Poor Student No More

We live in a nation in which higher education has become the goal of many, a necessity for most, and certainly a step in the right direction toward achieving the “American Dream.” Politicians base entire speeches on the promise of ensuring the opportunity to go to college exists for all. Teachers in primary and secondary education design their curriculum to prepare students for college, not necessarily for life (which is why we have such a problem with personal financial education — but I won’t digress to that topic here).

Since a college education has become such a commodity (with such a high price) in our nation, wouldn’t you think the government would offer students more opportunities and incentives to go?

There are federal loans (of which only some are subsidized) and grants, but overall, the federal government has not done an adequate job of protecting students from the debt trap that college can cause. Quite ironic considering they are encouraging American youth to go to college and achieve their dreams.

So, what is our government doing to protect students from high interest rates, defaults, and unforgiving lenders? What happens when higher education’s promise of a better financial future isn’t kept?

Right now, Congress is considering ending a program that backs private loans with government money. Instead, the money used to back the private loans would go directly to students, increasing the funds available for Stafford, Perkins and PLUS loans. This would not only save the federal government money, but also save students from high interest rates, unforgiving deferment policies and ridiculous calls from lenders telling you it’s time to start paying up. Yes please.

The most important legislation, however, comes from state legislatures. When there are budget cuts in the state, student aid often goes down, tuition for state universities goes up, and student debt goes up. For example, New York is thinking of cutting its student aid programs mid-year in response to a huge budget cut.

Jon Chattman wrote an article for The Huffington Post arguing that forgiving student debt would stimulate the economy because it would put extra money in pockets without decreasing taxes or giving stimulus packages.

Debt forgiveness is extremely rare, but there have been some ideas floating around Congress in recent years. The late Senator Kennedy introduced the Student Debt Relief Act of 2007 that increased the Pell grant, introduced a student aid reward program, cut interest rates in half, and offered fair payment assurance — meaning that there were less restrictions on granting forgiveness for all or part of student loans.

Keep pushing for more protection for students against private lenders, especially at the state level!

Bottom line: do not default on your loans.

Do everything possible to avoid it: Apply for deferment, get a third and fourth job, sell your vital organs, whatever it takes.  Just kidding about that last part.

But sometimes things happen and we end up having a lapse of judgment or let circumstances get out of control, and you cannot afford your payments.

If, for whatever reason, you happen to default on your loans, this is what happens and what you should do:

When you default, your loans can be turned over to a collection agency.  You can also be sued for the full amount of your loans, taken to court, and required to pay the court fees.  The government may take a percentage out of your paycheck each month to start repaying the loan.  Basically, once you default, the lender can use whatever legal means necessary to get their money back.  Default can also prevent you from renewing professional licenses or enlisting in armed services.

To get out of default, you must arrange payments with your lender.  These will have very strict rules and criteria, as you are now expected to default and you are risky.  After six consecutive, on-time payments, you are eligible for Title IV aid.  After 9 or 10 on-time consecutive payments and received “rehabilitation,” you will no longer be considered default.

“Rehabilitation” means that payments are adjusted to be “reasonable and affordable” based on your disposable income.  Payments can be below the minimum payment if the lender so decides.

Again, do everything possible to avoid defaulting, as it will set you back in actually paying off your student loans, as well as any other debt you may have.