It's Time to Pay Back!

If you are one of the recent graduates, you very likely have graduated with the help of student loans.  You are a young adult and trying to start your career while juggling student loan payments, pay your rent and cover other bills.  As many types of student loans there are currently available for students to take advantage of, there are just as many options a recent graduate has when it comes to re-payment options.  For those who did not take advantage of scholarships, did not qualify for grants or did not take advantage of many cost cutting community college options to complete a part of their education, what is the best option to manage debt?!

Lets take the first option not to pay debt off the table immediately!  Missed/late payments on student loans are reported to the credit bureau and can damage your credit score; which in turn affects your credit score.  This can affect one’s ability to get good terms on a loan in the future, get decent apartment or a mortgage loan, and in some cases disqualify you from employment.  Further, defaulting on your student loans can result in your school, the lender or the government taking action to recover the debt.  

If you think you are out of options, think again!  Most of us are familiar with the term forbearance; or at least should be.  Working in reverse, the last resort should be if you find yourself without means to pay for your student loans, forbearance.  Your lender will allow you to place your student loans in forbearance up to 6 months at the time.  This means that you will not be required to pay your student loans for that period of time.  One should keep in mind that if in 6 months you find yourself still not being able to pay, you must request again.  If you do not, payment will be due; and if you do not pay it will count as miss payment/s. 

If you are in the middle; meaning if you cannot afford fully amortized payment, you have options such as interest only, income sensitive, graduated and/or extended graduated.  These re-payment plans work with borrowers and their current situations.  Entering in any of these plans will extend the amount of time you will pay for your loans, and combined with a thing called interest rate, will result in more paid then if you had a fully amortized payment. 

The best option of course is to be in a situation be able to pay standard re-payment plan.  In other words, if you get out of college with student loan balance that results in a payment that you can afford (or if you find employment that pays sufficiently to support the mentioned payment if you will), the best way is to make a sound financial decision and make your student loans a priority by making scheduled payments in the amount that will result in $0 balance at the end of agreed period (most commonly 10 years / 120 instalment payments). 

In conclusion, one should use all resources at hand to avoid the student loans going into default.  Educate yourself about the type of the loan you have and what options you have in case you aren’t in a position to pay full amount.  If you have means, best advice is to pay fully amortized payment.  Alternative to this is you becoming defaulted on, in most cases, federally insured debt which can lead to but cannot be discharged in Bankruptcy!   

High Cost of Branded Education

With the most recent economic crises and the aftermath, recent graduate students are finding it harder and harder to find jobs that pay enough to support incurred debt.  It’s simple mathematics: while the cost of education is increasing, degree inflation coupled with recent economic crisis makes it harder for recent graduates to find an entry level job with sufficient earnings to pay off debt incurred to receive education needed to enter prospective fields. 

The benefit of 4 year college education is undisputable and unarguably equally beneficial for the students themselves and their future employers.  While we wait for the entire education system to be overhauled and for the economy to recover, what are the alternatives to the traditional four year university to obtain a degree, have a fair shot in the job market, and not starting off your life neck deep in student loan debt?!  Let’s explore much less popular community colleges. Today community colleges are much less publicized by media, presented in High Schools as an option or desired by students as their first choice.  Granted that a community college will not get you the desired degree, but utilizing the community college to obtain your associate degree is an extremely unexplored option by today’s aspired college students to reduce overall cost of the 4 year degree.

The idea is to attend the community college for the first 2 years.  Once successfully completed, students have an option to transfer to prestigious schools and earn a diploma stamped with George Mason University, for example, and pay half the price.   In DMV area alone students have a wide range of options to explore including Northern Virginia Community College (NOVA), Montgomery College, Prince George’s Community College, etc.  According to The Washington Post, this option is being considered more often then it has been in the past.  Still mainly explored by minorities, low to moderate income families and by those who’s grades do not get them into a “brand name” University, the stigma about community colleges makes this a very much unutilized tool in obtaining proper education.   

IT IS THE MATTER OF INTEREST

Student loan interest rates is quite  complex subject as the latest reports show where student loan debt has increased to $1.2 trillion in 2013.  The need for postsecondary education is greater today then it has ever been.  According to Bureau of Labor Statistics, a college graduates are nearly twice as likely to find work as those with only a high school diploma. This clearly illustrates the demand for student loans.

In the conventional markets common sense indicates to let the market determine the interest rate.  Borrowers are evaluated for their ability and likelihood of repaying the loan and interest rate is determined.  Student loans are quite a different story.  Unable to use conventional gages such as credit score and ability to repay which for most borrowers is yet unknown, how should the interest rates be determined for student loans?  Or should market supply and demand determine it?

In my opinion, with such an “inelastic good” as student loans, it is one of the rare situations where I would support government intervention on capping the interest rates.  Based on current offers on the table, it seems that President Obama’s suggestion will benefit future borrowers of student loan debt the most: In his budget, President Obama used a variable model to determine loan rates at the point they are issued. After that time, the interest rates remains fixed for the duration of the loan.

Ultimately, we would want to focus on the bigger picture and that is to eliminate the need for student loans or at least try to cut down on the amount borrowed by each student. In mean time, it is the plan President Obama suggests that will help avoid insolvency and possibly another financial disaster caused by uncontrolled borrowing. 

Monster Debt

How much is too much?

Most current figures suggest we as a nation have exceeded $1.2 trillion in student loan debt.  While the figure is alarming on its own with underemployment a serious concern for a new graduate, what is even more alarming is that $1 trillion of that debt is backed by the United States government.  Media is never short of stories describing recent graduates struggling to keep up with their student loan payments knowing the consequences if they do not: wage garnishment! While student loans remain one large part of US national debt (second only to Mortgage debt) and ever present concern among two thirds of student graduating, it does not seem to show signs of decreasing.  

Defaulting and/or inability to repay student loans incurred as a result of higher education can have devastating affects on an individual.  First consequence on defaulting of federal loan is of course documented on your credit report.  With credit report still a primary gage of one’s credit worthiness, this diminishes individuals future opportunities ranging from further credit to employment with companies evaluating one’s credit history.

Moving forward, there are many steps we can take to eliminate this problem for future generations such as early on financial education of borrowers/students, but what can be done about current borrowers who are already neck deep in debt?

Possibility of debt being included into bankruptcy has been suggested by the current administration, which could be last resort for some borrowers.  While we should always be focused on ability to repay, option to discharge student loan debt in BK would definitely help the individuals who otherwise do not see a way out.  One does not need to experience this to know the devastating effect of knowing you cannot start over.  Allowing student loans to be discharged in BK would allow an individual to eventually improve their financial situation (prospect of which prompted this individual to take on student loans in most cases).  

I believe that current administration has realized the seriousness of the situation and is forward thinking enough to suggest above solution.  This could be that last resort that some student loan borrowers will have to resort to.