Did you graduate from college in 2012? If so and if you’re typical, you probably graduated owing $25,000 in student loan debts. That’s just the average for an undergraduate degree. If you got a graduate degree in business, law or medicine, you could now be looking at anywhere from $50,000 to $100,000 in student loan debts. Of course, if you racked up that $100,000 in becoming a doctor, you could look at that as a good investment that will pay off big time in the years to come. On the other hand, if you borrowed say $30,000 to get a degree in business or marketing, you could be in trouble. Why is this? It’s because you might not be able to find a job this year, next year or even the year after. We saw one recent study that there are approximately five college graduates for every job available that requires a college degree.
Student loan debt is like no other debt
The biggest problem with student loan debts – besides paying them off – is that they are unlike any other debt. You cannot discharge student loan debts through bankruptcy and there is no statute of limitations. In short, you can run from student loan debts but you can’t hide. If you fail to pay back that debt, you could see as much as 15% of your salary garnished to satisfy your debt. Today, the government is even turning student loan deadbeats over to debt collectors. And trust us when we say that one of the last things you want in life is to fall into the clutches of an aggressive debt collector. He could make your life literally a living hell.
If you’re seriously struggling to pay back your student loan debts, you do have some options although none of them could be termed “ideal.” For example, it’s possible to get student loan debts forgiven after approximately 10 years if you work full-time in a public service job. This includes working for the federal, state or local governments. There is also a loan forgiveness program for people who are willing to teach in low-income schools. However, the only types of loan that qualify for forgiveness are loans made under the William D. Ford Federal Direct Loan (Direct Loan) Program. So, you would not qualify if you received a Federal Family Education Loan (FFEL), a Federal Perkins Loan or any other type of student loan. But if you have an FFEL or Federal Perkins Loan, you could consolidate it into a Direct Consolidation Loan and then apply for loan forgiveness.
As you might guess, loan deferment is a way to get student loan payments deferred or put off for some period of time. If you have a Direct Subsidized Loan you would not be charged interest. However, if you have a Direct or FFEL Unsubsidized or PLUS loan, you will be charged interest during your deferment. And if you don’t pay this interest, it will be capitalized at the end of the deferment so that you will be paying interest on interest.
There are a number of ways to qualify for a deferment including full-time enrollment in a graduate level program, if you have a hardship such as participating in the Peace Corps, are serving on active duty during a war or some other military operation, in the National Guard or an approved full-time rehabilitation program.
Student Loan forbearance
If you’re having a problem paying back your student loans and do not qualify for a deferment, you could apply for student loan forbearance. This is another way to temporarily put off or reduce student loan payments. There are a number of requirements for receiving forbearance. This includes serving in a medical or dental internship or residency program, if the total amount you owe each month for all of your Title IV student loans is 20% or more of your total monthly gross income or you’re serving in an approved AmeriCorps position. You might also be eligible for forbearance if you are called for active duty in the US Armed Forces or are performing a teaching service that would qualify for forgiveness under the Teacher Loan Forgiveness Program.
To qualify for forbearance
If you do qualify for student loan forbearance, you should be aware that interest is charged on all types of loans. And if you don’t pay back this interest, it will be capitalized at the end of your forbearance and again, you will be paying interest on interest.
Back in 1964, the economist Milton Friedman proposed a radical plan for funding a person’s education. The idea was that people would sell “stock” in themselves in the form of a share of their future earnings. These shares would be purchased by investors and used by the borrowers to fund their education and training. The idea is that this stock would be profitable so long as the ROI (return on investment) on the degree exceeded the market rate of interest.
As outrageous as this concept might seem, now 60 years later, this is actually beginning to take shape in the form of income-share agreements (ISAs). These are contracts that permit investors to provide money up front to individuals in exchange for a percentage of their future earnings. This idea has been gaining in popularity due mostly because of the nation’s huge student debt problem. There are companies such as Upstart, Pave and Lumni that have adopted this model to help talented people get funding for anything from a business venture to their educations.
Sen. Marco Rubio and Rep. Tom Petri recently introduced legislation to define the terms of these investment vehicles and broaden their use. This act is formally titled the Investing in Student Success Act. It is designed to provide a legal framework for ISA’s so that people seeking funds and investors would both know exactly what they were signing up for. Among the other details specified in this act are the minimum lengths a contract can last and how much a person seeking funds can owe (15%). The bill also formalizes the fact that an income share agreement is not a loan, which is a question that companies such as Pave and Upstart have been grappling with in trying to define their contracts.
Could help all students
Rep. Petri, who is a member of the House Education and the Workforce Committee, has said that these plans should help all students get what they need in the way of financing, even students from disadvantaged backgrounds. The basic concept behind these ISAs is that they would make life easier for the borrower because his or her debt would be repaid in proportion to their earnings. For example, if a person received an ISA contract to pay back 6% of their earnings over a five-year period, their monthly payments would vary depending on his or her salary at any given time.
Won’t solve every problem
It’s not clear whether this program will actually help give people with disadvantaged backgrounds better access to financing for their educations. The problem with both Upstart and Pave is that they are dependent on algorithms that often result in investments in people who already have well-decorated resumes and top-tier educations.
Because it’s not a loan
What’s true is that an ISA when compared to a traditional loan does a better job of aligning the incentives of the two parties – the borrower and the lender. This is because the investor sees returns that are directly tied to how well the student or borrower – their investment – performs. Lenders who invest in a student that gets a good education and goes on to a high-paying job will get back proportionately more than a student who struggles in the labor market. Since investors can’t force borrowers to do anything – because an ISA is not a loan – it’s in their best interest to help people on their way to success.