As stated in a previous post, student loan debt is nearly impossible to discharge in bankruptcy, and because most are insured by the federal government, the worst case scenario for most people in serious trouble is defaulting. Let’s take a look at the scenario the many people are currently facing. You graduate from college with your shiny new degree and the knowledge that someone will give you a high paying job right away and you’ll be set for for life. No one can stop you, you’re on top, the best, and anyone who can’t see that must be a fool that isn’t worth your time anyway. What does it matter that you took out $34,000 in student loans? There will surely be someone waiting on the other side of the stage at graduation to offer you a $100,000 a year job that you love as soon as you have that degree in hand… right?
The reality is that the job market for new college graduates is as bad as it has ever been and you’ll have to be very smart, self sacrificing, and above all, lucky to walk into any kind of outstanding job right after college.
The loan company on the other hand is going to give you about six months to make your dreams come true before they start wanting their money back. For most student loans, public and private, this is the most common grace period that you’re likely to have before you start having to pay back your loans. Since you’re unlikely to have that high paying dream job by this point, this could mean big trouble for you.
What will you actually be asked to pay? Well, for our example let’s assume the principal on your student loans is in fact $34,000 with an interest rate of 6.8% spread over 120 months (ten years). You’re lender is going to hit you with a bill for $391.27 a month and if by some miracle you manage to keep up with those payments for the full term of the loan; first, good for you; second, you’ll end up paying back $58,690.
As loans go, those terms aren’t too bad, but if you graduate from college and all you can find is an $11.00/hr job at (insert big box retail store name here) then you are in for some tough times. At that rate, you’ll be bringing home approximately $380.00/week after taxes, if you are lucky enough to actually get 40 hour/week. Couple that payment with your rent, utilities, insurance, car, etc, and you could be in a bad way.
The real solution to this problem for most people is to hustle. Work your butt off to find that dream job then work your butt off some more to be the best at it and success will probably follow, but there are no guarantees in life and you really do have to make your own luck. Work ethic and atitude are everything.
Now let’s see what happens when you can’t make those payments. Let’s say that you work full time, regularly pay your bills and just manage to keep the roof over your head. You decide that paying for your rent and groceries takes priority (as they should) and you simply don’t have the money to pay your student loan bill. After 270 days, your loan will leave repayment status and be in default, if it is a federally insured loan, then the government will pay the full balance of the loan to your lender and take possession of your debt. Along with with, huge fees and charges have been added to the principal of the loan and your lender has just made a lot of money for themselves, but now you owe that money to the government. What this means is that you keep going to work and trying to pay your bills, but now the government can simply take 15% of your wages before you even see them, forever.
This can take years and tremendous effort to recover from, and the best case scenario is that you make 9 qualified on time payments in a row so that the loan can be sent back to a borrower (now hugely inflated) and the process can start all over again.
What can you do about this. First realize that you won’t ever get anything unless you ask for it. If you are in danger of defaulting on your student loans, you should be in constant contact with your lender and realize that lending organizations are businesses and they would much rather get something than nothing, so negotiate to get your payments reduced or deferred.
Above all, get involved with getting these unjust systems changed, contact advocacy groups, call your representatives and tell everyone you know about it. There are currently two bills in the house and senate respectively that would open new pathways to debt relief for students.
The first is S.3219 – Fairness for Struggling Students Act of 2010, which was introduced to the senate on April 15 and referred to the judiciary committee where it has been ever since. What this bill would do would be to amend the federal bankruptcy code to allow the discharge of student debt.
The second is H.R.5043 – Private Student Loan Bankruptcy Fairness Act of 2010. Which is was also introduced on April 15, to the House of Representatives and also referred to the judiciary committee. This bill would amend the federal bankruptcy code to remove qualified educational loans as an exception to discharge from bankruptcy.
The summaries and official text of both bills can be found over at opencongress.org:
S.3219 – Fairness for Struggling Students Act of 2010
H.R.5043 – Private Student Loan Bankruptcy Fairness Act of 2010
What I’m asking is for everyone to contact their representatives and ask them to support these bills. There needs to be a major overhall of the student loan system in this country and these bills are the logical first step towards no longer treating students like criminals for trying to pay for their education.