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Effect of the sea of debt on students
It is almost like an approaching tsunami which is going to wash over everybody. That is what Barry Bosworth, an economist at the Brookings Institution has to say - “I think a few more years and it's going to be a general crisis.” Previously, some of the students were still able to manage the payments, but with the recent raise in the rate of interest, it is going to be tougher for one and all. So, Bosworth goes on to say that “We're pushing more and more of the cost onto the students.”
In the second and the third quarter of 2013, the college and the tuition fees went up by around 5%. On the other hand, the aids provided by the federal government fell significantly. So, according to the College Board, “The rapid growth in federal aid — which for a few years actually reduced the average net prices students paid — has ended,” thereby resulting in increased problems for the students and their parents. This is going to prove to be hard not only for those who have already passed out, or are already enrolled with the colleges. This reduction in the federal aid is also going to have a drastic effect on the new set of students who are aspiring to graduate or attempt for even higher studies.
Considering the bearings of the current economy, there is increasing requirement for the people to get higher degree. Only then may these people be considered as employable. This is becoming a serious issue of concern for the students and their parents. The New York Times terms this issue as “degree inflation” and considers that this comes at a serious cost with regards to the students. So, it goes on to say that “In the late 1970s, the median wage was 40% higher for college graduates than for people with more than a high school degree; now the wage premium is about 80%.” Coupled with this is the problem of lowered credit score. As the rate of student loan delinquency is on the rise, it is resulting in lowered FICO score. Therefore, Frederic Huynh, senior principal scientist at FICO says that “If we look at some of the more recent vintages… more consumers have lower FICO scores.”
The aftermath of the large number of delinquencies is going to result in situation which will be crippling the generation for at least a decade. This is more like a ripple effect, where the activity at the center causes lowered but some serious effect. In general, most of the people obtain federal student loans as these are less costly. However, the federal government or the lenders insured under them, can go on to garnish paychecks and the bank accounts and withheld tax refunds. This is going to have a long lasting effect on the people as the loans are long enough. Thus the garnishments will go on for quite a long duration too.
This also is going to have an overall bad effect on the personal finance standing of the person. The main reason for this is lowered credit score. This lowers the affordability as most of the money gets garnished month after month and year after year. In addition, with the lowered affordability and the lowered credit score, it becomes hard for you to obtain new loans and insurance policies. Therefore, if you apply for a loan and even if you get approval for the same the interest rate is going to be high enough. For example, you may have to pay as much as 12% to 15% instead of the 3.5 or 4%. So, it may never be possible to get out of the vicious debt cycle.
Reports show that most of the people are crippled with making large payments towards the student loans rather than using the money for other purposes. Very few are able to buy their dream home or very few are able to save up money for a secure retired future. So grave is the situation. This therefore can also have a serious effect on the recovery of the real estate and the housing market. Consumer Financial Protection Bureau student-loan ombudsman Rohit Chopra says that “Student-loan borrowers are sending big payments every month to their loan service-rs rather than becoming first-time home buyers.”
The greatest fact of concern with regards to the student loans is why are people having so much of problem in managing the payments? Researchers and market watchers attribute the reason to lack of knowledge and the complexity of the different student loan debt pay off programs.
Very few use loan forgiveness programs
Only about one fourth of the workforce in America are seen to be opting for the student loan forgiveness programs on offer by the federal government. Richard Cordray, the director of the CFPB says that "Teachers, soldiers, firefighters, policeman — public sector careers invariably involve some effort, some inconvenience or some sacrifice. People give up higher incomes to serve their city, their state or their country," and "We believe that people who contribute part of their talents, part of the benefits of their education, to society as a whole should not be mired in debt because they stir themselves to the calling of public service." Therefore, these people are eligible for the forgiveness programs. However, these programs and the eligibility requirements are complex, than what it seems to be. Thus, very few people actually opt for the forgiveness programs.
Therefore, Rohit Chopra goes on to say that, "The data is quite weak in this area. We don't have a sense of how much money is left on the table,"and that we suspect it's a substantial sum." The story of Karen Burger is one such proof that it is not easy to attain the forgiveness on the student loans. Karen graduated in 2012 from the Northeastern University and had been planning to join a school working on the basis of faith and non-profit groups. However, almost $96,000 in student loan debt pressured her into dissolving her plans. So, she had no other option, but to move back with her parents and then join a bank and then again shift her job under an Army Recruiter. She may not have considered this option if not for the huge student loan debt. The worst part is that, in her case, she was turned down by the Army as she has Asthma. If she could have served in Army Reserve,6 years of service could have helped her obtain forgiveness on the student loan amount, under her name. Similar is the condition of Mackenzie Hunter, who graduated this year (2013) from the Northeastern University. She isn’t able to get deferment on her student loans, which is mainly held by Sallie Mae. She is in $70,000 in student loan debt.
The main characteristics of the student loans have now become almost like that of the mortgages. In general, a home is bought at an young age and so you go on to make the payments for quite a long time, like that of 30 years or even more. So, in this case too people are required to go on making the payments for quite a few years which can extend to almost 15 to 18 years. In fact, the highly complicated effect of the federal student loan debt is going to have a far reaching effect on the population too. The growing student debt is crippling not only our present, but the future too. This problem will be carried on in the next few generations. This again is going to have further and serious effect on the lenders, in the near future.
As per reports, almost around 37 million Americans are reeling under the pressure of student loan debt. In addition to this, there also are more than millions still in college, who are to graduate soon, with the pressure of student loan debt hovering over their heads. Furthermore, it is not only about the federal student loans but the private student loans too. As is the case with Hunter, most of her loans were obtained from private lenders. Although, she is already working with a bakery, the amount she earns is not enough to sustain herself and the monthly student loan debt payments. Therefore, she has started to look for other job positions, which may help her make a few extra bucks. The more, the better will be the situation for her. So, she goes on to say that “I’m at the point where I’m ready to do anything that would pay more.”
Are there any other options?
Therefore, if you are obligated to pay down the student loans, getting relief from the same is not easy. Even if you file bankruptcy, it won't help you get relief from your obligation. However, student loan consolidation can still be an option. In this case too, you will have to to qualify based on certain factors. You will have to opt for separate private student loan consolidation and the federal student loan consolidation programs. The way in which the private student loans are consolidated, are completely different than the process followed by the federally insured lenders. The main concept of the consolidation process is lowered interest rate, so that it becomes easier for you to pay down your student loan debts. With consolidation, you are required to make the payments as per the new term, and the lowered interest rate.
However, in case of the federal student loans, it is definitely not easy to consolidate all of the student loans. You will be required to have a certain type of loan and not all of the federal student loans can be consolidated. Here, there’s another catch. Irrespective of the student loan type, if you consolidate it may not still be possible to obtain an actual reduction in the interest rate. If you check more carefully and compare, it would be seen that the interest rate actually remains high, in comparison to the other low interest rate student loans.
There also are some repayment options, but these are available only with regards to the federal student loans. These are the IBR or the Income Based Repayment Plan, the Standard repayment plan, Graduated repayment plan, Extended repayment plan, Income Contingent repayment plan, Income Sensitive repayment plan and so on. However, it is not easy to convince the lender about your financial hardship. Still, not all are considered eligible for the repayment plans. So, you will have to find out the detail and the eligibility criteria of the repayment plans, so that you can go on to opt for any one of the plans. Furthermore, in case of the repayment plans too you will have to go on making the payments for over quite a long term. So, the debt cycle goes on and on. It is the same story all over again, where you may not be able to save up much for your retired years or for buying a home at present or may be for buying a car.
So, it is quite obvious that the situation is hard enough for the students. Obtaining higher education is becoming tougher day by day, even with the provision of the education loan. You may either have to quit your dream of higher studies, or go on with the burdensome debt for over half your life.
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