One of the most buzzed about financial topics in the U.S. today is student debt.
While some financial experts speculate that the more than $1 trillion in student debt the country now carries could be the second incarnation of the 2007-08 subprime mortgage crisis, others are hesitant to draw that comparison.
Either way, financial counselors like Darryl Dahlheimer, Program Director at LSS Financial Counseling, say that the issue is one that students preparing to enter college and their parents should be aware of.
"This is being talked about at millions of kitchen tables in every state because people with record levels of student loan debt (averaging over $30,000, but many have over $100,000) are graduating into a recession job market and struggling to repay what is due," Darryl says.
The Federal Reserve estimates that one in three graduates is 90 days or more late on their payments, he adds, and that 31 percent delinquency rate is a world of pain for both graduates and for any co-signers.
Here, Darryl shares his insight on how to pick the best student loan, offering an overview of the different types available, their repayment options and red flags to be aware of. He also discusses the short- and long-term consequences of failing to repay a loan and how a student loan counselor can help you navigate loan options.
If you're preparing to borrow money to pay for your education, this is a must-read:
Tell us about LSS Financial Counseling ... what services do you offer and who should be using them?
At LSS Financial Counseling, we equip and enable people around the U.S. with quality guidance, knowledge and tools so they can skillfully achieve freedom from debt and worry about their finances. We are the largest provider of financial counseling and financial education in Minnesota with a large network of certified financial counselors statewide, and we also serve clients nationwide via phone and online counseling - everything from budget and debt counseling to credit report coaching and foreclosure prevention counseling. We also teach over 300 workshops in the community each year.
Since most Americans struggle with debt (especially credit card debt and student loan repayment - over $1 trillion of each of those), it's fair to say that the majority of us could benefit from tools and expert guidance to take charge of our lives and finances.
A Debt Management Plan (DMP) helps consumers to consolidate credit card debt into one payment at much lower interest rates - so DMPs can be part of an action plan to get free from debt
It's important to know where to seek help with conquering your debt, by the way. The National Foundation for Credit Counseling (NFCC) is the network of certified nonprofit counselors, and LSS is both NFCC and HUD certified. In the same way you want your bank to have "FDIC" on the door, you want "NFCC" standards in financial counseling.
What are the different types of loans available to students?
We've been part of an important research study on Student Loan Repayment Counseling, and one of the first findings was the huge knowledge gap about the loans themselves - only 37 percent knew their options for repayment, and many couldn't sort through the maze of what was owed to which lenders.
I think it's helpful to distinguish two sources of student loans since they are such different animals.
Federal loans include direct loans, Federal Family Education loans (FFEL), Perkins loans, Stafford loans, and PLUS loans (for parents and for graduate school). It is complex since some of these are subsidized, some have income limits and other rules. But what they have in common is a relatively low, fixed interest rate and many good repayment options.
Private student loans are offered by a wide range of lenders (the largest is Sallie Mae), and each has its own terms and rates. But what most of these have in common are disadvantages: Many require a co-signer to be on the hook, too; many have adjustable and even penalty rates of interest up to 21 percent; and they do not qualify for all the great federal loan repayment options. Financial counselors are in consensus that you should always treat private loans as a last resort, and seek to first exhaust all your federal loan options (as well as ways to lower expenses so you won't need more loans).
What considerations should students make before selecting a loan?
By far, the best way to pay for college is to lower your expenses ("live like a student"), thoughtfully select your college or university with your budget in mind, and get as much financial aid that you don't have to pay back as you can (work-study, scholarships, grants). LSS financial counselors have been invited onto several university campuses, and we see that there is opportunity for most students to benefit from a spending plan to keep costs low.
But people often need the personal contact and guidance of financial counseling in order to make those changes (the field of behavioral finance has shown over and over that money decisions are not logical, you must address the emotional parts, too - including student expectations, in a consumerist society, of living large). The costs of higher education have soared, so it's important to control the parts you can.
Are there any types of student loans that we should avoid? What are red flags that the loan might not have our best interests in mind?
The first issue is to see ALL debt as problematic. Our human brains are wired to prioritize short-term gain over long-term consequences - so a lot of people take too much in loans. One good guideline is to aim for all other types of financial aid first, and then if needed, take out only enough in student loans to cover the basic expenses (tuition, housing, books) - instead of the usual trap of taking all that are offered.
Within the student loan world, there are many disadvantages to private loans, mentioned above. Think creatively about how to drive down your expenses so that college degree is an asset, not a loan trap. The best way to think about keeping college affordable is to compare it to owning a home - which is another asset to build your financial future. A house can be a wonderful purchase if you do the homework to choose a neighborhood and house that fits your needs and is affordable.
Why is it important to understand the type of loan you have?
Knowledge is power, and believe me, you want to know every single option and right you have with each loan. Don't hope that your loan servicer will look out for you - that was one of the mistakes in the foreclosure crisis we're still recovering from. Our counselors have seen many cases where student loan servicers gave wrong information or steered borrowers toward more expensive options.
For example, it's almost never a good idea to consolidate federal loans in with private loans - you lose so many repayment options. And each federal option has rules about which loans qualify - so take the time to read up because there are some favorable options, such as cancellation of debt when working in many public service jobs.
We can become overwhelmed by the fine print and enormity of paying back a loan. Why is it so important that we don't bury our head in the sand when it comes to student debt? What are the short- and long-term consequences of defaulting on a loan?
Student loan debt is especially punishing when you default. Federal loans can add a huge fee in default (in some cases up to 30 percent more, so your $20,000 loan instantly becomes a $26,000 debt). These loans also have priority legal options, such as garnishing your wage and seizing funds in your bank account or tax refund. In addition, for private loans the interest charged can increase to penalty rates higher than credit cards. Student loan debt is almost never dischargeable in bankruptcy, and default is also a huge negative hit on your credit score, which can impact your ability to get mortgages, business loans, and even some jobs that do credit checks.
We need to get this message out: You can do this - don't try to wait it out or to dodge your student loan repayment. Any level of debt can be brought more into control with an action plan and expert coaching and support. We just helped a graduate who had $44,000 in her own student loans (two in default) plus her parents with a parallel $44,000 in PLUS loans. They came in overwhelmed and fighting and walked out of our office as a team with an action plan.
What are the different repayment options available to students?
So much depends on each type of loan. But in the spirit of making it more manageable to think about, your basic options for federal loans are: applying for deferment (so payment is not due while still enrolled) or forbearance (so payment is not due for a period of time after graduation), consolidation (to combine multiple loans into one payment or to bring old loans out of default), cancellation (an option for those working certain public service jobs, or if totally disabled), and many repayment plans such as IBR (income-based repayment) which either extend the length of the loan (so less due each month) or reduce your monthly payment, or both. Private loan terms are entirely unique to each lender.
What resources are available to students for understanding their loan?
Call LSS Financial Counseling (888-577-2227) or any other NFCC member organization to help with budget and debt counseling. Making an action plan for all your debts (e.g., DMP to make credit card debt conquerable) and a spending plan that drives down expenses will increase your realistic options.
In addition, there are two websites we like, for straight talk and trustworthy information:
- www.studentloans.gov (by U.S. Department of Education, which includes "loan look-up")
- www.studentloanborrowerassistance.org (by National Consumer Law Center)
Why is it helpful for a student to get student loan counseling versus seeking help from a general debt counselor?
Student loans are a complex maze which many struggle to sort through. Therefore, expertise and additional training in student debt repayment options matters.
LSS Financial Counseling has been one of two providers nationwide still in a 2013-2014 research pilot on Student Loan Repayment Counseling (coordinated by University of Missouri's center for Excellence in Financial Counseling). The outcomes have been wonderful and heartening. Prior to the counseling, only 37 percent of borrowers knew about the repayment options available, but post-counseling, 93 percent knew what they could qualify for. Over half the borrowers responded that they had qualified for a lower monthly repayment amount. Equally important, post-counseling, 76 percent reported keeping to a monthly budget, which is a huge predictor of success.
We think there is an important "public health" level of information that everyone can share, so that people can avoid taking on too much student loan debt and can understand the repayment process. But there is also a need for expert help when you are running late or in default, or frankly even just worried about repayment looming ahead. LSS has been talking with legislators and foundations to seek financial support to offer Student Loan Repayment Counseling to anyone who needs it. This kind of need has long been recognized for foreclosure prevention (where HUD funds the help so all homeowners in need can have free, confidential counseling - we hope the same will become available for student loan debt before a bubble bursts.