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Have Student Loan Debt? There’s Relief in Sight


flickr.studentloansAs I learned the ropes of personal finance, a money-savvy friend taught me how to tell bad debt from good debt.

Bad debt comes in many forms — including credit card balances (especially when tied to high interest rates), car loans and other forms of consumer indebtedness. With bad debt, you’re financing consumer items that don’t appreciate in value or create wealth. And that’s OK in small chunks, until your payments can’t keep up with interest charges, let alone pay off principal.

Good debt, I was taught, uses bank money or financing to secure a valuable asset: a mortgage is a good example. But my, how things have changed. In a future column I’ll share why one financial whiz argues that buying a home isn’t the bedrock investment many think it is. I’d still argue that mortgage is good debt, though. We all need shelter, and real estate almost always appreciates…given enough time.

Then there’s student loan debt. Oh boy.

If you subscribe to the “good debt” theory, a college education loan constitutes good debt because you’re making a sound investment in yourself. The debt allows you to earn a degree, develop your talents and look more attractive in the job market. That’s a compelling argument, right?

But here’s the problem: When students today amass loan balances in the five and six digits — to the point where they’re financially hamstrung for decades — how can such debt possibly be “good”?

As I wrote in an earlier column, student loan debt now averages $23,000 per college student borrower, and some estimates place the figure as high as $27,000. Meanwhile, the cost for college education at a four-year private college education tripled in price between 1980 and 2010. To me, the tuition hikes are often unjustified — and the value students get for going that deep in the hole is debatable.

Here’s a simple financial question for you: If the job market in your chosen field is particularly sour, what’s the return on investment? Thirty grand in debt versus … a post-graduation job as a barista because no one’s hiring?

Sadly, I have several friends caught in this very predicament. One of my favorite Starbucks employees also ranks as one of the most talented music critics I’ve ever met, but he can’t find full-time work as a journalist three years out of school.

Back in 1980, anyone who graduated with student loan debt of $10,000 or more was considered a freak. Today, I could break out my address book and within 30 minutes find a half dozen twentysomething friends with student loans of $50,000 or more. And we’re not talking about loans for medical school, either.

Fortunately, students saddled with that kind of financial load can find relief — not that it’s getting widely advertised by the universities that have already pocketed your cash.

‘Pay as You Earn’

In December 2012,  the Obama administration fast-tracked the “Pay as You Earn” program, which allows eligible student loan borrowers to cap monthly payments at 10 percent of discretionary income, with loan forgiveness after 20 years. That might sound like a long time, but consider that an earlier version of the program had a 25-year clock.

Qualified borrowers must have federal student loans that date after Oct. 1, 2007 and will have received a disbursement (or cash payout) from the loan on or after Oct. 1, 2011. You’ll qualify for partial financial hardship based on how much of your income would otherwise go to standard repayments. This page uses a calculator to tell you if you’re eligible.

Unfortunately, this relief doesn’t apply to private loans from banks and other non-federal lenders, but for roughly 1.6 borrowers, it could spell welcome relief, if not a clean financial slate.The loans covered include all William D. Ford Federal Direct Loan (Direct Loan) Program loans, as well as certain types of Federal Family Education Loan (FFEL) Program loans.

Additional Benefits for Public Servants, Vets

For those looking to speed up the timetable to 10 years, here’s how you can do it: Get involved in public service and make all your payments on time. Eligible positions include those in nursing, government, police, fire, social work and nonprofit organizations.

Other loan forgiveness programs will reward you for volunteering through the Peace Corps, AmeriCorps or VISTA, or service in the Army National Guard. Certain state programs also grant forgiveness to medical school grads and nurses who work in underserved areas. It’s a great idea to check through agencies in your state to find what assistance might be waiting for you. In my home state, for example, the Illinois Student Assistance Commission administers at least half a dozen loan forgiveness programs for public interest attorneys, child care providers, veterans home nurses and more. A friend of mine with a staggering $50,000 in student loans just started taking advantage of help from the ISAC.

If she ran up $50,000 on her Visa buying kung fu memorabilia and Versace swag, I’d find it hard to sympathize. But anyone who runs up $50,000 in student loan debt deserves a chance to beat back that financial albatross. No doubt schools should do more to help students get the education they need without the backbreaking debt; sadly, it doesn’t work that way. In many corners, higher education is big business, with a captive market of customers who’ve been cowed into thinking that they need a degree, no matter the cost.

To me, that’s not bad debt — that’s bad-faith business, and the universities should act more responsibly. Instead, they view this sort of student debt insanity through rose-colored glasses as the “new normal,” and justify it with glitzy ad campaigns and feel-good slogans about investing in your future.

The last time I checked, 25 years of student loan debt doesn’t exactly equate with “investment.” But remember: It’s your money. And if it’s your debt, you need to take charge.

Hopefully, that’s something they taught you in college. If not, don’t beat yourself up.  We’re here to help, and I’ll do my best to inform and enlighten through this weekly column.

Have you taken advantage of programs that help you reduce student loan debt?

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About Lou Carlozo

Based in Chicago, Lou Carlozo is a personal finance contributor for Reuters Money, a columnist with DealNews.com, and a former managing editor at AOL's WalletPop.com. Contact him with story ideas for Money Under 30 at feedbacker@aol.com, or follow him via LinkedIn and Twitter (@LouCarlozo63).

Comments

  1. Unfortunately, I don’t see how the government backing student loans is going to deter colleges and universities from 10%+ annual tuition increases.

    As terrible as the situation is, it seemed to stem from largely good intentions. Everyone wants better for their children and for a long time, more education was the answer to that. For me, I only have to go back 2 generations to get a grandfather that didn’t finish grade school. His children all finished high school, but varied on whether or not they went to college. I went to college, largely because it felt there wasn’t an option. My timing for graduation (2008) as well as my choice of majors was pretty bad, but I’m glad that when I looked around in second semester of junior year and saw nothing but Anthropology majors that were going on to grad school with no questions asked, that I knew what I should do.

    I felt like I didn’t want to be in school until I was 30, so I finished up with my degree and started looking for jobs. Now, I’ll fully admit that I can’t easily place a value on my degree because I’m not in my field of study. I’m sure I’m slightly more attractive as a brewer with a BA than a brewer with a high school diploma but by how much? Luckily, using the mutual fund that my parents had for my college education, I escaped college with ~15k of my own student loans and another ~8k that my parents took out. This June, I will finish repaying the money.

    I have a feeling that our generation of debt saddled college grads will have much tempered opinions on the value of college for their children. Academia was never meant as job training, and while I’m not sure where that idea got started or who perpetuates it the most, I do know that at least in the minds of my wife, myself, and many of our friends, a college education, while somewhat useful is not money well spent for most.

  2. While the Pay as You Earn program sounds great, it doesn’t help those who are dealing with their debt now, those of us who graduated before 2008 and who don’t qualify for such a program. The problem with student loan debt is massive. It is due to high kids who are left with big choices on how to fund college, parents who don’t have the money to help, high school guidance counselors who don’t care or know what to tell students, colleges praying on kids, and private lenders doing the same. I know so many who are left large sums of debt and are working very hard to pay it off and others who have been lucky to get grants. We need a reform of college funding across sectors. Grants shouldn’t be given to everyone who seems like they can graduate from college. How many grants go towards kids who don’t want to go to college but do for their parents, kids who drop out, and others who aren’t ready? Those funds can go towards those in true need of school funding, the poor who postpone school because not of enough grants or scholarships were given to them and the middle class, who the FSAFA deems “wealthy” enough fund college.

  3. chelsea lewis says:

    Though it is always nice to hear an upbeat “how to defeat student debt” kind of monologue. I feel as if we are just really talking around the problem. Several of these government programs do help, some. But, lets face it, they don’t help more than 10-15% of those with student debt. Affording college used to manageable when local and state governments saw young people going to college as a future investment for everyone. What ever happened to that idea? I would like to see articles about how to get back to that idea, not just how to handle a horrible problem that will eventually crush us all.

  4. Honey Smith says:

    Pay as You Earn means that 1) you have to trust that the government will honor 25 years in the future a promise made today (I don’t, do you?) and also 2) you better hope they honor that promise, because Pay as You Earn payments typically don’t even cover the interest, so your balance is actually increasing the ENTIRE time you’re on the program.

    No thank you!