Financial Tip of the Week

Thursday, October 6, 2011

Student Loans Part II

Last week we covered important information about student loans – some statistics, what types of loans there are, and some steps to take before going into default. If you didn’t read that article you can read it here: http://www.mufinancialtip.blogspot.com/. This week we will discuss default rates and some steps you can take to prevent student loan problems.

STUDENT LOAN DEFAULT RATES

If you do enter default, you should still try to utilize one of the methods discussed last week, including forbearance and getting a more flexible repayment plan. If you are in default here are some actions the federal government can take:

Deny new student loans
Report the delinquency on your credit report
Intercept tax refunds
Garnish your wages without a court order
Hire aggressive collectors
Charge high collection fees – as much as 25% of the total loan balance
Professional license revocation

In addition, there is no statute of limitations on federal student loans, which means they can attempt to collect on your loans indefinitely.

Earlier in September the U.S. Department of Education released the official FY 2009 national student loan default rate^{^[i]} – which is now at 8.8%, up from 7.0% in FY 2008.

Here is a graph of the national student loan default rates for the past 25 years^{^[ii]}:

As you can see from the chart the default rate is substantially lower than it was in the late 80’s and early 90’s, before some reforms in government lending. Unfortunately, after many years of declining default rates, the trend is again going up.

Here is a chart comparing Missouri, and specifically the University of Missouri (Columbia campus only) with the national rates, for the past 3 years^{^[iii]}:

	2009	2008	2007
National rates	8.8%	7.0%	6.7%
State of Missouri	7.6%	5.8%	6.0%
University of Missouri	2.9%	2.3%	2.4%

PREVENTING STUDENT LOAN PROBLEMS

There are steps I recommend you take while in school to try to minimize your student loans, which will help you have a lower payment after graduation:

Don’t use student loans to finance an unaffordable lifestyle – live like a student now so you won’t have to continue to live like one after school.
Don’t just accept the full amount of loans offered to you if you don’t need it. Review your budget and take the minimum amount you can.
Don’t use student loans to purchase all the newest electronic gadgets. I know, the iPads and latest iPhones and everything else with an “i” in front of it are really cool, but do you really need all of them while you are a student? If you haven’t had to distinguish between needs and wants before college, there is no better time to do so than now.
Consider working part-time. Some people won’t agree with me on this, but I think it is OK for students to work part-time while going to school to help pay for housing, food and other living expenses. Students who work part-time gain valuable time management skills as well as resume building experience. School needs to come first, though – if your grades are suffering you need to re-evaluate how many hours you are working.
While I haven’t talked about private student loans much in these articles, private loans are always going to be more expensive than Direct loans. Maximize your Direct loans before taking out any private loans.
Keep your grades up and apply for every scholarship you qualify (or might qualify) for.

Ryan H. Law, M.S., AFC

Personal Financial Planning Department

Office for Financial Success Director

University of Missouri Center on Economic Education Director

239E Stanley Hall

University of Missouri

Columbia, MO 65211

573.882.9211 (office)

573.884.8389 (fax)

[i] http://www.ed.gov/news/press-releases/default-rates-rise-federal-student-loans

[ii] http://www2.ed.gov/offices/OSFAP/defaultmanagement/defaultrates.html

[iii] You can find State-by-State default rates for the past 3 years here:
2007: http://www2.ed.gov/offices/OSFAP/defaultmanagement/2007staterates.pdf
2008: http://www2.ed.gov/offices/OSFAP/defaultmanagement/2008staterates.pdf
2009: http://www2.ed.gov/offices/OSFAP/defaultmanagement/2009staterates.pdf
and rates for each educational institution here:
http://www2.ed.gov/offices/OSFAP/defaultmanagement/cdr.html

Thursday, September 29, 2011

Student Loans Part I

Student loan balances continue to increase every year – here are some of the recent statistics^{^[i]}:

67% of students take out federal student loans
The average federal loan balance is now $23,186 – if you include PLUS loans the balance goes to $27,803
Master’s degree students accrue an additional $25,000, Ph.D. students $52,000 and Professional students an additional $79,836.
There is approximately $945 billion in outstanding federal student loans, which exceeds credit card debt^{^[ii]}
It is estimated that there is $158 billion in private student loans

For this week’s and next week’s Financial Tips I will share some basics on student loans, including what types of loans there are, repayment issues, then finally the recently released default rates.

TYPES OF STUDENT LOANS

Federal student loans are also called Direct Loans because they are loans directly from the federal government to the borrowers through the school or university. Your Direct loan is either a Stafford loan or PLUS loan.

Stafford Loans are either subsidized or unsubsidized. Subsidized loans are given out based on financial need and the interest is deferred until after repayment begins (i.e. interest is not charged while you are a student). Unsubsidized loans are not based on financial need, but interest accrues from the day you take out the loans. Interest (and principal) payments can be made while going to school.

PLUS loans are loans for parents of undergraduates and for graduate and professional students. All PLUS loans are unsubsidized. As with Stafford loans, interest and principal payments can be made while going to school.

In general, repayment begins 6 months after you leave school – either dropping out of school or graduating. The interest that has accrued on unsubsidized loans will be capitalized when repayment begins (meaning the accrued interest becomes part of the principal balance).

You can view your Direct loans online by going to http://www.nslds.ed.gov. This system shows you your loan balances, the type of loans you have and who the servicer is.

STEPS TO TAKE BEFORE GOING INTO DEFAULT

Student loans generally go into default after nine months of no payment. If you are facing problems paying your student loans there are some steps you should take before you go into default:

Communication with your lender is always an important key – whether you are dealing with student loans, car payments, credit card payments, rent or a mortgage. If you communicate with the lender before payments are late, your lender is generally much more willing to work with you to find an acceptable solution.
Deferment – if you are unemployed or having some other type of economic hardship you should apply for loan deferment. During deferment you do not have to make payments on your loans. In addition, no interest is charged on subsidized loans.
Forbearance – Forbearance is similar to deferment (no payment is due during forbearance), but interest does accrue on subsidized loans. In many cases you can get a forbearance even if you are already in default.
Repayment Plan – If you don’t qualify for a deferment or forbearance you can often find a more favorable repayment plan. The standard plan is level payments for ten years. If that payment is too high there are repayment plans that will give you a lower payment:

Extended Repayment – you pay back the loan over 25 years instead of 10. You need an aggregate balance of $30,000 or more to qualify.
Graduated Repayment – you still pay the loan back over 10 years, but the payments start our low then increase every 2 years.
Income-based Repayment – most borrowers will pay no more than 10% of their income under the IBR plan. Most will pay even less (or have no payment at all). Payments are based on your income and family size. For more information on IBR visit http://www.ibrinfo.org/index.php.

As an important side note, in general, student loans cannot be discharged through bankruptcy.

Next week we will continue our discussion of student loans – looking at the current default rates and steps students can take to keep their student loan balances, and therefore their payments, low.