Student loan debt is second only to mortgage debt in the U.S., and the average college student graduates $29,000 in debt, which jeopardizes his or her financial future if the debt is not paid according to the loan’s terms.
Parents of students getting ready to graduate from high school, college students ready to graduate, and those ready to go back to school have been hearing a lot about student loans, the debts they have caused, and the fights in federal courts over what to do about the staggering debt loads.
Yet, few are talking about what types of loans there are, what types are better than others, what types to avoid, or how to utilize as few loans as possible. Because of the timeliness of the subject and its complicated nature, I requested some expert advice from a certified NFCC financial professional, Shauna Fischer, who provided me with the following information:
Private student loans: Personal loans that often are parent-plus loans that require a co-borrower. These loans go through a credit review and offer the least amount of security and protection in case of default or difficulty making timely payments.
Prospective borrowers should begin by shopping around for the best rates. There is a 30-day grace period, during which credit scores will not be affected. In the event that a student dies or becomes completely disabled, these loans are not dischargeable, and the co-borrower becomes completely responsible.
It may be advisable for the student to take out a life insurance policy in an amount that would cover the student loans, should the unthinkable happen. There is no leniency with a delinquency. The first day a payment is missed, the loan is considered in default, and the borrower can be sued for any past-due amounts.
Once a loan is delinquent, there may not be programs available to help bring it current. Private loans can be charged off after 120 days and sold to a collection agency. Delinquent status can stay on the credit report up to six years after the first delinquency.
Federal loans: These loans are backed by the government and are not based on the borrower’s credit score, normally do not go through a credit check and do not require a co-borrower.
In the case of complete disability or death, the debt can be discharged. These loans are not considered in default until nine months of missed payments, and there are programs to help borrowers become current again.
The borrower’s credit report will show positive once the loan is brought current. A defaulted loan may be consolidated or rehabilitated. The National Consumer Law Center advises that rehabilitation might take a little more effort, but affects credit more positively. A loan is considered current if nine consecutive payments are made in a 10-month period. The loan will be then be noted on the credit report as current.
For loans not in default, there are many options available, and each should be tailored to the specific situation. Deferment, forbearance and income sensitive repayment plans are just a few of the available options. Borrowers having trouble making payments should contact the lender before it is too late and the problem becomes too big and unmanageable.
Sallie Mae has a chat option for its federal loans, and it is very simple and easy to use.
After graduation, borrowers should consider consolidating all loans into a direct loan. This is especially important for those working in a public service-related field. After 10 years of payments and full-time employment, the remainder of the student loan debt is forgiven.
Other options exist to lessen the necessity of taking out student loans, such as work study programs, federal Pell Grants and scholarships. Some of these can be applied for by filling out an online application called FAFSA. As for scholarships, there may be work involved, but with a little effort and planning, the student loan burden may be reduced.
For assistance, you may make an appointment with Fischer or any of the certified counselors at Consumer Credit Counseling Service of McHenry County by calling 815-338-5757. The counseling is free.
• Virginia Peschke is executive director of Consumer Credit Counseling Service of McHenry County.