April 26, 2020
Ah, one of my favorite topics: student loans, along with their nasty consequence: student loan debt. Over the years, I have constantly nagged my student and parent readers about keeping a rational mindset when considering the lure of financial aid packages, especially those of the seductive (and emotionally exciting) first year.
In the flush of excitement following a particularly coveted acceptance, the long-term implications of accepting a large portion of loans as part of a financial aid package can be something to cause significant regret in later years. Also, once an enrollment decision has been made, followed by a full year's on-campus experience, it becomes increasingly emotionally difficult to transfer if financial circumstances change.
By that, I'm referring mainly to that infamous technique called "front loading." Front loading is used as an enrollment incentive and manifests itself in the form of a quite-inviting first-year aid package, where the student loan component is relatively low. What follows in successive years isn't quite so incentivizing. Schools that employ front loading never seem to quite match that initial aid package's lure. What usually happens is that the amount of student loans of various types is increased and may even get larger as the student moves through junior and senior years, let alone going beyond the traditional four years, which is very common these days.
You don't have to take my word for it. As I always say, "Look it up!"
This U.S. News article doesn't mince words: "Some schools offer more aid for students' freshman years, then drop it in subsequent years; [that's] called bait-and-switch pricing." Bait and switch. Hmm. Keep in mind that you're not buying a washing machine or refrigerator at Sears that can be returned for a refund or store credit. You're in the Big Time now, dealing with higher education that costs hundreds of thousands of dollars. So, be careful!
Now, moving right along to that wonderful thing between our ears -- the brain -- let's consider its considerable power to rationalize just about any potentially uncomfortable or even unreasonable situation, making it seem more acceptable. This brings us to the area of the common mythology regarding financial aid.
Of course word of mouth and the Internet are the two chief conspirators promoting mythology. I always laugh when I hear someone defend a certain point of view when they exclaim, "I read it on the Internet!" That's one of my favorite knee-slappers.
Anyway, I thought it would be prudent to address some financial aid myths. What follows does just that.
Sarah Hamilton is a student loan supervisor with Take Charge America, a national nonprofit credit and student loan counseling agency that assists consumers in all 50 states. You can find out more about TCA at www.takechargeamerica.org.
Sarah has graciously agreed to address and debunk seven financial aid myths. I've posted her wisdom below.
For all you financial aid neophytes reading this, I have just three words for you: Read and learn!
So, here's Sarah ...
If you recently made the decision to attend college in the fall, the first thing you probably did (after celebrating of course) was check out the financial aid packages, right? These options typically include both federal and private student loans, and merit-based aid from your school.
With more than 44 million borrowers in the U.S. amassing more than $1.4 trillion in student loan debt, the reality of paying for college is a point of stress for many students and their families.
Constant media coverage of the student loan crisis has created a lot of confusion when it comes to student loan repayment. It's made worse by the fact that student loan servicers aren't required or incentivized to tell their clients about all repayment options, so many borrowers are left in the dark.
At Take Charge America, we want to make sure you're clear on the facts versus the fiction. There are seven myths people commonly believe about student loan repayment that can have a negative effect on their approach to reducing their debt—and we're going to bust them.
Some students may take out loans with the intention of seeking “loan forgiveness" upon graduation. However, there isn't a program available that will instantly forgive your loans. Loan forgiveness is highly limited and only applies to people in specific situations:
* Public Service Loan Forgiveness is available to borrowers who work full-time for the government or a qualifying nonprofit organization, but only after they make 120 qualifying payments—that's approximately 10 years.
* Standard income-driven repayment offers loan forgiveness after 20-25 years of on-time payments.
* Loan discharge may be granted to borrowers who can't repay their debt due to permanent disability, death or other qualifying events.
When you take out a student loan, your interest rate is set and cannot be reduced. However, if you have federal student loans, you may benefit from a Direct Consolidation Loan. This loan combines multiple federal loans and offers a new, fixed interest rate based on the weighted average of each individual loan's interest rate.
Myth #3: Private loans offer better rates.
Private loans are credit-based, meaning that your interest rate may end up being higher. These loans may also extend the repayment terms, meaning that you will end up paying more over the life of the loan. If you refinance to a private loan, you may also lose government subsidies, including forgiveness options and deferments.
It's extremely difficult to obtain student loan forgiveness, even in bankruptcy. Instead of being dismissed, your student loans are placed on hold, meaning that your debt will be waiting for you after bankruptcy.
According to the Federal Reserve Bank of New York, 11.2 percent of borrowers are late or delinquent on their loans, and many minimize the consequences because “nothing bad has happened yet." However, student loan debt is reported to the credit bureaus and negatively impacts your credit score if you are delinquent. And, unlike other debts, negative reporting for student loan debt doesn't end after seven years. Moreover, the government may elect to start a wage garnishment, set a tax offset or even withhold Social Security.
While loan discharge may be possible if your school shuts down, the criteria are stringent. For example, you must attend the school either when it closed or within 120 days of its closing. If your loans are discharged in this way, you forgo the opportunity to transfer any credits you earned at that school to another.
Loan servicers often place borrowers into the standard 10-year repayment plan automatically, but there are numerous options that may be a better fit for your individual financial circumstances. These repayment plans each have their own requirements, so it's in your best interest to do your research and communicate with your loan servicer to determine the best option for you. Some repayment plans are based on income, others on the amount you borrowed, and others on the type of loans you have.
You may want to seek help from an expert to evaluate alternative programs. For example, Take Charge America specializes in working with student loan servicers on behalf of consumers and understands the ins and outs of each repayment plan and can help you choose the right one.
The moral of the story? If you are investing a large sum of money in your education, understanding your repayment options shouldn't be tougher than your chemistry class. Do your research on student loans before deciding on one—you'll avoid confusion and will graduate with a game plan to tackle your debt.
Be sure to check out all of Dave Berry's college-related articles at College Confidential.