Student Loan Problems - Help to Avoid Default

Originally Published on forbes.com on October 27th,2011

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One of the most frequently mentioned grievances on the We Are The 99 Percent site is excessive student debt.  To supplement what I have alreadywritten on the topic I have invited guest posts.  This is from a representative of American Student Assistance.  I did my own field research by venturing out from the geriatric wing of 1400 Computer Drive and interviewing the young people who are occupying the cubes and interior offices.  Although some of them have a touch of schadenfreude as they contemplate the fate of their high school classmates who mocked them because they went to Worcester State College (current tuition and fees less than $8.000 per year) to major in accounting, there were more than enough sobering stories of friends and relatives who had made other choices.

Over the next month or so, the first student loan payments come due for students who graduated from college last spring. Unfortunately the Class of 2011 faces some grim statistics.  Students today are borrowing twice what they did a decade ago, with an average student loan burden of about $25,000 (although some students borrow considerably more).  Meanwhile, the Economic Policy Institute reports that 9.3% of college graduates younger than 25 are unemployed, while the rate for those older than 25 is 4.7%. The news is even worse for those who left school without a credential:  The unemployment rate for those without a college degree under age 25 is 22.5%. For those lucky enough to land a job, the median starting salary (for students graduating from four-year colleges) is around $27,000, down from $30,000 in 2008. And the number of college graduates aged 25 to 34 “under” employed in food service, restaurants and bars rose 17 percent from 2008 to 2009. 

Fewer jobs and lower salaries for college-goers have naturally taken a toll on student loan repayment.  The national student loan default rate recently reached its highest point, 8.8%, since 1997.  But default, officially classified as 270 days of non-payment, doesn’t even scratch the surface of the real story of struggling student loan borrowers today.  According to theInstitute for Higher Education Policy, for every one borrower who defaults, two more fall behind on payment by 60 days or more and as a result, they face damaged credit and higher interest on other forms of consumer credit.  In fact, only 37% of federal student loan borrowers were able to make their student loan payments without interruption over the last five years. 

The good news is that the federal student loan program was actually built to withstand economic times like these.  Federal student loan borrowers have multiple rights to keep their student loans above water (more on those later).  The bad news, though, is that the federal government hasn’t exactly made proactively educating borrowers about their rights a number one priority up to this point.  That means it’s up to individual borrowers to be proactive and arm themselves with information as they navigate student loan repayment.  Sounds daunting, but here are three steps to get you started if you’re overwhelmed by student debt.

1. Know what you owe.  You probably received a packet of information on student loan repayment from your college when you graduated, but that was six months and who knows how many address changes ago.  If you don’t know how many loans you have, what the monthly payments are or where to send them, visit the National Student Loan Data System atwww.nslds.ed.gov.  This is the U.S. Education Department’s central database for federal student aid and here you can get a complete listing of all your federal student loans.  NSLDS doesn’t track private loans, so check yourcredit report if you took out loans with names other than “Stafford,” “Perkins” or “PLUS.”  You can request a free copy of your credit report once a year. 
2. Know your rights.  Federal student loan borrowers have multiple rights to make the debt more manageable.    Can’t find a job after college?  You can defer payment, and sometimes even interest, for up to three years or longer.  Can’t afford your current monthly payment?  You can either lengthen your repayment term to lower your payment, or start out with lower payments and gradually increase if you anticipate your salary will grow in future years.  Longer repayment terms will mean you pay more in interest over the long term, but you can always prepay your federal student loans at any time if your financial situation gets better.  Have lots of student loan debt but entering a low-paying field?  That’s covered, too. You may be able to cap monthly payments at 10% of your income and the balance could be waived after 25 qualifying years (in some cases after 10 years if the borrower works in public service).  If you can’t make your student loan payment, contact your student loan servicers (the ones listed on NSLDS) and ask them how to take advantage of any of these programs.  You can also visit American Student Assistance’s website or the U.S. Education Department for a full list of repayment options.

(A word about private loans . . . Private or “alternative” loans are loans made by a private lender that are not backed in any way by the federal government.  Unfortunately, these loans typically do not offer borrowers the same repayment rights found with federal loans.  But all is not lost; if you’re having problems repaying, you should still contact the lender and see if they will work with you to help you avoid default.  Also, the relatively new Consumer Financial Protection Bureau is rumored to include a “private student loan ombudsman” in the future to assist borrowers, so that may be an additional resource down the road.  Speaking of ombudsmen, there is also a Federal Student Aid Ombudsman to help individualsafter they’ve tried other ways to resolve a federal student aid dispute.)

1. Act sooner rather than later. The rights of federal student loan borrowers dwindle the longer their loans remain past due.  If you’ve fallen behind on payment, it’s really in your best interest to contact your servicer quickly and work out a different payment plan.  Once you default, you no longer have many of the rights outlined above.  But that being said, default is not the end of the world.  You can rehabilitate your defaulted loan by making nine consecutive payments or you may also consolidate your loan out of default. This will help repair your credit and regain your eligibility for federal financial aid in the future should you choose to return to school. 

Michael Ryan is a vice president for American Student Assistance, a nonprofit that helps college students and alumni successfully manage education debt by giving them money smarts they can use for a lifetime.