Consider it a cautionary tale. Over the past decade, college students have had every reason to borrow for college and little reason not to. College costs exceeded inflation by as much as six percentage points a year, bringing the average annual price of a private-school education to $37,000. Congress raised the maximum on federal student loans and introduced the Grad PLUS loan, allowing graduate students to borrow up to the cost of attendance. And until 2008, when credit began tightening up, lenders handed out private student loans.
Result? More students borrowed and in larger amounts. The average debt at graduation was $24,000 in 2009, up 6 percent from the year before, according to the Project on Student Debt. But that understates the dramatically higher debt that some students racked up. And many of them got swamped by their bills almost immediately.
Of the 3.4 million federal-loan borrowers who entered repayment in 2008 (as the economy slid into recession), 7 percent defaulted within the year, the highest percentage in more than a decade. That statistic doesn’t include the thousands of borrowers who fell behind on their payments without defaulting, or those who couldn’t keep up with their private student loans.
Missing a few payments invites dunning calls and letters, but defaulting can destroy your future. Being on the dark side of federal student debt means the feds can demand payment in full, assign your case to a collection agency, garnish your wages, pocket any state or federal refunds, and even come after your benefits in your old age.
“We see people who defaulted on loans in the 1970s and 1980s whose Social Security benefits are being garnished,” says Paul Combe of American Student Assistance, an agency that guarantees federal loans. Worse yet, old, neglected loans carry decades’ worth of fees, interest and collection costs. “A $2,000 loan that defaulted 20 years ago is now $30,000,” he says.
Strategies for repayment
The federal loan program offers several plans to get back on track. With private loans, you have to negotiate with the lender. Either way, start by knowing what types of loans you have, where they originated and who services each one. For federal loans, go to the National Student Loan Data System. For private loans, review your loan agreements, which should include repayment options.
With the federal loans known as Staffords (now part of the Federal Direct Loan program), as well as Grad PLUS loans, the loan goes into delinquency when your payment is 21 to 30 days late. If you fall 60 days behind, the loan agency will report the lapse to the national credit bureaus.
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