Student debt has become one of America’s most serious problems. It’s estimated that we have more than $1 trillion – with a T – outstanding in student loans. It’s become so bad for individuals that an estimated 10% of recent borrowers defaulted on their loans within two years of graduation. And one in seven went into default within the first three years of required payments.
Given these statistics it’s no wonder that there is so much information floating around about student loans Unfortunately, not all of it is true. So here to set the record straight are some of the most important facts and myths about student loan debt.
Myth: You can get rid of your student debts by declaring bankruptcy
The truth is that you can’t get rid of your student loans by declaring bankruptcy. Congress decided some years ago that since the money to fund these loans come from U.S. taxpayers and not from banks or private corporations that we should be protected. It rewrote the law so that it’s virtually impossible to get student debts discharged in a chapter 7 bankruptcy. If you were to file for bankruptcy, you could plead with the judge to discharge your student debts but it’s highly unlikely you’ll succeed unless you can prove a “special hardship,” which includes:
You are unable to maintain even a minimal standard of living if you have to repay your loans
These circumstances will continue for a large portion of your loan repayment period
You’ve made a good faith effort to repay your loans
Fact: Student loans can be forgiven
You can get student loan debt forgiven (erased) after 20 years if you work for a public service organization such as the federal, state or city government and have made all your payments as scheduled and on time – but still have a remaining balance. This is called Public Service Loan Forgiveness IPSLF). If you are a teacher you could get up to $17,500 of your loans forgiven after teaching five complete and consecutive years of qualifying teaching service. Click here to learn more about this type of forgiveness.
Myth: Pres. Obama will soon sign a bill forgiving all student loan debt
This pops up on the Internet from time to time and if you’re swamped with student debt it could have you singing Hallelujah. However, it is just a myth. It’s not only unlikely that a president has the power to do this but if he were to do so, wiping out $1 trillion in debt equals about one-third of the federal budget. This is a huge amount that even if it were spread out over several years and would lead to even bigger deficits, tax increases and budget cuts. You just couldn’t wipe out $1 trillion in debt with the stroke of a pen without there being serious consequences.
Six months after you graduated or stopped going to school, you were required to start repaying your loans under 10-Year Standard Repayment. This means you have a fixed monthly payment and 10 years to repay your loans. As an example of what this can mean, if you owed $30,000 at 6.80% your monthly payment would be somewhere in the neighborhood of $340. Your cumulative payments will be about $41,000 and you would pay nearly $11,500 in interest. You could reduce that $340 a month by changing to one of the other six repayment programs available. For instance, there is Graduated Repayment where your payments start out small and then gradually increase every two years. This could be a good choice if you are just starting out in you career but believe your earnings will increase over time.
Myth: Students graduate owing an average of $29,400
This is one of the most quoted statistics about student debt but is not exactly the case. A recent study revealed that this number is swelled by the nearly 1.7 million graduate school students that are taking out loans, many for degrees that may or may not lead to better salaries. And the median debt loans for these borrowers grew from $40,209 in 2004 to $57.000 in 2012 and have probably only gotten worse since then.
Fact: Pres. Obama did do something that can help people with student debt
While Pres. Obama did not sign an executive order forgiving all student loans, he did sign one that made many more people eligible for Pay As You Earn Repayment. This program caps the monthly payments of eligible borrowers at 10% of their disposable income and includes loan forgiveness after 20 years. However, to be eligible for this program you must have had at least one federal student loan that you got on or after October 1, 2011 and no loans prior to October 1, 2007. It is also available only for loans in the Federal Direct Loan program.
Myth: You can beat the student debt game by going to a cheaper school
The problem with this statement is that even colleges that cost less now cost more. In fact, the average total cost to attend “all institutions” (this includes private, public, four- and two-year schools) increased from $8,438 in 1982 to $19,9339 in 20212 – even after adjusting for inflation. In other words, even if you attend a less expensive college, it will still be expensive and you will likely have to borrow money to pay for it.
Fact: Consolidating federal loans together with private loans is a bad idea
First, you cannot get a Federal Direct Consolidation Loan to consolidate both federal and private loans. To do this, you would need to go to a private lender. The reason why you shouldn’t do this is because you will lose all the benefits associated with federal loans including loan forgiveness, deferment, cancellation and the ability to switch repayment plans. Instead, you would have a loan with a fixed monthly payment, a fixed term – and no ability to change things if your circumstances were to change dramatically.
Myth: It’s impossible to get a student loan cancelled
The truth is that if you have a Stafford loan, you could get it cancelled – if you die or become totally and permanently disabled. There are some other special circumstances where it’s possible to get a federal loan canceled. They are:
- You were unable to complete your program of study because the school closed within 90 days of the time you enrolled
- Your school did not qualify your status properly before you began your studies
- You had a refund due you never received
- The school forged your signature to a promissory note or some other important document
- Your school failed to evaluate your ability to benefit from its coursework before you began school
- You loan was certified falsely as the result of identity theft or some other crime
Fact: You can leave your debts behind
It is possible to move to another country to avoid repaying your student loans. If you have an international address, it just makes it a lot more difficult for debt collectors to find you. In fact, collection agencies usually have to hire a third party or international counsel to recoup the money you owe. Since this would cut deeply into their profits they have less of an incentive to find you. However, you would be basically living in exile away from your family and friends and might not ever be able to return to the US.
Myth: Student loans won’t have a long-lasting effect on your life
One study revealed that even after 25 years after graduation the students who borrowed more than $25,000 were less likely to enjoy their work and are less physically and financially fit than those who graduated without debt. In other words, borrowing $25,000 or more to finance you college will have a negative effect on just about all aspects of your life.