Obama Administration To Lower Student Loan Payments

For many students about to get caught in the "debt trap" this news will be welcomed with joy.

The Obama Administration announced it is taking steps to increase college affordability by making it easier to manage student loan debt. The announcement is part of a series of executive actions to put Americans back to work and strengthen the economy.

In a global economy, putting a college education within reach for every American has never been more important, but it’s also never been more expensive. That’s why today we’re taking steps to help nearly 1.6 million Americans lower their monthly student loan payments.

The Administration is moving forward with a new “Pay As You Earn” proposal that will reduce monthly payments for more than one and a half million current college students and borrowers. Starting in 2014, borrowers will be able to reduce their monthly student loan payments to 10 percent of their discretionary income.

But President Obama realizes that many students need relief sooner than that. The new “Pay As You Earn” proposal will allow about 1.6 million students the ability to cap their loan payments at 10 percent starting next year, and the plan will forgive the balance of their debt after 20 years of payments.  Additionally, starting this January an estimated 6 million students and recent college graduates will be able to consolidate their loans and reduce their interest rates.

An interesting take on this subject can be found in this article by Mike Konczal: Student Loans: The Debt You Carry for Life

According to the Project on Student Debt, the average debt load for graduating seniors in 1996, when this law was passed, was $12,750. Now it is over $23,200. 

When it comes to collecting on student loans, the government can take funds from your Social Security check. There are rules to the offset: the first $750 a month can’t be touched, and only 15 percent of benefits above that can be taken to pay back student loans.

Garnishing Social Security to pay off student debt ensures that the economic crisis will haunt today’s graduates well into their retirement.

Investigate Loan Forgiveness Programs

Your college career may have come to an end, but now your real work will begin.

I don't mean your job in your chosen career field, I mean repaying your student loans. Sixty days from college completion you have to start repayment.

The average student earning a bachelors degree owes $20,000 in student loans. Vocational students owe $10,000. Students in professional programs requiring a masters degree or higher owe an average of $100,000. This all comes at a time when you are beginning to be thinking of developing a relationship and settling down.

Be smart. Investigate the loan forgiveness programs that will reduce part or all of your student loans if you choose to work in areas that are underserved.

Teachers who are willing to work in a low income public school, or teach math and science classes in areas where there are not enough teachers, or with disabled children can greatly reduce or eliminate student loans.

Nurses willing to work in inner city hospitals or low income neighborhood clinics can eliminate their debt.

Lawyers and doctors who agree to work a certain number of years with disadvantaged people can also wipe out their debt while they are gaining professional experience.

Student Loan Default Rates Rise

The Department of Education released recent data that stated approximately 8.8 of all student loan borrowers defaulted in the fiscal year that ended September 30, up 7 percent from the previous year. 

Public institutions suffer from a rate of 7.2 percent, up from 6 percent, and not-for-profit private institutions suffer from a rate of 4.6 percent, up from 4 percent. 

The deputy under secretary of education, James Kvaal, says that borrowers are struggling in this economy. He also stated that there is a strong relationship between student default rates and unemployment rates. 

These default rates are the highest since 1997; they were 8.8 percent in 1997, as well. However, the highest unemployment rates occurred in 1990, when they were 20 percent. 

Though the rates are high, education remains to be a very important factor for a recovering economy. In fact, secondary education has become the concern of the nation. Without higher education, the economy will continue to suffer. Economy experts urge single parents, laid off workers and young adults to enroll in some type of secondary education. 

More importantly many students do not realize that there are programs designed to help them pay off their debt. These programs allow borrowers to pay based off of their household income, as little as 10 percent. Within 20 years, their debt will be paid.

What happens when you default on your student loan?

Develop A Budget To Stay Out Of Debt

In this video the main tip to stay out of debt is to develop a monthly budget based on what money is coming in and what has to go out, like groceries, gas, rent, ...

Then decide what money can be used as "disposable income". Fun money!

How You Handle Debt Will Affect Your Credit Score

Debt and credit are closely connected. How you handle your debts can harm your credit rating. While repairing your credit you need to be careful how you handle your debt.

Too much debt is bad but you knew that

A large part of your credit score is based on your credit card debt. Make sure you pay off regularly to stay clear of the limits and you will look like a trustworthy borrower.

Paying late is even worse.

While keeping your debt low the monthly payments are easy to keep under control.When these payments get too high you will have trouble keeping up. Once you miss a month or two you will hurt your credit score and it will be a lot harder to get back on track.

Debt Management

Will the help of a debt relief company help you get rid of your debt? Will they help restore you credit score?

The most certain way to protect your reputation is by making regular payments.

Debt settlement can make you life easier as well since the lender agrees you will pay back less than the total amount. This will lower your credit score as well.

Bankruptcy is really the last choice to get rid of unsecured debts. The damage to your credit score will be long lasting, like 10 years.

As a Co-Signer You Need To Be Careful

First-time borrowers often find it difficult to get a loan. Even if they are not considered a risk due to poor credit rating they are often asked to find a co-signer. This is an easy way for the lender to minimize risk.

As a co-signer you need to be careful. How well do you know the borrower? Are you sure he will be able to make the payments? And in a worst case scenario can you afford the debt if he defaults on the loan?

In a way you are being asked to take a significant risk that a finance company is not willing to take.

If the lender sues to collect, you may end up paying attorneys' fees, and if he wins the suit, your wages could be garnished.

You could even lose your car or you house!

Do you realize that the loan can affect your ability to get financing as well?

You should take adequate measures to protect yourself. At the very least have the lender put in writing that he will advise you of any delays in payements.

Read more at:

http://www.bankrate.com/brm/news/advice/20020927a.asp

Most Student Loan Debt Carries More Risk Than A Mortgage.

When the government shares the risk with the financial institutions lending 'government' student loans, this can help you avoid the need for short-term student loans at that time and result in you getting the money you need at the best interest rate possible.

Although the student runs a risk of debt with both options, government loans represent the least risk and offer greater opportunity for postponing payments. 

Most student loan debt is not bankruptable, so it actually carries more risk than a mortgage. Student loans cannot be dismissed in bankruptcy, so if they are at high interest or variable rate or if there is any issue of being unable to pay the premiums (e.g. loss of job), then they should be higher priority.

Concerns have surfaced over the Department of Education's role in overseeing lenders and schools that participate in the largest of the federal government's student loan programs, the Federal Family Education Loan Program. 

Student loans present a greater risk to loan providers, so they raise the interest rate and fees of student loans according to the credit score of the applicant. The risk premium was designed to compensate financial institutions for the high number of student loan defaults.  They suggested that students in financial difficulty should be seeking assistance under the debt relief provisions of the student loan program while coping with student loan garnishment before resorting to bankruptcy.

Lenders, on the other hand, want to have their interests protected and remain concerned that increased levels of student borrowing and higher student debt loads will lead to more bankruptcies and greater loan losses.

To avoid ending up as a bad credit risk, wrecking the monthly budget, and sacrificing peace of mind, many graduates would benefit by consolidating their student loans.  Again, the interest rate is likely to be better than the rate you can secure from a private lender for student loans, since the government takes much of the risk of default, thereby subsidizing your low rates.

Consolidating your student loans can help you lower your monthly payment and lock in an interest rate, so you are not exposed to a potential rise in rates which could affect your payment greatly. As time passes, managing student loan debt can seem insurmountable as life changes, and buying a home, affording transportation, raising a family, come into the game of life along with the requisite cash flow.

Another thing you might consider, once you are employed, would be to look for a bank loan with a better interest rate (or a more amenable repayment schedule) and use that to pay off the student loans.

References:

http://www.educationsector.org/publications/lowering-student-loan-default-rates

http://www.fafsa.ed.gov/