out your summer vacation, and why health care expenses are crucial when planning your retirement.credit card detailed 1

Government to Switch Student Loan Servicers: What You Need to Know
Why you should start paying closer attention to your loan statements.

Are Cash-Back Rewards Good Deals for Consumers?
Do consumers end up spending more than they normally would in pursuit of cash-back rewards?

12 Tips For Professionals Who Want To Go Back To School
How to prepare financially for a return to the classroom.

Nine Cheap End-of-Summer Ideas
Inexpensive ways to close out the summer.

Do You Have a Retirement Care Plan?
Why health care needs to have equal billing in your plans for retirement.

Son signed them up for overwhelming student loan debt

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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.