Color of Money Book Club

Author Deanne Loonin joined Michelle Singletary for a discussion of this month's Color of Money Book Club selection -- "Take Control of Your Student Loan Debt" (Nolo, $26.95).

Michelle says this book "is an easy-to-understand guide to the complex and often overwhelming process of the federal student loan program. ... You can pick and choose which parts serve your needs." Read the related column: " Coming to Terms With Student Loans " (June 5).

A transcript follows.

Read Michelle's past Color of Money columns .

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Michelle Singletary: Sorry for the delay folks. Let's get started.

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DC: Michelle: Does it make sense to consolidate your loans - while still in school? From what I understand, Access Group has a new program where you can consolidate loans even if you are in school - I did this to take advantage of the low interest rate.

Deanne Loonin: There are some pros and cons to in-school consolidation. The big "pro" right now is that interest rates are at historically low levels and are going to go up. You have until midnight tonight to take advantage of these very low rates. The biggest "con" is that you typically get a grace period, usually six months, after graduation before you have to start repaying. Consolidation eliminates the grace period. Some lenders may agree to maintain the grace period though.

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Anonymous: I found out something annoying yesterday, a "private" loan provided through Sallie Mae cannot be consolidated. Why is this?

Deanne Loonin: Consolidation, either through the Federal Family Education Loan (FFEL) program or Direct Loan program, is actually a benefit provided for in the law that governs federal student assistance programs. For that reason, it only applies to government loans and not to private loans. In general, the Higher Education Act rules do not apply to private loans. Other laws, such as consumer protections laws, do apply. But these laws do not give you a right to consolidate your loans. Private lenders could decide on their own to come up with consolidation programs. As generally happens in the market place, they are more likely to do this if they see that there is consumer demand. I suggest you and others let your private lenders know that you want this service. They may not be required to do it, but maybe they will respond to market demand.

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In Debt! Default&Deferment: Hi, I made a lot of financial mistakes when I was disabled because of severe depression. One of them was hiding from my (significant) student loans so that I got into default.

While I didn't qualify for Social Security disability, I was not working and on disability from my former employer's disability insurance policy.

I am back to work now and just started working with a collection agency to come up with a solution. I know it is late, but what I did really was a symptom of my illness. I never intended to default temporarily or permanently, I just couldn't deal at all.

My question is: While I am in default, could I appeal to the student loan people directly (I am consolidated, both federal and private loans) to give me a deferment that is "back dated"? Also, if I had applied for a deferment while I was disabled, would disability (private not social security) have qualified me for the deferment? I am hoping at least to get rid of the penalties that accrued.

Also, the collection agency keeps telling me (not that I believe them completely) that I cannot apply for economic hardship relief until I'm out of default for one year. But I have no way to get out of default because I don't earn enough money to pay the full amount they're telling me I'm obligated to pay.

Advice for others: Get someone to steward your finances when you're not able to deal with them yourself, whether a friend, someone from church, or a volunteer from one of many great social service agencies.

Thank you!

Deanne Loonin: It's great that you're trying to deal with these problems now. It is true, however, that deferment rules can be somewhat tricky. First, the collection agency is partially correct in that you are not eligible for a deferment if you are in default on a loan. But I'm not sure why they are telling you that you have to wait a year once you get out of default. There is more than one way to get out of default. If you attempt to get out of default by rehabilitating your loan, it is true that you have to make twelve consecutive monthly reasonable and affordable payments before you can get out of default. However, you can also get out of default by consolidating your loan, assuming you are eligible for consolidation. In that case, assuming the process takes less than a year (and it should) you can apply for the deferment as soon as your loan is consolidated and you're out of default. This would only apply to the loans that are actually consolidated.

As far as grounds for deferment, there used to be a temporary disability deferment for most federal loans. The government got rid of this deferment, although it still does apply to certain loans if you got them before July 1993. Otherwise, the most likely deferment, as you mentioned, is an economic hardship deferment.

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Minneapolis, MN: I went back to school for my MBA just so I could re-consolidate my undergrad loans at a lower interest rate. Faced with 25 more years of loan payments, I will be 59 years old when they are paid off. What alternatives do I have to dumping all expendable funds into paying them off early? Should I bother, or should I just consider it cheap money and write the check each month?

Deanne Loonin: There's not really an easy answer to your question. In general, it's a good idea to pay off your student loans as quickly as possible, although you want to be sure you can meet all of your other priority expenses. Also, there are many different types of repayment plans available through the federal student loan programs. You can, for example, usually set up a graduated plan so that you make lower payments during periods when your income is lower and then increase those payments if your income goes up.

Michelle Singletary: And just remember with historically low rates on student loans, if you have the extra money, the lower payments means you might be able to double up every so often to pay off the loan sooner.

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Santa Rosa, California: Are student loans viewed by the courts as a property interest, that property belonging the student who borrows the money for their education and is responsible for its repayment?

Michelle Singletary: I think I can take this. Your student loans are YOUR OBLIGATION. The lender gave you a loan with the expectation that you would do the honorable thing and pay it back. What's with this "property interest" nonsense. It's a loan. In return for that loan you got an education. A responsible person would back it back and not try to mumble jumble themselves into thinking there is so way out of it. Unless you are extremely disabled and under so great hardship pay the darn loans back.

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Fairfax, VA: I have had to put my $65,000 student loan in forbearance for 3 years now and will not be able to get it out again this year. The cost of living in this area is killing me. I consolidated the loan when I graduated so I'm told I cannot consolidate any more. If I were to take another class or enroll in another graduate program and applied for student aid, could I then reconsolidate? What else can I do? It has acrued $20,000 in interest in the last few years. Help!

Deanne Loonin: In general, you cannot "re-consolidate" the loans that were included in your original consolidation loan. You could be eligible later on for consolidation, but just for the loans you take out after the date of receipt of the original consolidation loan. In my opinion, given how much trouble you're having with your current loan, I don't think it's a good idea to go back to school mainly because you want to try to get better terms for your student loan.

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Washington, D.C.: Dealing with student loans "by the book" can have unforseen consequences. I feel like a huge sucker for the way I handled my student debt. I graduated from law school about $120,000 in the hole. I then systematically paid off the loans, starting with the ones with the highest interest rates. Since I'm a government lawyer, this was a huge burden -- at the start, I was paying half of my net salary to loans. After about 6 years of this, I managed to get the loans down to a level that I can handle. Sounds good, right?

Here's the rub: during that time, other people I know who were in the same boat put their loans on hold, and bought houses, which were still affordable at the time. I resisted, thinking this was a bad idea. Now, those people have seen their houses skyrocket in value, and they've paid off their student loans with tax-deductible home equity loans. Meanwhile, I'm still renting, and housing prices have gone up so much that, even relatively student debt-free, I cannot afford to buy. Point is, I was disciplined, cautious, and did the "right thing." And it has turned out badly.

Michelle Singletary: No,no,no you did not do a "bad thing." You did the right thing for you at the right time. Stop playing Monday Night Quarterback (that's the term right?) You are doing what folks do about the stock market -- second guessing, wishing they have bought a stock years ago because now it's thu the roof. You didnt' know then what you know now. You were trying to save yourself money and you did. And think about it, your friends still have debt if they are using home equity loans. Doesn't matter if they can get a tax deduction. They are still heavey in debt. None of us can predict the future. We all should just try to make the right decision with the information we have at the time. You are not a sucker because you did a responsible thing in trying to reduce your debt. I trust that you will get your house one day and unlike your friends you won't have to use it like a piggy bank.

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New York, NY: I am going back to school this fall to get my MBA. I already have loans from my undergrad years and I am interested in finding alternative ways to pay for my education. I have looked into scholarships, but I am also interested in grants. Can you explain what exactly grants are? How you can get them? How are they used?

Thanks!

Deanne Loonin: It's certainly a good idea to look for grants and scholarships rather than taking out a lot of new debt. Unfortunately, there aren't a whole lot of grant programs out there offered through the government. In fact, the main government grant program, Pell grants, is available mainly just for undergraduates (and for eligible teaching credential programs). With a few exceptions, most other grant programs are either offered by your state or your school. The best way to find out more is to contact your state department of higher education and your school.

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Cincinnati, OH: Hi Michele:

When we were first married (in 1999), my wife and I took the government's well-advertised advice and consolidated our student loans. At the time, the 8.25% minimum rate was considered a decent floor. Since that time, of course, interest rates have plummeted, and most current graduates are locking in interest rates between 2.5 and 3.5%.

If the Federal Government is going to function as a loaning agent, why can't I refinance my loans to a more competetive rate, just like I refinanced my house last year. We really feel like we were suckered into a one-time only deal without the benefit refinancing in an economic environment that we couldn't predict.

Why shouldn't the government be required to allow refinancing of student loans? We have a great credit rating, but I doubt that we can go somewhere else to get a better interest rate on an unsecured loan. Are there alternatives to being stuck with my already consolidated rate, and how is this not a government monopoly? Thanks in advance for your advice.

Michelle Singletary: The short answer to your very good question is that the lenders lobby hard to keep that rule in place. And why? Because they like your 8.25 percent interest rate and don't want you to shop for better rates. If you want to do something about it contact your Congressional representatives and scream like a two-year who doesn't want to go to bed.

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Arlington, VA: Does it make any financial sense at all to take out some extra in student loans to pay off higher interest credit card debt? I am going back to school to get my teacher's certification and I have about $1000 on a credit card from moving expenses. Would it be better to pay that debt off over time or to take some extra loan money and pay it all off now?

Michelle, I LOVE your column! I am a confirmed penny pincher now!!

Michelle Singletary: Thank you for such a nice comment. And now can I fuss at you big time? Think about what you are asking. Can I take out more debt to pay off debt? At $1,000 pay it off by cutting your expenses. Only get as much in student loan debt as you need to pay your educational costs.

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bethesda, md: hi michelle,

i love your column and forums! i am currently in graduate school and am working at a company that is paying for the majority of my education. so far, the company has paid for the majority of the cost of tuition for my first two semesters, however i have two more years until i will complete my program, since i'm going part-time. if my company is paying for my school, i will need to stay with the company for several years after i graduate as part of their tuition reimbursement program. i've decided that i don't want to work here after obtaining my degree, so from now on i am going to finance my education using federal loans. tell me in your honest opinion if this is a dumb decision? i'm not happy with my job and although my degree is relevant to my field of work, i'm not being challenged at work and my company isn't the type that will bump me up to a higher position after obtaining the degree. so really there's no incentive to stay here. i know that i'm going to accumulate a huge pile of debt but i'd rather move onto a job where i can utilize my degree. please advise!

Deanne Loonin: There's no perfect answer to this question. These company tuition reimbursement programs are great, as you well know. It's sort of like getting the military to pay for school and then serving afterwards. Each person that joins one of these programs has to balance the pros and cons of working for the company (or serving in the military) vs. the prospect of piles of debt. I suggest that you make a list of the various pros and cons. For example, there are certain restrictions you're going to experience if you take out a lot of federal debt. You might not be able to work in the exact career you want to work in because you have to pay back your loans. On the other hand, that might be a risk very well worth taking if you're sure you're going to be miserable working for this company. The main thing I think it's important for everyone to understand is that student loans pretty much stay with you forever. It's very hard, although not quite impossible, to get rid of them down the line. There are ways to make them more manageable, by for example setting up flexible repayment plans, but it's hard to get rid of them. That doesn't mean that you should avoid student loans. In many cases, education is the best investment you will make. It just means that you should go in with your eyes open and understand the amount of debt you're taking out and the prospect of paying this back.

Michelle Singletary: So will you pay back the company for the first two semesters that they paid? I do understand the position you are in but I agree with Deanne. It may be worth it to tough it out and give the company your best since you took a great benefit from them. And have your really evaluated whether the degree will pay for itself? Why wouldn't your company bump you up if they are willing to pay for your education? Can you work a while and save up the money to go back to school without taking on more debt -- even if you move to another company. I would just encourage you to read the postings in this chat and see how deeply in debt so many people are for graduate studies. Just make sure you are doing the right thing at the right time and it's worth piling on a lot of debt.

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Alexandria, Virginia: So this consolidating loan deal..Am I too late? How do I choose a group through which to consolidate? I got a couple different letters from different groups. How do I choose? How do I go through the process quickly before the deadline?

Deanne Loonin: You have until midnight tonight to lock in the low rates. Not much time! Ideally, you should call around before choosing a lender because loan terms differ. Keep in mind that the companies are really being flooded with requests since today is the last day for locking in the low rates. It's going to be harder than usual to get through, but it's still not too late.

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Washington DC: Can you ever negotiate with your lender to lower your interest rate if you have a good credit history?

Deanne Loonin: Are you asking about student loans or about other types of credit? Interest rates for federal student loans are set by law. Credit cards, however, may be a different story. U.S. PIRG did a study a few years ago that found that consumers had great success in convincing their credit card companies to lower their interest rates when they simply called and asked them to do this. 56% of consumers who called lowered their annual percentage rates (APRs) by an average of more than one-third. But keep in mind that the consumers with the best credit rating and with fairly long relationships with their credit card companies were the most likely to get these breaks.

Michelle Singletary: And if you are talking about a federally back student loan, ask your lender about programs it may have to reduce your rate slightly for on-time payments. Some lenders will reduce your rate by some if you make your payments on time for one or two years.

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Washington, DC: Hi, I'm posting early because I really need advice! I'm expecting to inherit some money this summer, and was wondering whether I should apply all of it to my student loans. It is not enough to cover all my debt, but enough to eliminate my commercial loans (interest rate currently 5.5%) with my consolidated federal loans remaining (3% interest). It would be nice to get rid of the debt, but I've heard that student loans are "good debt," so I wonder if I should invest the money instead, since I'll probably never get another windfall like this? Thanks for posting my question!

Michelle Singletary: What you need is a master financial plan. Make a list of all your debt. Now with the inherited money take some and put it toward building up a cash cushion (three to six months of living expenses). After that I would take part and pay off as much of the higher interest student loan. If after that there's still money left pay off as much of the lower student loan debt that you can.

I know the temptation would be to "invest" the money but unless you can invest it in something that guarantees you will get a return more than what you are paying on interest for those loans the best investment would be to pay down as much of your debt as possible (after putting away your emergency money.)

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Syracuse, NY: My wife and I are both in the last days of finishing our Ph.Ds. We have about 250K in combined educational debt. We figure that we can expect to make about 80K in combined income the first year out of grad school. We have two small children that will have to be in daycare at approximately 1K per month. Any advice on managing really large educational debts.

Deanne Loonin: Ideally, you want to pay the loans back in the least amount of time possible. But that, as I'm sure you know, is easier said than done. You also want to be sure that you don't default or get seriously behind on the loans. The government has a lot of ways to come after you if that happens. On the positive side, the best way to manage your loans is to learn about and take advantage of the many different flexible repayment options that the government offers. There are for example graduated payment plans where the payments increase over time as your income increases. There are also extended payment plans for most types of loans that extend the total amount of time you have to pay from the usual ten years. This means that you will pay more interest, but that might be acceptable if you just can't afford to make the higher monthly payments under the shorter-term plan. Keep in mind that you can change payment plans over time as your overall financial circumstances change.

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Washington DC: Off topic question in case you have time to answer: I have a friend who is paying off his auto loan early. Does he owe the entire amount of the principle and the interest, or is an auto loan like a home mortgage in that you can pay off the principle early and "save" i.e. not pay the future interest? If so, does he contact the lender and ask what the payoff is on the auto loan?

Michelle Singletary: I like off topic questions. If your friend has a regular auto loan (not a lease) then yes he only has to pay off the principal and whatever interest is due up to this point. He should definitely contact the lender to see what the payoff amount would be. And good for him. I also have a suggestion I would like you to pass along to him that has helped me save a ton of money over the years. Once he pays off the car loan, tell him to continue making a car payment but TO HIMSELF. Since he's used to the payment it's a great way to build in a hefy monthly savings. Just have him continue to put that car payment amount away automatically in his savings account. I've been doing this for years (including paying off car loans early) and then taking the car payment and saving it.

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Columbia, Md.: I am a 4th year medical student, graduating next May. I recently consolidated $150,000 in loans, but will graduate with $260,000 in debt due to private loans and loans currently not dispersed. My question regards recruitment from hospitals in hopes of loan payoff/forgiveness. Currently, I am torn between surgery (due to potential income) and medicine (due be better lifestyle). What things should I look for in determining the best recruitment offer, in terms of loan payoff? I realize this is not an easy question, but any direction would be appreciated.

Michelle Singletary: If I were your mama, I would say chose the career first. You will be spending the rest of your life working and doesn't it make sense to chose something that will give you joy. Sure you could go for the job with the big bucks to pay off that massive student loan debt but when people do something just for the money it usually turns out bad for them, their spirit and franky in your case your patients. I know. It's easy for me to say this since I'm not facing having to pay back $260,000 in student loans. But really think this thu. Do what will make your life a blessing. And that choice might mean really cutting expenses and eating tuna for a lot of years.

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To Bethesda: Look, you don't know if or when you're actually going to change jobs. A lot can change between now and then. You should keep using your company's tuition benefit and set aside the money you would pay towards tuition in a separate account. If you change jobs, you can pay them back no problem, but if not, you haven't lost out on the "free money", plus you have a cushion/down payment/whatever.

Michelle Singletary: Good advice!

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Washington, DC: I'm doing fairly well financially and have a good grasp on my current student loan payments. Right now, I'm contemplating going back to school for a career change which would put me over $100k in student loan debt! Yikes. I'm worried that I will have a problem making the payments for the first few years. Am I able to find a loan program that will reduce my payments to manageable amounts based on my income for the first couple of years? Thanks.

Deanne Loonin: Most of the federal loan programs allow you to choose what they call a graduated payment plan. This allows you to make smaller payments in the initial years after graduation when presumably your income is lower and then the payments increase over time. It sounds like this is what you're looking for. The lenders don't always tell you about these options, so it's a good idea to do some outside research. There is information on the Department of Education web site, www.ed.gov and also in books like Nolo's book, Take Control of Your Student Loan Debt (www.nolo.com) or the book I write for the National Consumer Law Center, Student Loan Law (www.consumerlaw.org)...this last book is geared more for attorneys.

Also, don't forget that you can change payment plans as your circumstances change. You're not locked in.

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Tuition Reimbursement: Hi!

To the poster who used their employee tuition reimbursement plan and now is thinking about leaving: I had the same issue and decided in the long run it was better off for me to leave. So I stopped reimbursement at the time I knew I'd be able to finance the rest of my education. I also knew the the time I would finish would coincide nicely with that, and that I'd be able to look for a new job with an updated resume.

Don't feel bad about wanting to move on because the company won't move you up (mine didn't move anyone either). Hey, if they were losing money, they wouldn't think twice about laying people off. Just make sure you stay long enough to fulfill your end of the bargain, that's all!

Michelle Singletary: Also a very good point. I love you guys. Really smart and thoughtful comments!

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Santa Rosa, Ca: My student loans were abused by the institution I attended through the institution's abuse of student policy, specifically their student grade appeal policy, their student grievance policy and ultimately their student discipline process. The harassment has been so severe that I cannot go back to this school and I cannot afford a lawyer. What recourse does a student have? The student loan Ombudsman can't help nor has the OCR been able to help. My situation is and has been severe, there must be someone, any suggestions would be helpful. The school is a part of the California State University and therefore a state agency. I have tried very hard to resolve this problem. The school has responded in a manipulative and deceptive manner. All of this has caused me terrible pain and suffering and seems to be outside of anyone's realm to solve. Institutions of higher education must have some responsibility to the Department of Education in their acceptance of federal money. The school I went to acts as though they have none. Please, any feedback would be helpful. My life has been badly damaged. Thank-you.

Deanne Loonin: Yes, schools do have responsibilities when they accept federal money. The federal Department of Education defers a lot to accreditation agencies. The Department is responsible for evaluating and then approving these agencies. There are also state regulatory agencies which are supposed to monitor schools.

The federal Department, state regulatory agencies, and accrediation agencies have all been criticized at various times for problems in enforcing the financial aid laws. You can find out more about this by looking at the Department of Education web site, www.ed.gov, particularly the separate section that is maintained by the Office of the Inspector General. But the truth is that this general information is probably not going to help you much.

It sounds like you've contacted the right agencies to make complaints. You might also try contacting your legislative representatives, both state and federal. I don't know the exact circumstances of what happened at your school, but in some cases, you can bring private lawsuits against either the school or lender or government agencies. This is very hard to do, as we describe in the NCLC book Student Loan Law. You will most likely need a lawyer to help you and to give you a sense of whether you have a case or not. The best resource I know of for private lawyers that work on consumer cases is the National Association of Consumer Advocates, www.naca.net.

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Laurel, MD: Thanks Michelle for your answer to the person with the $120K debt. I needed to read that. My debt isn't as large, but I was feeling the same way: I coulda, woulda, shoulda bought a house when prices were low then used the equity to pay off the student loans. But hey, at least my credit is excellent so I'm at least thankful for that.

To the person looking for grants: Check out www.scholarships.com. It's a FREE service. Also, at the graduate level most free money is in the form of assistantships and fellowships and require high test scores and/or a committment to go to school full time. Definitely talk an advisor at whatever school you plan to attend.

Michelle Singletary: I try my best. Look, I second guess myself all the time when it comes to financial decisions. But you can make yourself crazy. Just do the research, search your soul, do the right thing and things will work out.

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Washington, DC: I graduated two years ago from undergrad, and paid my way through school. I feel as though college was a complete waste of my time and money, because I now have a job that doesn't even pay half of my college debt!! I work in the nonprofit sector which can explain my income, but I really love helping people. For those working in nonprofits, is there anyway we can have some loans forgiven? Or some incentives for college grads wanting to help those less fortunate? It's pretty sad where I need/qualify for the services of my employer!! I think if things don't change, I'll be on the other side of nonprofits seeking their help instead of providing it. Any suggestions? Advice?

Deanne Loonin: I hear this from a lot of people and I know how hard it is to pay back student loans while working in the nonprofit sector. At this point, there is a patchwork of loan forgiveness programs out there, state, federal and private. The private forgiveness programs are usually offered by some schools. For example, there are law schools that will forgive loans or portions of loans for graduates that work in jobs and earn under a certain amount. For those people who haven't yet chosen a school, it's a good idea to look into loan forgiveness options ahead of time. You might decide to go to a lower choice school if it means that you will be more likely to be able to pursue the career you want after graduation.

The loan cancellation programs currently offered by the federal government are few and far between, but there are some out there. (You can find out more on the Department of Education web site, www.ed.gov. There are different programs for different types of loans). For the most part, they allow you to forgive portions of debt if you work in certain professions, for example teaching, usually in low-income school districts. There have been some proposals in Congress to expand these programs. I believe there have even been a few proposals specifically to cancel portions of loans for students who work in the non-profit sector. There have also been some proposals to expand cancellation programs to other types of professions, nursing for example. So far, these proposals have not yet become law. You might think about writing or calling your legislative representative about this.

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Washington, DC: Hi, Michelle. I love your column, and especially your book: they changed my life. Just a quick note to let you know your advice works. Four years ago, I was looking at law schools, had my choice between admission with no grant aid to a big Ivy school or a full ride to my (midwestern) state university law school. Took the scholarship over the screams of every person -- parent, professor, boss, et al -- who thought I had lost my freaking mind. Here I am now, no credit card debt, tiny student loan debt, able to work as a lawyer for a nonprofit advocacy group where I can help people in crisis AND wear shorts to work if I want. It is hard to resist the student loan trap -- people will tell you you're crazy -- but it's not crazy. Think of it this way: every penny you don't take on buys you another day of freedom. I love my career, love being a lawyer. It's worth holding out for a job that will let you say that. Keeping your debt down is the key!

Michelle Singletary: I'm so glad I could help. That's my calling in life. To help people see their way to financial serenity.

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Michelle Singletary: Well folks that's it for today. Thanks to all who joined me online today. Deanne has promised to answer some leftover questions in my print column. And if you haven't gotten her book and you have student loan debt -- get it. It's a really good, easy read with lots of good information.

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