Is Student Debt Unmanageable?

College loans exceed 1.5 trillion dollars! Most of this debt is owed to the U.S. government student loan programs. Since this represents 6% of our national debt, non-repayment is a serious matter.

According to the Consumer Financial Protection Bureau, student loan debt has exceeded $1.5 trillion, with federal student loans accounting for over $1 trillion of that amount. These federal loans make up 6% of our $16.7 trillion overall national debt. Over 37 million people owe student loans, making the average about $28,650. While mortgage debt is still number one, student loan debt is now the second highest form of consumer debt in America. According to the Institute for College Access and Success, two-thirds of today’s graduating students have student loans.

What to Do?

If you have student loans, be sure to consider the various repayment options available. If the standard repayment plan that amortizes your loan over ten years results in a monthly payment that is more than your budget can handle, then consider the option to extend your payments over a maximum of twenty-five years. You can even select a repayment program that allows your monthly payment to start lower and increase every two years.

The disadvantage in choosing one of these options is that the lower monthly payments and extended repayment period will cause more interest to be paid over the life of the loan. However, since you can always pay more than the minimum, this can be a sensible option for college graduates struggling to budget.

If you earn a low income, are unemployed, or have a financial hardship, you may qualify for alternative repayment options and deferral programs. These income-based programs cap your monthly payments at a fixed percentage of your income, which fluctuates as your income changes, and extends the repayment period beyond ten years.

There are also loan forgiveness programs for debt holders who have chosen a long-term career in education, the non-profit sector, or public service. If you qualify, a portion of your loan may be forgiven.

You can find information regarding these loan repayment options and the student debt forgiveness programs at www.studentloans.gov. This website also provides a repayment calculator that compares the monthly payment amount under each option. You simply enter your actual loans along with other information regarding family size and income level.

Important to Repay

For good reason, the federal government does not want students to default on debt. However, their data indicates that of the students who began repayment in 2010, over 600,000 defaulted by 2012.

Once a loan payment is ninety days delinquent, the three major credit reporting agencies are notified by the loan servicers. This will negatively impact the borrower’s credit score, which hinders their ability to secure a mortgage or a car loan, receive approval to rent an apartment, to purchase a cell phone, to sign up for utilities, or even to purchase property/casualty insurance at a reasonable price. Likewise, the government aggressively pursues loan repayment through garnishment of wages and interception of federal tax refunds and other benefits.

Impact on Financial Security

The real impact of student debt is how it prohibits the creation of personal wealth. Funds going to pay off student loans take away from the person’s ability to make contributions to a retirement plan or otherwise invest in his/her financial future.

Summary

It is always good advice to plan ahead for college by making contributions to a 529 college savings account. Just as important is giving serious consideration to the costs. Selecting a college with manageable expenses will help to either avoid or at least minimize the need for student loans. In turn, this will allow our graduates to get an earlier start on their own financial security.

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