With the cost of College skyrocketing over the last 20 years, more and more students, and their families had to get loans to pay for tuition, books and living expenses. With in-state university tuition running between $20,000.00 and $35,000.00, out-of-state public schools can cost $40,000.00 to 60,000.00 per year. Private schools can run even more. For many schools, the “sticker price” is not what students pay, because students can get scholarships and financial aid. But, even after getting scholarships and aid, students and their families use student loans to cover the difference in cost. This is because, with such high costs, most families haven’t had the ability to save enough to pay the full costs of a college education.
Over the years of helping clients of all ages with their finances and debt issues, I have seen plenty of families struggling with student loan debt, and, while trying to pay on student loans for themselves, their children, or grandchildren, they in turn fall into more debt, as the payments get larger and larger. Now $1.2 trillion in student loan debt is outstanding, it is the 2nd largest amount of debt outstanding after home mortgages. I am seeing many more clients struggling with student loan debt, from the new graduate, all the way through to grandparents who cosigned for these loans.
We can help you make sense of your student loans, at each step of the process. We can guide you and give you options that the lenders don’t tell you about. From choosing a school for your child, planning to try to minimize the debt, to selecting the types of loans from what is available, to helping with repayment plans, we can help you manage all parts of the college financial process. We can also help when student loans spin out of control.
Some common questions: What are your rights if your tax refund is taken by the lender? What are your rights if you are sued? What can you do to stop a wage garnishment?
STEP 1—CHOOSING A SCHOOL—LOOK AT THE BOTTOM LINE!
If you are a parent of a high schooler, by the time your young adult hits junior year, they would have already spoken with their counselor, signed up for the ACT or SAT, and started thinking about what kind of career they want to try for, and whether they are going to a 4-year university, or a junior college, or a trade school. Most jobs require some kind of training, and that costs money. Junior year is the crucial year to see where your child is heading. And, depending on the goal, those grades are important. Not just to graduate, but also to see what schools might be the best fit for your child and where they could be accepted. And, how your child performs with grades and college entrance tests also determines how much financial aid he or she will get. This will then help you narrow down the choices. Once you’ve narrowed down the choices, you might go on some college visits.
By senior year in High School, your child will start applying to schools. And, the financial pieces will come into focus. That’s because the parent can fill in the FASFA form (Free Application for Student Financial Aid). Based on your income from the last tax year, schools will use that form to determine how much in Financial Aid, Grants and Scholarships the student will get.
If the student is accepted, the school will list these things in a “package”. The numbers listed there are not just “FASFA Money”. Grants and Scholarships don’t have to be paid back. Also in this package, loans will be listed. Those have to be paid back. And, if there is a shortfall, the student or the student’s family has to come up with the rest. Loans plus the balance EQUALS the bottom line. This is the true cost of the school. Look closely at that for each school. Why is this so important? Because if the student doesn’t have enough saved (and, let’s face it, most students don’t have enough saved), you have to figure out how to pay for the rest!
STEP 2– ALL LOANS ARE NOT CREATED EQUAL
What kind of loans are available to pay for college? Generally, there are 2 types of loans available, Federal and Private. It’s amazing to me that by the time I see people who are having problems with their student loans that they don’t know what kind of loans they have. It can be very confusing. When a student first gets the “package” offer from the school, it will say right there.
Any student can check on their loans to see what kind of loans they have by looking at their account at nslds.ed.gov. This shows all federal loans. If they are not in the NSLDS system, they are not federal loans.
Federal loans are listed on the school’s financial aid package. Most common types of Federal Loans are: Stafford, Perkins, and Plus loans. Each type of loan has rules and some have limits of how much a student can borrow. These loans are the best loans to use. Why? Because the interest rates are lower than most other loans, and, most importantly, they have the best repayment options after graduation. In most cases, even though the student doesn’t have to start paying the loans back while he or she is in school, the interest does accrue.
For subsidized Stafford loans, the interest doesn’t start until after the student leaves school. But, an undergraduate student can only get a maximum of $5,500.00-7,500.00 in Stafford loans. Perkins loans are usually given to families with exceptional financial need.
Plus loans are available for parents to borrow the rest of the school costs, or for graduate students, and are based on the credit.
Private loans are any other loans that a student or family would be able to get. These are the loans to avoid, or limit, if at all possible. They are very easy to get. In fact, once a student enrolls in school, he or she, and parents, get letters by email and snail mail, with easy applications to get more money. Why are they so easy to get? Lenders such as Discover, Citibank, and others lend money at CREDIT CARD RATES, such as 10%-20% or more per year. And, because they are student loans, they generally cannot be eliminated in bankruptcy (more on this later). In comparison, Federal Student loan interest can be between 4 and 6%. So, they get all of the upside of high interest rates to charge, with little downside. Also, if the student can’t pay these loans, there are not any options to help them. Most often, when I see people being sued, and their paycheck getting garnished, it is from private student lenders.
STEP 3— GET OUT OF SCHOOL—WHAT TO DO?
Hopefully, once out of school, the student finds a job. Then, it’s best to set up a repayment plan with the lender. There is a grace period on Federal Loans of 6-9 months. Your lender may just send a letter with the monthly payment listed. If the student doesn’t have a job right away, for federal loans, there are options. One option is Forbearance, which means the loan is put on hold. But, during that time, the interest is still running. Another option is an income-based repayment plan. In some situations, forbearance may not be the best option. And, the lender may not tell you this. Why? Because, with certain federal repayment plans, if you pay for 20 or 25 years, the rest of the loan will be forgiven. That’s right, FORGIVEN! So, you want to get that going right away.
There are other types of loan forgiveness, such as for teachers who work in certain schools with a high percentage of low income families, or other types of work for public service organizations. There are many requirements, but it is worth it to investigate all of these options when the student graduates and is looking for jobs.
STEP 4—IN DEFAULT—WHAT TO DO?
If the student doesn’t get a job, or is not making enough money over the years, the student can get into default on the loans. What is default? That is any time the student doesn’t pay what is due. And, after too much time in default, bad things can happen. We can help you get back on track.
Federal loans: The Federal government can take tax refunds for federal loans. They can garnish wages, and can use the court system and sue the student. For these loans, it’s best to get out of default and get into a repayment program, such as Income Based Repayment plans (IBR or IDR), Pay as you Earn (PAYE) , or Revised Pay as You Earn (REPAYE). These plans are best to prevent the more drastic measures. Consolidation is another option.
Private loans: Try to work out a repayment plan. These lenders don’t have many great options. You can try to call them. If you still can’t afford the payments, Chapter 13 Bankruptcy may be an option, to pay what you can afford for 3-5 years. Or, they may sue and garnish wages. A Chapter 13 Bankruptcy can also stop the wage garnishment. Even though after the Chapter 13 is finished, the balance owed plus interest will remain due, it can give people a breather, and allow them to pay for their regular living expenses.
STEP 5—CAN YOU DISCHARGE (ELIMINATE) STUDENT LOANS?
Generally, there are 2 ways to eliminate student loans without forgiveness. The first is directly through the federal government, by applying for Total and Permanent Disability. This requires doctor certifications and a detailed application. This only applies to Federal Loans.
The other way to eliminate a student loan is through bankruptcy. The law is set out in the Bankruptcy Code and states that the borrower must show that repaying the loan would cause an “undue hardship”. As of now, the Bruner test, from the Bruner v. New York State Higher Education Services case, determines how courts are to determine an undue hardship. The student must show good faith efforts to repay the student loans, that the student cannot maintain, based on current income and expenses, a “minimal” standard of living for himself and his dependents if forced to repay the loans, and that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans. Over the years, this has been very difficult to prove, and a very small number of students are even able to try this method. While it is possible to discharge a student loan in bankruptcy, it is very difficult.
Another question to ask– is it a student loan at all? Because if it is not a student loan, but rather, tuition owed to a school directly, that may be eliminated.
STEP 6– DON’T PANIC!
As you can see above, there are plenty of options in dealing with student loans. Call us, we can help you figure out what is best for you and your family. Whether you are a newly graduated student, underemployed worker, parent, or grandparent, we can help.
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