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Borrowing Money For College Is A Bad Idea For A Reason You’ll Never Guess

Three tough decisionswoman thinking

If you or your son or daughter is nearing college-age, you have some difficult and confusing decisions ahead of you. Three of the most important are choosing a school, determining how to finance its cost and deciding on a field of study. These are difficult decisions to make because making the wrong ones could have a very negative affect on you or your child’s entire life.

Should you or your child even go to college?

We have heard it drummed into our heads over and over that every child should have a college education. Unfortunately, this is simply not true. We are all different, we all have different skill sets and we all have different abilities. So the first question you need to ask yourself or your child is whether she or he really needs to go to a four-year college. He or she might be better off in a two-year community college or in a trade school. You need to have a frank discussion with your child regarding his or her interest in college and whether or not they are committed enough to make it worth investing in what today’s four-year college education costs.

STEM or something softer

When choosing a college or helping your child choose a college you need to think about whether he or she would be best choosing a major in one of the STEM (science, technology, engineering, math) curriculums or in something softer. Study after study has shown that a STEM major will lead to a higher paying career than most other majors. However, again it’s important to factor in your interests, skills and abilities. Not everyone is cut out to be a math or engineering major regardless of potential earnings. On the other hand, if your child’s or your interest lies in areas such as photography and television arts, fine arts psychology or pre-K education you need to understand that he or she likely won’t be able to earn more than $25,000-$30,000 right out of school, which will make paying back any student loans very troublesome.

Food for thought

While this may not apply to psychology or social studies majors, a study of people in engineering and science and their earnings revealed some very interesting findings. What this research found is that the biggest single thing that has the most affect on salaries is variations in GPA or grade point average, And that students borrowing money for college generally end up with lower grades than those that didn’t have to borrow money and that this is the most important reason why they end up earning less. What this translates into is that borrowers don’t end up earning less due to financial restrictions or demographics that require them to go to inferior schools. In fact, students that are required to borrow money to finance their educations are 50% more likely to choose a more expensive program or a private school. This means they are betting more on the advantages they will benefit from these programs in their futures.

What are the results of this? It’s that non-borrowers that are disadvantaged and that attended lower-ranked schools leave schools with salaries that are more than 10% higher than those that were required to borrow money to finance their educations.

The reason for this

It all really boiled down to grade point average. Those that borrowed money had dramatically poorer grades than non-borrowers and this completely eliminated the positive advantages of attending a better school.

Why do the students that borrow money have lower grades?

The answer to this has been hotly debated. It could be due to the fact that there is the stress of debt that often requires them to get a job to help finance their educations. It’s also very possible that those who borrow money to finance their schooling are overestimating how important school quality is on their prospects for employment. Or it could be that borrowers faced more anxiety when they were trying to get a job and ended up taking one that paid less or was more secure instead of waiting for a better one.

Another possible explanation is that going into a very competitive program may not be in you or your child’s best interest. There is research showing that in the more competitive math, technology and science programs there is a higher dropout rate than those fields that are less competitive. The ugly truth is that the smarter are your peers, the dumber you may feel. And the dumber you feel the more likely you are to drop out.

man carrying dollar signThe moral: Reconsider borrowing money to finance your schooling

The net/net of all this is that when it comes to your future your grades are more important than where you went to school. For whatever reason, it’s clear that students that borrow money will end up with worse grades. So the best bet for you or your child is to avoid student loans like the plague and just do the very best you can do in your studies.

Student debt is like the Roach Motel

You’ve probably seen that advertisement for the Roach Motel where roaches check in but they never check out. Unfortunately, the same thing is true of borrowing money for college. It’s very easy to get into but virtually impossible to get out of. Our federal government in coordination with our colleges and universities has made taking out student loans so easy it’s very difficult to avoid taking them. But our government isn’t so nice when it comes to repaying those loans. Six months after you graduate from college you will be required to start paying them back no matter how painful it might be. You were automatically put into what’s called 10-Year Standard Repayment unless you were smart enough chose another program. If you are in 10-Year Repayment you will have a fixed monthly payment for 10 long years. And, of course, the more you borrowed the higher your monthly payments will be. For example if you borrowed $10,000 at 6% interest, your monthly payment would be $111.10. And if you were in debt to the tune of $20,000, your monthly payment would be $222.04 for those 10 long years. That could be enough to keep you from buying a car or putting together a down payment on a house.

Not even bankruptcy can save you

In 2005 our Congress in its infinite wisdom changed the bankruptcy code to make both federally backed and private student loans non-dischargeable in a bankruptcy. This means that student loans can’t be written off or forgiven unlike other private debts. This puts them on the same level as alimony and child support payments – totally non-negotiable so that they stick with you forever. For whatever it’s worth there is one exception to this, which is if you were able to prove to your bankruptcy judge that you had a severe financial hardship. You would need to be able to show and prove you can’t maintain even a minimal standard of living if you are forced to repay your student loans and that this problem is likely to continue for most of the repayment period of your student loans. You would also need to show the bankruptcy judge that you had made really good faith efforts to repay your loans. Barring this, you’re stuck and you will need to repay those loans whether it’s for 10 years or even longer.

Read What Dick Blumenthal Wants To Do To Public Service Loan Forgiveness

female doctorSo whom you might ask is Dick Blumenthal? He’s Sen. Richard Blumenthal from Connecticut. Why might you love him? It’s because if you’re a government worker and have a load of student debt, he wants to help you. The way he’s done this is by introducing legislation that could make it easier for you to get those debts forgiven.

How it works now

If you’re not aware of this there is a program called Public Service Loan Forgiveness or PSLF. You would qualify if you work for the federal, state or local government or a not-for-profit organization that has been designated tax-exempt by the Internal Revenue Service (IRS). You must also have loans that you received under the William D. Ford Federal Direct Loan Program. If you got loans under the Federal Family Education Loan (FFEL) Program, a Perkins Loan or any other type of student loan program you would not be eligible.

10 years

In the event you qualify for PSLF you would be required to make 120 scheduled, on time, full monthly payments for 120 months or 10 years. These must be payments that you made after October 1, 2007 and you must have made them under what’s called a “qualifying” repayment plan. Finally, you must be working full time at a qualifying public service organization when you make these payments.

A “qualifying” repayment plan is where you repay your loans under one of the income-driven repayment programs, which includes Pay As You Earn, Income-Based Repayment or Income-Contingent repayment. You would likely also qualify if you were on 10-year Standard Repayment or any other program where your monthly payment would equal or exceed what you would pay under 10-Year Standard Repayment.

Loan forgiveness

Assuming you meet these criteria you would then have any remaining balance on your student loans forgiven after those 10 years or 120 payments. But, and here’s the big but, you can’t wait too long to get started on PSLF as the more payments you make, the lower your remaining balance will be, which means less money will be forgiven. In fact, if you were to make all 120 payments under this program, you would have a remaining balance of zero and there would be nothing left to be forgiven.

A word of warning

It’s important to also understand that under Income-Based Repayment, your monthly payments will likely be less than under any of the other PSLF-qualifying repayment plans and your repayment period or terms will be longer. This means that additional interest will accrue on your loan and with a smaller monthly payment; you will end up with a higher loan balance to be forgiven. What happens if you do not meet the eligibility requirements for PSLF? Then you would be responsible for repaying the entire balance of your loan, including all interest that had accrued. Of course, this would not be true if you qualify for forgiveness under the terms of Pay As You Earn, Income-Contingent Repayment or Income-Based Repayment.

What Sen. Blumenthal’s legislation would do

What Sen. Blumenthal has proposed is a plan that would make it easier for you, as a government worker, to get your student loans forgiven. His bill would alter the Public Service Loan Forgiveness program so that 15% of a government worker’s student loan would be forgiven after two years. Two years after this, another 15% would be canceled. If you work for six years in the public sector, you would see another 30% of your debts forgiven. Then, after 10 years on the job you would see the remaining 30% forgiven.

What the senator believes is that the way PSLF is currently structured is that it’s an all-or-nothing deal. You don’t get forgiveness unless you complete 10 years of public service. If you were to quit or lose your job after nine years and 11 months, you’d lose forgiveness. Since PSLF loans continue to accrue interest over those years, if you were to lose your public service job, you might feel as if you are being forced to start all over from scratch.

The downside of his proposed legislation

The biggest negative of Sen. Blumenthal’s legislation is that no one knows how much this would cost the US government – or, to put it bluntly, US taxpayers.

Also, while federal government workers might have been underpaid in the past, this is no longer true. The average US federal government employee now earns $14,632 more in direct income than his or her counterpart in the private sector. In fact, the average US federal government employee now earns$74,436 versus the average private sector worker at $59,804. In addition US federal government workers earn the equivalent of $26,632 in benefits so that their total compensation is $114,436 versus the private sector employee at $87,804. So while Sen. Blumenthal may be well intentioned, it would seem that at least federal government workers already have a major reason to sign up for PSLF and work for the 10 years – although this may not be quite so true for people who work for state or municipal governments.

What types of jobs qualify?

A public sector job is defined as any kind of job where you are paid directly by the government. This even includes civil service jobs such as working for the US Postal Service, the Federal Bureau of Investigation, the Internal Revenue Service or even holding public office. Beyond this, here is a list of the jobs that would definitely qualify for Public Service Loan Forgiveness:

  • Law enforcement
  • Military service
  • Public safety
  • Emergency management
  • Early childhood education (including licensed or regulated health care, Head Start, and state-funded pre-kindergarten)
  • Public interest law services
  • Public education
  • Public service for individuals with disabilities and the elderly
  • Public health (including nurses, nurse practitioners, nurses in a clinical setting, and full-time professionals engaged in health care practitioner occupations and health care support occupations)
  • Public library services
  • School library or other school-based services

TeacherTeacher Loan Forgiveness

While most teachers would qualify for Public Service Loan Forgiveness under “Public education” (as listed above), there is another program specific to teachers called Teacher Loan Forgiveness.

If your five years of teaching service began before October 30 of 2004 you could have up to $17,500 of your student debts forgiven if you teach for five consecutive years in specified elementary and secondary schools and educational service agencies that serve families with low-incomes, and that meet other qualifications. The loans eligible for this program include Direct Subsidized and Unsubsidized Loans and Subsidized and Unsubsidized Federal Stafford loans. Unfortunately PLUS loans are not be eligible for this program.

However, you could earn up to $5000 in loan forgiveness if the chief administrative officer of the school where you taught certifies that you are a full-time elementary school teacher that showed teaching skills and knowledge in reading, writing, reading, mathematics and other parts of the elementary school curriculum; or where you were a teacher full time for five years in a secondary school where you taught in a subject area related to your academic major.

After Oct. 30, 2004

If your five consecutive years of teaching began after October 30, 2004, you could qualify for that $5000 in loan forgiveness if you were a highly qualified elementary or secondary school teacher. To earn the $17,500 in forgiveness you must be certified by your chief administrative officer that you are a highly qualified full-time teacher of mathematics or science in an eligible secondary school; or are highly qualified as a special ed teacher where your main job was to teach children that had disabilities and taught them in an area that corresponded to your training in special education. In addition, you must have shown that you have knowledge and teaching skills in the content area of the curriculum in which you taught.

There are some other requirements to be classified as a highly qualified teacher and you can learn more about them by clicking on this link.

Should You Refinance Your Federal Student Loans Into A Private Loan?

Video thumbnail for youtube video Surprising Fact – Secured Credit Cards Are Not Just For The Credit TarnishedWe read recently that another bank is offering to refinance federal student loans into private loans. It’s currently offering these loans starting as low as 4.75% for borrowers that have a good credit score, long-term employment and that have a checking account at the bank. It is also offering variable rate loans as low as 2.31%,

How this compares with federal PLUS loans

These rates are dramatically lower than rates that parents got when they took out federal PLUS loans as they have interest rates ranging from 6.41% and 8.5%. Other federal loans generally have high rates and don’t offer many alternatives for getting them reduced.

Federal Direct Consolidation Loans

One option available to people with multiple student loans is to consolidate them into a federal Direct Consolidation Loan. However, the interest rates on these loans are the weighted average of the loans being consolidated rounded up to the nearest 1/8th of one percent. What this means is that if you were to opt for one of these loans your new interest rate would be higher than the loan with the lowest interest rate you’re currently paying but lower than the one with the highest interest rate. In other words, you might see a reduction in your interest rate but it probably wouldn’t be very dramatic vs. that loan at 4.75%.

Other options

Other banks are beginning to offer similar refinancing loans. For example, Discover Financial Services, Social Finance (SoFi) and Commonbond all offer to refinance federal loans. Social Finance is an especially interesting alternative. It’s currently offering fixed rate loans starting at 3.63% and variable rate loans as low as 2.66% APR (with AutoPay).

However, to qualify for one of these loans you must have graduated from one of SoFi’s 500+ colleges and universities and your loan would come not from SoFi but from the school’s alumni. In addition, you must be currently employed, a US citizen or permanent resident, have graduated from one of SoFi’s member schools and have a good credit and employment history.

Should you stay or should you go?

Should you refinance those student loans by converting them into a private loan or stay with what you’ve got?

Unfortunately, this is not an easy question to answer, as there are pros and cons to both of these options. Of course, the biggest pro to refinancing those student loans is if you could get a dramatically lower interest rate. As an example of what this could mean let’s suppose you owe $30,000 for 10 years at 8%. In this case your monthly payment would be about $363. If you were to refinance that federal debt to a loan at 4.75% your monthly payment would fall to about $314 — a savings of $49 a month or $588 a year. In addition, you would have a fixed interest rate for a fixed term, a fixed monthly payment and just one payment a month.

Would this be enough to tempt you to refinance?

The reasons to stay

As you have seen in the example given above, you probably need to have a lot of student debt at a very high interest rate to make refinancing an attractive option. But even if you do, it’s important to understand what you would be giving up – or those benefits that come with federal student loans.

Repayment options

Once you refinance federal student loans into a private loan you will have just one repayment program, which is to make the same payment every month for 10 years or whatever is the term of your loan. If you were to run into a serious financial problem you wouldn’t be able to change your repayment program to fit your new circumstances. In comparison, federal student loans have six repayment programs not counting the federal Direct Consolidation Loans mentioned above. While none of these will get your interest rates cut they could get your monthly payments reduced.

Graduated Repayment

One of the most popular repayment options available with federal student loans is Graduated Repayment. This can be especially helpful if you are just starting out in your career as your payments would start low and then gradually increase every two years. By the time you hit year six (or two increases), you’d most likely be earning more so your payments would still be affordable.

Income-driven repayment

In addition to Graduated Repayment, the US Department of Education (ED) offers three “income-driven” repayment programs where your monthly payments are tied to your income and family size. The programs are Pay As You Earn, Income-Based, and Income-Contingent.

Pay As You Earn

You may have read about this program last summer when Pres. Obama signed an executive order making about 5 million more people eligible. Prior to this order, only those who were newer borrowers were eligible for Pay As You Earn. However, starting next year borrowers who took out loans before October 2007 or stopped borrowing by October 2011 are also now eligible.

What’s the big deal about Pay As You Earn? It’s that this program would cap your monthly payments at 10% of your household income that exceeds 150% of the federal poverty guideline based on the size of your family. An example of how this works is if your monthly adjusted gross income were $4280, you would subtract 150% of the poverty line ($1480) yielding discretionary income of $2800. Multiply this by 10% and your monthly payment would be $280.

Income-Based Repayment

A second income-driven repayment program is Income-Based. If you don’t qualify for Pay As You Earn, you might qualify for this program, which would cap your monthly payment at 15% of your discretionary income. Take the example given above and multiply that $2800 by 15% and the monthly payment would be $420.

Income-Contingent Repayment

If you don’t qualify for either Pay As Your Earn or Income-Based Repayment, there is Income-Contingent Repayment. The biggest plus of this plan is there are no initial income eligibility requirements. If you have any eligible federal student loan, you could switch to this plan. Like Pay As you Earn and Income-Based, your payments would be based on your family size and income but will likely be higher than those under Pay As You Earn or Income-Based repayment. What would your monthly payment be under Income-Contingent Repayment? It gets a bit complicated so the easiest answer is to click on this link to calculate what it might be.

Note: Click on this link to see which types of federal student loans are eligible for any of these Income-Driven Repayment programs.

Changing repayment programs

Another important reason why you might want to stay with your federal student loans is that you always have the option to change your repayment plan. If you are on 10-Year Standard Repayment and are having a tough time making your payments, you could switch to either Graduated Repayment or one of the Income-driven repayment programs. Or maybe you’re on Graduated Repayment but have found that you are now eligible for Pay As You Earn. You could easily make the switch and see your monthly payments cut substantially. The

Man holding piggy bank and books. Cost, value of educationBefore you make your final decision

There are several things you should do before you decide whether or not to refinance your federal student loans. First, be sure to go to the Department of Education website and familiarize yourself with all the various repayment options available. Second, call your loan servicing company to discuss this with it. When you do this you will be assigned a counselor that will discuss all of the options with you and help you determine if there is a program that would be better than the one you currently have. Be sure to understand all of their options including interest rates and terms. Then with this information in hand it should be much easier to decide whether to stay or go – to a private debt consolidation loan.

Could Rolling Jubilee “Disappear” Your Student Debt?

young magician performing with wandYou might remember that about three years ago there was a whole bunch of people in New York City protesting income disparity. The movement came to be known as Occupy Wall Street. What, you might ask, ever happened to that movement? Well, it’s morphed into an organization called Strike Debt that has a program titled Rolling Jubilee that might be able to erase your student loan debt.

One lucky debtor in Kalamazoo Michigan woke up one day and found an odd letter in the mail. What it basically said is that, “we have good news. We got rid of some of your Everest College debt.” It went on to say that her private student loan in the amount of $790.05 had been forgiven outright by an organization called Rolling Jubilee.

About $15 million erased

Since November 2012, Rolling Jubilee has purchased and eliminated around $15 million of debt in the form of unpaid medical bills. It recently announced that it had also eradicated $3.8 million in private student loans for almost 3000 students.

How this works

While Rolling Jubilee can’t do much about federal student debt, it is able to help with private loans due to a quirk in the way debt works these days. When people stop paying on a debt it becomes delinquent. The lender usually writes off the debt after about six months and sells it off at a cheap price to a third-party debt collector. What Rolling Jubilee is now doing is buying some of this debt using donations it raises online. In most cases it’ s able to buy student loan debt for three cents on the dollar or less. Then, instead of trying to collect on the debt, Rolling Jubilee just makes it disappear.

Just a drop in the bucket

Student loan debt is now estimated to be about $1.2 trillion and more than 40 million Americans have some form of it. Rolling Jubilee understands that the number of people it has been able to help is only a drop in the bucket and doesn’t solve the actual problem. The group’s goal is to draw attention to the predicament of those millions of people that have unpaid student loans – especially loans with high interest from expensive for-profit colleges. It’s next step is to get a large number of people organized to push for policy changes that would allow debtors to get release from obligations such as student debt that they are unable to meet.

For-profit colleges have come under fire recently due to their disproportionate contribution to the $1.2 trillion in student loan debt. They’ve enrolled about 13% of all students but have been responsible for 50% of the students that defaulted on their loans. Strike Debt has deliberately targeted one of the largest, Corinthian Colleges, the company that owns Everest College and several other for-profit school chains. It was already having serious financial problems when the Department of Education put a hold on financial aid payments to the company – due to its failure to satisfy requests for information made by the Department. In fact, Corinthian Colleges currently has some 200 lawsuits pending for fraudulent practices. The Consumer Finance Protection Bureau announced recently yet another lawsuit against the company for alleged predatory lending. The Bureau’s goal in this lawsuit is obtain relief for borrowers because it believes the company misled students about job prospects, pressured them to take out private high-interest loans and then used high-pressure debt collection tactics.

Not even bankruptcy can help

One of the main reasons that Rolling Jubilee turned its attention to helping people with student debt is because these loans usually can’t be dismissed by a chapter 7 bankruptcy – whether it’s a private or federal student loan. Before 2005 it was possible to get private student loans dismissed through a chapter 7 bankruptcy just like any other kind of unsecured debt (think credit card debt). However, our Congress passed a law that year that changed the status of private student loans in a bankruptcy to be the same as that of federal loans. What this means is that if you want to have any kind of student loan discharged you must show that repaying it would cause you to experience an undue hardship.

What is undue hardship?

Most bankruptcy courts throughout the US use what’s called the Bruner test to determine undue hardship. This consists of three conditions you would need to meet in order to get your student loans discharged.

Poverty – The first is that you must able to show you cannot maintain a minimal standard of living for yourself and your dependents based on your current income while repaying your loans. In this case, minimal standard of living is not the same as a middle-class standard of living and is a much lower standard.

Persistence – Second, you must be able to show that your financial situation is likely to continue for most or all of your repayment period

Good faith – – And third, you must show you’ve made a good-faith effort to pay off your student loans.

Whatever you do, don’t default

As of 2012, 9.1% of student loan borrowers had defaulted on their loans within two years of graduating. This is up from 8.8% the previous year. And while 9.1% doesn’t seem like a significant number that translates into 375,000 borrowers. Even worse, 13.4% of borrowers defaulted within three years after they made their first payments.

Trust us when we say these people made a big mistake – especially in the case of federally backed loans.

Power that regular collection agencies would kill for

It’s not a good idea to default on any loan. But it’s especially bad to default on a federally backed student loan. Technically, you are in default on a student loan the day after you miss a payment. In reality, your debt won’t be reported to the three credit bureaus until you have missed your payments for 90 days or three months. If you have still failed to make a payment after nine months, the odds are that your debt will be turned over to a student debt collection agency. These collectors have powers that regular collection agencies would kill for. They can garnish your wages as well as your Social Security benefits without going to court. They can take part of your income tax refunds and even block the renewal of any professional licenses you hold.

What you can do if you’re in defaultwoman thinking

There are ways to get a student debt out of default. The first of these is probably the simplest answer and that’s to just repay the loan. There are several different ways to repay defaulted loans depending on the type of loan you have. You can learn more about repaying your loans by clicking on this link.

A second way to get a federally backed student loan out of default is called loan rehabilitation. To do this, you must first agree to a reasonable and affordable payment plan and then make at least three voluntary payments. A lender must then purchase your loan. The best thing about loan rehabilitation is that if you can do it, you will get back some of the benefits that came with your original loan such as income-driven and Extended Repayment. In addition, once you get your loan rehabilitated …

  • The default status on your defaulted loan will be removed
  • This default status that was reported to the credit bureaus will be erased
  • If your wages are being garnisheed, this will stop and …
  • If the Internal Revenue Service is withholding any of your income tax refund, this will also stop.

Issues to be aware of if you are able to rehabilitate your loan successfully include the fact that your new payment may be more than what you are paying when you were rehabilitating the loan. Second, the total amount you owe may increase because collection costs may have been added to your principal balance. And finally, if your late payments (delinquencies) were reported to the credit bureaus before your loan defaulted, they will not be removed from your credit report.

Loan consolidation

The third alternative for getting student loans out of default is to get a Direct Consolidation Loan. This would allow you to pay off the balances on multiple student loans and end up with just one loan and one monthly payment. You will have a new interest rate that will be fixed for the life of the loan. And you will be eligible to choose a new repayment program such as Pay As You Earn, which would cap your monthly payment at 10% of your disposable income.

Who’s Really Responsible For the Student Debt Crisis?

graduate chained to student debtWe hear more and more about the student debt crisis. A few politicians argue that there is no student debt crisis though most others say there is. Whether this is a crisis or not, one thing can’t be argued. There is now more than $1 trillion outstanding in student debt. That makes student debt larger even than credit card debt. And it’s not going to get any better in the future, as the graduating class of 2013 owed an average of nearly $30,000

The real problem

The people that say there is not a student debt crisis point to the fact that most people will repay their debts though it may take them 10 to 20 years to do it. The real problem, these people believe is the escalating rate of default on student loans.

The US Department of Education recently released a report that the national two-year cohort default rate on student loans increased from 9.1% for FY 2010 to 10% for FY 2011 and that the three-year default rate increased from 13.4% in FY 2009 to 14.7% for FY 2110. Even worse, the average default per borrower was $16,697 and the total of outstanding loans in default as of the third quarter of this year is $95.9 billion. This, some experts contend, is the true crisis in that this is money that likely will never be repaid and it’s us, the taxpayers, that are on the hook for it.

Who’s to blame?

The easiest people to blame for these problems are, of course, the students. After all they are the ones that took out the loans. However, it’s not quite that simple. We here in the US have basically adopted the idea that everyone should have a college education. As a result, the vast majority of our high schools are dedicated to getting their students prepared for a college education whether they should have one or not. Forty-six percent of those that start college dropout before graduating and one of .the major reasons for this is undoubtedly the fact many of them shouldn’t have been in college in the first place.

Another part of the problem is that most 18-year-olds are not prepared to choose the right majors. Many choose majors that align with their passions such as film and video arts, pre-school education, psychology, anthropology, archaeology, fine arts and music that might be fun and rewarding but that don’t lead to well-paying careers. For that matter, many of the young people who choose these types of careers won’t even be able to find jobs. In fact, as of March 2012, 60% of college graduates were unable to find work in their fields of study.

The colleges and universities

Colleges and universities are also at least partially to blame for the student debt problem, especially the for-profit schools. They are in a competitive business and it’s clear that some of them have enticed students to take out loans they really couldn’t afford. As an example of this, students that borrow similar amounts to pay for their schooling end up defaulting at a much higher rate at for-profit institutions. In fact, 26% of for-profit students that took out loans between $5000 in $10,000 ended up defaulting versus the 10% of students at community colleges that defaulted and the 7% at four-year schools. Private schools are not immune to this either. They, too, must compete for students. The more aid they can offer prospective students, the more they are will attract. This puts pressure on them to accept “marginal” students and for their financial aid offices to promote federal student loans as a way to pay for their educations.

The federal government

It’s also clear that the federal government itself has played a part in creating the student debt crisis. It has not only helped fuel the idea that everyone should have a college education, it’s also made it very easy to get student loans. Every year high school seniors are encouraged by their guidance counselors to fill out and submit the Free Application for Federal Student Aid (FAFSA). This form not only goes to the Department of Education (Ed) it goes to every school for which a student has applied. The process then becomes automatic and sometime in late spring each student receives a notice of the federal financial aid it will receive based on its family’s financial situation. In most cases a large part of this aid will be in the form of federal student loans, which the average family will have a very difficult time not taking.

Not even a chapter 7 bankruptcy can help

If you were to run up $30,000 in credit card and medical debts you would be able to get them discharged through a chapter 7 bankruptcy. In fact, this form of bankruptcy can get almost all unsecured debts discharged except for alimony, spousal support, child support and… student loan debts. That’s right. Our Congress rewrote the law several years ago making student debts “bankruptcy proof.” If you have $30,000 in student loan debts, you have only two choices – to default on the loans or to repay them. And defaulting on federal student loans is a very bad idea. Student loan debt collectors have powers that conventional debt collectors can only envy. They can garnish your wages without going to court, seize your income tax refunds or a part of your federal benefits, deny you eligibility for new loans or grants – or even put liens on your property and bank accounts.

What could helpYes, debt negotiation works

While you can’t get student loan debts discharged through a chapter 7 bankruptcy, the federal government does offer the equivalent of a chapter 13 bankruptcy. If you’re not familiar with this type of bankruptcy its purpose is one of reorganization – to give you time to reorganize your finances and pay off your debtors. The federal government’s equivalent of this are its increasingly liberal loan-modification plans. For example, one of these programs is called Pay As You Earn. You may have read about this program earlier this year when Pres. Obama signed an executive order making as many as 1.4 million more borrowers eligible. This plan permits borrowers who are financially distressed to cap monthly payments at just 10% of their discretionary income and gives them as many as 20 years to repay their loans. Unfortunately, many people who would be eligible for this program are unaware that it’s available to them. In addition, some are not eligible because of technicalities in the program such as past-due payments or loans that started into repayment mode too many years ago. In addition, the companies that service student loans have been less than forthright about discussing these options with their customers. And if you have private loans they are precluded from this program.

Determining your eligibility

If you’re carrying a load of federal student debt, don’t be turned off by the phrase “financially distressed.” What this really amounts to is that your payments will be based on 150% of the federal poverty guideline and your family size. In addition, you must have gotten your first federal student loan after October 1, 2007 and you need to have gotten a Direct Loan or Direct Consolidation Loan after October 1, 2011. Note: If you’re wondering whether or not you would qualify for this program, the government has a Pay-As-You-Earn calculator you could use to determine your eligibility.

If you are not eligible

If you determine you are not eligible for Pay As You Earn, there are two other income-driven programs available that could make it easier for you to repay your student loans. One of these, Income-based Repayment, would cap your monthly payments at 15% of your discretionary income and Income-contingent Repayment caps it at 20%. There is more information on these income-driven repayment programs available on the Federal Student Aid website.

It doesn’t have to be a personal crisis

While student debt may or may not be a crisis, it doesn’t have to be a crisis for you. As you have read, there are increasingly liberal loan modification programs available that could make it much easier for you to manage and pay off those burdensome student loans.

What Those Overly Aggressive Student Debt Collectors Won’t Tell You

Debt collector hollering into micStudent loan debt has become almost out of control as it now totals more than $1 trillion. This makes this debt larger than even America’s total credit card debt. Depending on which source you want to believe students recently graduated from college owing an average of either $24,000 or $33,000. It’s not uncommon for people in their 40s to still be paying on their student loans. And one recent study revealed that 6.8 million Americans have defaulted on their student loans to the tune of $14,103,000.

It’s easy to default

One of the underlying reasons why so many people have defaulted on their student loans is that it’s very easy to do this. You’re considered to be in default when you miss a payment by just one day. However, your student loan servicer probably won’t report you in default until 90 days after you first missed a payment and it likely will be nine months of no payments before you start hearing from a collector.

It can get ugly

Federal student debt collectors have an enormous amount of power. They are entitled by law to garnish your wages without taking you to court, seize your tax refunds or even take up to 15% of certain types of Social Security payments. Plus, unlike other types of debts, there is no time limit on student loan debts. Collectors could literally hound you forever.

They can be too aggressive

The National Consumer Law Center has said it feels the Department of Education is not doing what it should to crack down on debt collection agencies that are too aggressive about seeking payments. The problem is, of course, money. How much these collectors earn correlates strongly with the amount of money they are able to collect from people who have defaulted on their student loans. And here’s the important part, they don’t always tell people about the options that are available to them.

You could have your loan discharged

If you defaulted on one or more of your federal student loans and are being harassed, you still do have options although the debt collector may not make this clear to you. You could actually get your federal student loans canceled if you are totally disabled. It’s also possible to get them discharged or cancelled if …

  • You withdrew from school, but the school didn’t pay a refund that it owed you or the U.S. Department of Education
  • Your school falsely certified that you were eligible to receive a loan based on your ability to benefit from its training, and you did not meet the ability
  • You were victimized by identity theft
  • The school signed your name on an application or promissory note without your authorization or endorsed your loan check or signed your authorization for electronic funds transfer without your knowledge
  • The school certified that you were eligible for the loan but because of a physical or mental condition, age, criminal record, or another reason you are excluded from employment in the job for which you were being trained

Loan rehabilitation

Assuming you can’t qualify for loan discharge, you could rehabilitate one or more of your federal student loans. However, this applies only to a direct loan or FFEL program loan The way this works is that both you and the Department of Education agree on a practical and affordable repayment program. Your loan will be rehabilitated after you’ve voluntarily made the agreed-upon payments on time and the loan has been purchased by a lender. Note: Outstanding collection costs may be added to the principal balance.

Once you have had your loan rehabilitated, it’s possible you can regain eligibility for the benefits that were available on your loan before you defaulted. This can include forbearance, deferment, a choice of repayment plans, and loan forgiveness. In addition, you will have removed:

  • The default status that was reported to the national credit bureaus.
  • The default status of your defaulted loan
  • Any garnishment of your wages
  • Any of your income tax refund that had been withheld by the Internal Revenue Service.

How To Make Debt Consolidation Loan EffectiveLoan consolidation

Another option if you’ve defaulted on a federal student loan is loan consolidation. This is where you pay off any outstanding balances you have on your federal loans and end up with a new one that will have a fixed interest rate. You could choose to include a defaulted federal student loan in the new loan but only after you’ve made arrangements with the Department of Education and have made several voluntary payments. This is usually at least three consecutive, voluntary and on-time payments before you are allowed to consolidate the defaulted loan into the new direct loan.

The types of loans that can be consolidated

Almost every type of federal loan can be consolidated but not private loans. Some of the more popular types of federal student loans eligible for consolidation include Direct Subsidized and Direct Unsubsidized loans, Subsidized and Unsubsidized Federal Stafford loans, Direct PLUS Loans and Federal Perkins Loans.

Eligibilty for a Direct Consolidation Loan

As you have read, almost every type of federal student loan can be consolidated. However, there are some eligibility requirements you should be aware of. As noted above, you must have at least one Direct or FFEL Program loan and it must be in a grace period or in repayment. You must make satisfactory repayment arrangements with your loan servicer on the defaulted loan before it can be consolidated. And you must agree to repay the new Direct Consolidation Loan under one of the following

  • Income-based Repayment
  • Pay As You Earn Repayment t
  • Income-contingent Repayment

The interest rate on a Direct Consolidation Loan

These loans have a fixed interest rate. The way it is calculated is by using the weighted average of your existing loans rounded up to the nearest 1/8 of 1%. The easiest way to understand this without doing all the math is that the interest rate on your Direct Consolidation Loan will be higher than the loan with the lowest interest rate you are currently paying but lower than the loan with the highest interest rate.

The options for repaying a Direct Consolidation Loan

One of the best things about choosing to consolidate your federal student loans into a Direct Consolidation Loan is that it offers several options for repayment as indicated above. For example, you could choose Income-based Repayment where your monthly payments would be capped at 15% of your disposable income. Pay As You Earn Repayment was a hot topic recently when Pres. Obama signed an executive order making approximately 1.4 million more people eligible for this program. It’s even better than Income-based Repayment as if you qualify you would see your monthly payments capped at just 10% of your disposable income. How do you calculate disposable income? The short explanation is that it’s your adjusted gross income minus 150% of the federal poverty level times 10 percent.

Income-contingent Repayment

If you are unable to qualify for either Pay As You Earn or Income-based Repayment there is Income-contingent Repayment. It’s designed for people with lower salaries such as those who work in public service. It helps by pegging monthly payments to your family size, income and the total amount of money you borrowed. Its monthly payment is adjusted annually based on changes in the size of your family and your annual income – just as are Income-based and Pay As View Earn Repayment.

Are You Waiting For the Good Fairy Of Student Debt?

Young black college graduate with tuition debt, horizontalIt’s currently estimated that outstanding US student loan debt exceeds $1 trillion. Assuming this is true it would make student loan debt an even bigger issue than credit card debt. And depending on which source you believe this past June’s graduates owed an average of either $24,000 or $33,000 in student debt.

How did we get to this place?

Some people believe the problem began way back in the Reagan administration when Congress shifted funding from student aid to student loans. While this may be true it’s equally true that the cost of a college education has skyrocketed over the past 20 years. In fact, the cost of going to college has been increasing at about a 7% rate per year for decades. The overall consumer price index has risen 115% since 1985 while the college education inflation rate has grown nearly 500%. What this translates into is if college tuition cost $10,000 in 1986 and its cost had increased at the same rate as inflation, it would now cost $21,500. However, the average is now $59,800 or more than 2 1/2 times the rate of inflation. Given this, it’s fairly easy to see why most people end up having to get student loans to pay for their educations.

Is it worth it?

Is a college education really worth paying $59,800 or more just for your tuition? The answer to that is a simple “maybe” because it will depend largely on your field of study. If you choose a STEM major (Science, Technology, Engineering, Mathematics) then borrowing money to help pay for your education will definitely be worth it. On the other hand, if your passion is preschool education, anthropology, archaeology, philosophy or fine arts then getting loans to finance your education may not pay off.

How to determine how much is too much

If you are in college there is a way to determine how much is too much. First, you will need to determine two things — how much your starting salary will be in your intended field and how much debt you will have when you graduate. If your total debt is less than your annual starting salary, you should be able to pay back your student loans comfortably in 10 years or less – if this is what you plan on doing.

Use a student loan calculator

Once you determine how much money you will need to finance your schooling, you could use a student loan calculator to determine what your payments will be. When you match them against your starting salary you should have an even better idea of how much is too much.

The gift that keeps on taking

Student loan debt is the opposite of the gift that keeps on giving as it keeps on taking. If when you graduate you are on the Standard Repayment program it will take you 10 years to repay your loans. This could force you to delay some of the most important things of life such as getting married, buying a house or having kids. While you could move to another repayment program such as Extended Repayment to get your monthly payments reduced, this could keep you in debt for as long as 25 years. You could still be repaying your student loan debts when your children are worrying about paying for their educations.

How to keep college debt under control

If you’re still in school there are some things you can do to keep your college debt from getting out of control. You should make sure you apply for scholarships through sites such as and and through your college or university. Second be sure to fill out your FAFSA as you might qualify for grants. If one of your parents belongs to a club or organization or if you are the member of a church, see if it offers scholarships or grants. Third, when you borrow money be sure to get federal student loans and not private student loans as private ones tend to have higher interest rates and are subject to change. Finally, pay as much out-of-pocket towards your college costs as you can by working part-time or try to graduate faster, which will mean fewer semester fees.

If you’ve already graduated

In the event you’ve already graduated and owe a ton of student debt the one thing you don’t want to do is default on your federal loans. The government actually has more power to come after you then does even the most aggressive debt collector. It can garnish your wages, take part of your income tax refunds or seize 15% of your Social Security payments. You can’t even get out from under student debt by filing for bankruptcy.

Don’t hold your breath

Believe it or not you can’t even refinance federal student loans. However, there have been several attempts made to change this. In the Senate, Elizabeth Warren introduced a bill that would make it possible for people to refinance their student loans at better interest rates and Rep. Mark Pocan did the same thing in the House. While these bills stalled in committee, both Warren and Pocan have said they will bring them up again in the next session of Congress.

Stop waiting for a good fairy

If you have student loans at 5% or 6% and could refinance them down to 2% or 3% this would certainly help with your monthly payments. But what many people are experiencing is buyers’ remorse. They wish they had never borrowed the money and what they really want is for a fairy to swoop down and forgive all their student debts. News swept the Internet a few months ago that Pres. Obama was going to issue an order forgiving all federal student loan debts. This, of course, was a false rumor. Pres. Obama really doesn’t have the authority to do thie and even if he did, it would likely send our economy into a tailspin.

two men shaking handsBuckle down and repay them

At least at this point the best answer to federal student loan debts is to buckle down and repay them. If you’re on the 10-Year Standard Repayment program and are having a tough time making your monthly payments, you could switch to another repayment program. One of the most popular of these is Graduated Repayment where your payments start low but then gradually increase every two years. This can be an excellent option if you’re just starting out in your career. There are also three different types of income-driven repayment programs where your monthly payments would be based on your income. If you were to qualify for one of them – Pay As You Earn – your monthly payments would be capped at just 10% of your discretionary income and you could earn forgiveness after 10 years.

Check out your options

What this means is that you need to check out your other options to see if there isn’t another repayment program that would be better for you given your circumstances. The government site has good information about the various repayment programs and how to know if you would be eligible for one or more of them.

5 Financial Moves For Students Entering College

student with a notebook and calculatorWhen you are going into college, there are a lot of financial moves for students that you need to do. There is no such thing as being too young to implement the right financial habits that will set you up for a debt free future.

It is a sad scenario that most students feel like they need to borrow high student loans to get a job in the future. That is not true. You need a college education. That is the truth. But you do not have to borrow a lot of money just to get the higher education that will qualify you to earn a higher income.

Our students are mostly misinformed or completely ignorant of what they are facing before going to college. This is why they can easily be encouraged to sign in on those student loans that will keep them in debt for the next decade or so. It is very important that we educate these students or that they seek out on their own certain financial lessons that can set up their future correctly.

While the student loan debt scenario should raise some concerns about the nation’s future, there are efforts to help steer the next batch of students from the same fate. According to the data published on the website of the Council for Economic Education (, 17 states have already added personal finance in their course requirements. High school students are encouraged to take these personal finances lessons before graduating so they are educated on financial moves for students entering into college. Not only that, economics courses are also being set as a requirement before graduation in 22 states.

The data showed that only 6 of the 50 states implement testing the knowledge of students when it comes to personal finance. Somehow, this might help students be more aware of how they should manage their finances when they get into college. It might even help if they have specific lessons about student loans and their options to minimize the load of this debt.

5 moves you must make before going to college

While it is difficult to demolish student loan debt this is not impossible to do so. Some students have actually graduated without getting any debt at all. It is mostly a combination of their parent’s planning and preparation but the student themselves also did their part by learning how to manage their money wisely.

You may feel overwhelmed when your parents are not able to help you pay for college but do not be discouraged. Although you will need to borrow student loans, it does not have to ruin your financial future. You just have to make these 5 financial moves for students so you can head off any potential financial problems while you are getting your degree.

  1. Plan your finances. Everything should start with a plan. And take note, you should not stop with just one plan. The first that you need to create is a budget plan. This will help you identify how much money you have – whether it will be coming from your student loan or the funds that your parents have saved up for you. You need to determine the expenses that you will be making on a daily or weekly basis when you get to college. This will help you estimate how much you can afford to spend. You should also make a spending plan so you are guided on where your money should go to on a daily, weekly or monthly basis. Comparing it with your budget plan will help you decide if you need to add more money or cut back on some of your expenses. Lastly, for those who borrowed student loans, you may want to create a plan that will help you pay it off in the future. You can start paying off the interest on your student loans while you are still in school. That will help keep your debt payments to a minimum when you graduate.
  2. Build up your emergency fund. Nobody is exempt from emergency situations. Even if you are still young, you should be prepared to finance any unexpected event while you are still in school. It may be a sickness or a sudden expense that you have to make in the house where you are living. It can even be car repairs or the delayed release of your funds. It is always best to have an emergency fund so you will not be too stressed when something happens. Start with a small amount and gradually build it up as you get extra money.
  3. Apply for an account in a local credit union. Given your lack of credit history, it may be difficult for you to enjoy the products and services that traditional banks offer. But joining a credit union may be more beneficial for you. They are more customer oriented and do not usually ask for fees to maintain your checking account. They also have higher interest rates for savings accounts and lower rates for borrowers. Check out the local credit union near the school you will go to and see if their products are something that you can maximize.
  4. Work on your credit. It is a great idea to start developing your credit management while in school. If your parents helped you apply for a credit card, or you applied for a student or secured card, use it wisely and pay it off immediately. That way, you can build a strong credit history that will allow you to borrow money in the future with very low interest rates.
  5. Get a side job. One of the most common financial moves for students is getting a part time job. You may want to see if you can get a job waiting tables or in the retail industry as a sales crew. You can tutor or get work in the campus where you study. There are so many options for you to get the extra finances that you can utilize while you are still studying. Not only will this be beneficial in your finances, it is also something that you can put in your resume. According to an article published on, some college students have graduated without any student debt because they worked while in college. Some started their own business after high school while others entered paid internships. These students got their degree without incurring debt and were offered jobs immediately after graduating – no doubt because of their work experience in school.

Financial habits to develop while in college

As you work on these financial moves for students, you should also think about developing certain habits while you are at it. There are various habits that you can form while in college that will help set up your financial future. These habits will not only help you stay away from student and credit card debts, it will also train you to make smart financial choices all your life.

Here are some of the habits that you may want to form while you are in college.

  • Budgeting. This is something that you can practice if you implement the first of the financial moves for students that we discussed earlier in this article. You can apply this all throughout your life to ensure that you have full control over your finances.
  • Saving. This includes saving for your emergency fund and any expensive item that you want to buy. Make it a habit to pay for your expenses in cash. That way, you will not be working to pay for past expenses. You will be working to pay for future expenses. It will be a less stressful life.
  • Setting financial goals. Setting goals is a great way for you to make the right decisions because you know where you want to take your finances. It should be easy to make your decisions aligned.
  • Spending wisely. You have to understand that being a smart spender does not only mean you are saying no to the expenses that you cannot afford. It also means saying no to the expenses that you do not need – even if you can afford to pay for it in cash.
  • Investing. You do not have to be old to learn how to invest. The earlier you start, the more gains you will have in the future. When you have your emergency fund in place, put your extra money into investment funds.

Financial moves for students will help you set up for a wealthy future. Don’t you want to look back in your college years as something that helped propel you towards a better life? After all, a college degree will help you earn more as compared to those who skipped getting a higher education. According to, The value of getting a college degree is rising each year. Although the cost is also rising, your ability to get a high paying job can compensate for that. Even if you had to go through college through student loans, it is possible for you to minimize that debt and get more out of it through the development of proper financial management skills.

If you need help with any of your student loans, National Debt Relief can help. Their consultancy service will assist you in choosing and applying for the right student loan debt relief program. The service also includes helping out with the documentation. The consultation involves a one time service fee that will be put in an escrow account. If you are satisfied with the paperworks, that is the only time this payment will be released. There are is no upfront or maintenance fees.

How To Keep Student Debt From Ruining Your Life

graduate chained to student debtIt is estimated that some 20 million students are going to college this fall and that unfortunately some 12 million of them will be required to take out student loans to pay for their educations. Unless you’ve been hiding under a rock, you probably already know that student debt stands above $1 trillion making it even larger than our national credit card debt. Colleges and universities are not making things any easier either. The average tuition has increased 27% at public universities and 14% at private schools in the past five years, which would help explain why people are graduating owing an average of $25,000 or more.

But regardless of whether you’re just starting college or are already in school, there are things you can do to keep student debt from ruining your life.

Choose the most affordable school you can

In the event you’ve already started college this advice may come too late. But if you’re still a high school senior you should try to choose the most affordable school you can. This may not be the most prestigious of colleges but what many people have found is the secret is to go to an affordable school for four years and then get their graduate degrees at a more prestigious college or university.

Another way to keep from piling on so much debt it would ruin your life is to go to a community college for two years and then transfer to a more prestigious school. Whether you start at a two- or four-year college you’ll probably be required to take basically the same courses for the first two years so you really have nothing to lose by starting at a local community college. As an example of what this can mean, the cost to attend one of our local community colleges for a year is $6832 while the cost for an in-state student to attend our state university is $26,933. Do the math and you’ll see you would save approximately $40,000 by doing your first two years at the community college.

Choose your major carefully

Even if you’re already in college it’s not too late to consider changing majors if you’ve chosen one that would doom you to being a low earner for years. Recent studies have shown that if you get a degree in child and family studies, elementary education, exercise science, broadcast journalism or animal science you will be a low earner for life. For example, even the mid-career salary for a person with a major in child and family studies is just $37,200 and for elementary education it’s $45,300. The starting salary for a person with a major in exercise science is $32,600 with an estimated mid-career salary of $51,000 while the mid-career salary for a broadcast journalism major is just $68,800. Now compare this with the $100,000 or so that you will spend on your education and ask yourself the question would one of these majors be a good investment.

Also be careful about the college you choose

Believe it or not there are colleges that offer better values just as there are automobiles that are better values and the names of some of the schools might astonish you. For example, Harvard University is considered to be a good value because nearly 60% of its students receive need-based grants so that the average cost to them is just $15,486 a year. Brigham Young University is also considered to be a good value because the average cost of attending there for a year if you receive need-based grants is just $12,367. And the cost to attend the Massachusetts Institute of Technology for a year averages just $19,957 assuming you qualify for need-based grants. Now compare this to the cost of attending our state university for a year of $26,933 with little or no opportunity to get grants and you should be able to see why it’s important to be careful about which school you choose.

Score some scholarships

Fortunately, scholarship money being handed out by foundations, corporations and other private-sector benefactors has also risen as has tuition at universities and colleges. There are websites available that can help you and your family find scholarships for which you might qualify. However, it’s important to search early. If you’re a student your parents should check with their employers to see if maybe they offer its employees’ children scholarships. Don’t be afraid to aim high. Even though the competition for big scholarships can be very tough, you should give it a shot. They payoff can make it worth the effort. This is also an area where choosing a private school could be better than a public university. While it’s very difficult to score a scholarship from a public school it should be easier to get one from a private institution – just as it’s easier to get needs-based grants. As an example of this, the small private college I attended now costs – at least theoretically – a little more than $37,000 a year. However, 100% of its students receive scholarships or grants so that the true cost of attending it is clearly much less than the $37,000.

What to do if you’re already deep in student loan debt

If you owe $20,000, $30,000 or more in student debt you can still keep this from ruining your life. For one thing, you could get a federal Direct Consolidation loan, which could lower your monthly payments dramatically by giving you more time to pay off your debt. The other advantage of this is that you would have just one monthly payment to make a month versus the multiple payments you’re currently making. The interest rate on these loans is computed as the weighted average of the loans you’re consolidating rounded up to the nearest 1/8th of a percent. The simplest way to think of this is that if you get a Direct Consolidation loan, your interest rate will be higher than the lowest interest rate you’re currently paying but lower than the loan with the highest interest rate.

Choose a different repayment program

You might also be able to make your life easier by changing repayment plans. There are six available in addition to the 10-Year Standard Repayment program. Three of these are income-based meaning that your monthly payments would be based on your income and family size. One of these is Pay As You Earn, which would cap your monthly payments at 10% of your discretionary income. Pres. Obama recently signed an executive order that makes about 1.6 million more people eligible for this program and you might be one of them – if you got your first federal student loan after October 1, 2007 and it was a Direct Loan or a Direct Consolidation loan you received after October 1 of 2011. The eligibility requirements for Pay As You Earn can be a bit confusing so be sure to watch this short video to learn more about them,

Other repayment options

In the event you aren’t eligible for Pay As View Earn, there are other options that could keep your student debt from ruining your life. The Income-based Repayment program would cap your monthly payments at 15% of your discretionary income or if you just recently graduated you might choose Graduated Repayment. This is where the payments start smaller but then gradually increase every two years.

The long and short of it is that you can get a good college education without it ruining your life. However, you will need to make some smart decisions when it comes to choosing a school and choosing a major. There are also options available that can make things easier in the event you have a considerable amount of student debt. As the old saying goes, “you don’t need to know a lot about money to be good with money.” The important thing is to think things through and make decisions that will enhance your life and not ruin it.

Should You Go Social To Consolidate your Student loans?

Video thumbnail for youtube video How To Be A Smart Credit Card UserIf you don’t think student loans have become something of a crisis, consider this. There are now more than $1 trillion outstanding in student loan debt. The reason for this is fairly simple. Approximately 20 million Americans go to college each year and of that 20 million, close to 12 million or about 60% borrow annually to help cover the costs of their educations. Seven out of 10 college seniors (71%) that graduated last year had student loan debts that averaged $29,400 per borrower. And debt at graduation (combining federal and private loans) increased an average of six percent each year from 2008 to 2012.

Going social

Are you laboring under the weight of student debts totaling $20,000, $30,000 or even more? If so, there could be help available through a relatively new entity named SoFi (Social Finance, Inc.). It is dramatically different than any other institution offering debt consolidation loans in that it is more of a social community as it consists of a network of 550 colleges and universities and offers loans only to those that are an alumnus of one of these schools.

How SoFi does business

SoFi is based on peer-to-peer lending. It promotes itself as a leading edge marketplace that connects high quality borrowers with alumni investors. SoFi offers rates that are lower than conventional loan consolidation companies because it’s certain that its borrowers will repay the community that backed them. As of this writing SoFi had fixed and variable rate loans beginning at an interest rate of 3.625% (with Autopay) and with terms of five, 10 and 15 years.

More than just a lender

SoFi is also different from conventional lenders in several other ways. As an example of this it offers unemployment protection. When a member becomes unemployed SoFi will pause her or his payments and even help the person find a new job. In addition, SoFi provides complementary coaching for its members to help them reach their career goals. It also helps its members find jobs and creates opportunities for entrepreneurs. In fact, qualified applicants that are interested in creating a new business can get their payments deferred for six months, access to a cohort of like-minded entrepreneurials and professional mentorship.

The negatives

Becoming a member of SoFi may sound very attractive. However, you need to be aware that there are some negatives. First, as you have read you must be an alumnus of one of its 550 member schools. A second negative is the eligibility requirements. To get a loan from SoFi depends on a number of factors, such as your credit score, that you can show a strong monthly cash flow and that you’ve had a solid employment history. A third negative is that SoFi will consolidate federal student loans together with private loans, which many experts consider to be a no-no. The reason for this is that once these loans have been consolidated, you lose all the benefits that come with federal student loans such as forgiveness, cancellation, deferral and the multiple repayment programs available.

Young black college graduate with tuition debt, horizontalYou can’t borrow your way out of debt

Finally, as a wise man once said, you can’t borrow your way out of debt. If you were to consolidate, say, $30,000 in student loans via SoFi you would still owe $30,000. Plus, you would have a fixed term and fixed monthly payment with no ability to change your repayment plan should that become advisable. It is for these reasons that many student loan borrowers opt to restructure their federal student loans rather than consolidate them.

Repayment options

What many borrowers don’t realize is that there are a number of repayment options besides 10-Year Standard Repayment. One of the most popular of these is Graduated Repayment. This can be a very attractive option for young people who are still low earners as the payments start low and then gradually increase every two years.

Income-based Repayment

There are also several repayment programs for federal loans that are based on your income. One of these is Pay As You Earn. You may have read about this program when president Obama recently signed an executive order that made about 1.6 million more people eligible for it. The best feature of this program is that it caps your monthly payments at 10% of your discretionary income. In addition, if you make your qualifying payments and have a remaining balance after 20 years it will be forgiven. Alternately, if you work for a public service organization you might be able to earn loan forgiveness after just 10 years.

Eligibility requirements

To be eligible for Pay As You Earn you must have one of the following types of loans.

  • Direct Unsubsidized Loans
  • Direct Subsidized Loans
  • Direct Consolidation loans that were not used to repay any plus loans that were made to your parents
  • Direct Plus loans made to graduate or professional students
  • Subsidize Federal Stafford loans
  • Unsubsidized Federal Stafford loans
  • FFEL PLUS Loans made to graduate or professional students
  • FFEL Consolidation loans that were not used to repay any PLUS loans made to parents
  • Federal Perkins Loans

Do you know what types of loans you have?

If you’re typical and have multiple student loans you may not actually know which types you have. If this is the case you will need to go to the Department of Education’s student loan database ( where you can learn what types of loans you have, when the funds were disbursed and how much you currently owe.

Your payments under Pay As You Earn

Generally, your monthly payment amount under Pay As You Learn will be a percentage of your discretionary income, which will be different depending on the plan and when you took out your federal student loans. To determine if you’re eligible you must also calculate your discretionary income as defined under this law. Without getting technical, suffice it to say that the way you determine this is by taking your gross income and then subtracting 150% times the federal poverty line.

Income-based Repayment

If you are ineligible for Pay As You Earn Repayment there are two other income-driven options. The first is Income-based Repayment. This is essentially the same as Pay As You Earn except your monthly payments would be capped at 15% of your discretionary income.

Second, there is Income-contingent Repayment. It is much like Income-based Repayment except it is only available under the Federal Direct Loan Program. Like Income-based Repayment your monthly payments would be a percentage of your discretionary income.

However, its monthly payment is usually higher than those under Income-based Repayment. In fact, it can be higher than the payments you are probably now making under 10-Year Standard Repayment.

The downsides of income-driven repayment programs

While one of these income-driven repayment programs could be a good choice it’s important to understand that they do have their negatives. For one thing you will pay more total interest over the life of your loan. Second, you will be required to submit updated information on the size of your family and your income to your loan servicer every year. If you do not do this, your monthly payments will no longer be based on your income and any unpaid interest will capitalize. Third, only Direct Loans are eligible and finally if you have a portion of your debt forgiven after the 10 or 20 years, you may have to pay taxes on it.

In summary

If your objective is to get lower monthly payments through loan consolidation, SoFi could be a good choice. Of course, this assumes that you would be eligible for one of its loans. If so, you would probably end up with a lower monthly payment than what you have now and might be able to get your loan paid off quicker. Plus, you would be eligible for the “extras” offered by SoFi including unemployment protection, career support, career services and its entrepreneur program.

If you would not be eligible for a SoFi loan or if your goal is to pay off your student loans without borrowing more money, a better option would be one of the income-driven repayment programs available through the Department of Education. You could end up with a lower monthly payment and would still be eligible for loan forgiveness, cancellation, deferral and the ability to change repayment programs should the need arise.

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