How to Default (or Not) on Your Student Loans
One out of every nine students with college loans is now in default, according to new federal data. Could this mean student loans are going to be the next bubble, like the subprime mortgage and housing crisis?
The Department of Education in September issued updated default rates, which stand at a stunning 9.1 percent of federal student loans, or roughly $90 billion worth.
Of the 22 million students enrolled at universities now, two thirds attend using loans, either federal or private, with an average total debt balance of $26,000, according to figures from publicly traded lender Sallie Mae (ticker: SLM).
The total for federal plus private loans outstanding just hit $1 trillion, exceeding credit card debt.
If you’re behind on your student loan payments, or on the verge of default, what can you do?
First, ask your lender for an “income-based” repayment plan. Congress is considering overhauling today’s abhorrent debt collector program for student loans, to make income-based repayment the law of the land. Monthly payments would be capped at 15 percent of your income after basic living expenses.
Some lenders are not keen on income-based payments that will keep them from charging exorbitant interest and extra fees. Students and parents “don’t even know they can ask for it,” says Chanel Greene, who oversees financial aid at Peirce College in Philadelphia.
As a servicer on behalf of the Department of Education, Sallie Mae helps “federal loan customers understand their payment options – including income-based repayment – which is available today to anyone whose federal student loan payments exceed 15 percent of their discretionary income,” said spokeswoman Patricia Christel. “Federal loan terms and payment plans are set by Congress, and we, of course, follow the rules in place at the current time and follow new rules whenever Congress makes modifications.”
Second, there are two types of education loans. The most common and more forgiving type is federal student loans, which are available directly from the Department of Education at rates and terms set by Congress. Federal student loans are available regardless of income, assets or credit history. They are designed by government and underwritten by taxpayers as a public program to encourage access to education.