How Your Student Loans Could Bury You

Education, Money, Politics, Taxes

A greater-than-ever percentage of Americans are going to college these days, but unfortunately for them, tuition has risen sharply as well and shows no sign of stabilizing. The rising costs of attending college are far outpacing inflation, according to a report released in 2011. College tuition increases averaged 8.3 percent, though one (California State University, San Marcos) jumped an insane 31 percent. Even community college costs rose 8.7 percent.

Most families are unable to pay the full cost of a college education, so many students bridge the gap with federal or private education loans. In theory, low-interest student loans are a terrific concept because they can be paid off slowly once the student has graduated and is working full time. The only problem is that the current economy isn’t supporting all the indebted graduates, and people are becomingly increasingly overwhelmed by their student loan debt. The Federal Reserve Bank of New York says nearly a third of all borrowers are at least 30 days behind on their student loan payments.

The Numbers

The report states that about 37 million people carry student loans worth a total of $870 billion. Some experts say that student loan debt will soon top $1 trillion—not surprising, considering that student loans have now surpassed credit cards as a source of debt for Americans. Among people under age 30, 40 percent have student loans, with an average debt of $23,300. Some owe far more, however—about 10 percent owe at least $53,000 and 3 percent are in for more than $100,000. Some borrowers are given permission to postpone payments due to hardship, though according to Fed economists, they shouldn’t be counted as delinquent because they aren’t making payments. But when you consider that they make up 47 percent of all borrowers, it indicates just how crushing student loan debt can be–especially in a depressed job market.

The Best Way to Pay

Most student loans are set up for very low monthly payments over the course of 15 to 30 years, so if you pay the minimum, you can expect to still be paying them off toward the end of your career. CBS News Business and Economics Correspondent, Rebecca Jarvis has some tips for managing student loan debt.

First, she says, you should consolidate all your student loans into one so that you only have to make one monthly payment. She also points out that you can get better terms by consolidating. She explains that there are four options:

1.    Standard option, which is a minimum of $50 per month for about ten years, and which will save the most money in interest overall.

2.    Extended option, also with a $50 per month minimum, but over 12 to 30 years.

3.    Graduated repayment, which is a minimum of $25 per month over 12 to 30 years.

4.    Income-based repayment, which is $5 per month minimum for up to 25 years. This will cost you the most in interest.

What If You Can’t Pay?

The non-profit organization American Student Assistance has several tips for if you find yourself unable to make your student loan payments (and hiding the statements under your bed isn’t one of them.)

First of all, you need to know how much you owe, to whom, and what the terms of your loans are. Second, find out whether you have private loans or federal. If you have federal loans, you should be able to change your repayment plan or, under some circumstances, defer payment.  If you have private loans, contact your lender as soon as you realize you can’t pay. They will, in many cases, work with you to extend or restructure the loan to make paying easier. If you think you will be making more money in the future, lowering your payments temporarily is a better option than doing so for the life of the loan.

The biggest thing to remember is that avoiding the problem and defaulting on your loans is the worst thing you can do. If you’re drowning, contact your lenders as soon as possible so that you have the greatest number of options and can address the problem before it’s out of control and your credit is irrevocably damaged.

New Legislation That Can Help

Recognizing that an educated population is good for the economy, the Obama administration has taken several steps to help mitigate the burden of student debt to encourage more students to attend college. It began by beefing up funding to Pell Grants and the American Opportunity Tax Credit. In 2010, President Obama did even more by allowing borrowers to cap their student loan payments at 15 percent of their discretionary income until 2014, when the cap will be lowered to 10 percent. In October of 2011, the Pay As You Earn proposal was put forward, which would give some students relief as early as this year. In addition, federal student loans will now be eligible for lower interest rates when they are consolidated. Finally, the new Know Before You Owe program allows students to compare the financial burden of each college they are interested in attending to prevent surprises down the road.