Borrowing money so you can attend a college of your choice? It certainly seems worth it. But, do you have to make some hard decisions when it comes to taking on a student loan? The answer is yes.
Many young 20-something professionals who graduated within the last 5 to ten years are in deep trouble. These young people went to school during a time in which private student loans were very easy to get. Big banks handed out variable rate private student loans like free cookies, without verifying costs of enrollment or financial need. Many students took out loans to advance their education, thinking they’d graduate with a guaranteed job making big bucks. Paying off their student loans was a mere afterthought – something that would be easily affordable. Then the economy crashed, jobs are hard to come by and now the student loan default rate is at an all time high of 13.8%. Taking a student loan may not be the best idea.
Big Problems for Student Borrowers
There are several factors that formulate the perfect storm for the current incredibly high student loan default rates. The 7 factors are turning student loan debt into a real life nightmare for graduates:
1. Lack of Jobs: There are only a few industries thriving through the economic downturn. Jobs are hard to come by in most industries and nearly impossible to find in others. Beyond this, pay rates in most industries are down as well, making student loan debt less manageable.
2. Rising interest rates on variable rate loans: Many private student loans taken out during the past few years are variable rate loans. Current interest rates set by the Feds are at historic lows, but student loan default rates are still alarmingly high. Interest rates have nowhere to go but up and when they do, borrowers will see huge jumps in their monthly payments on their variable rate loans. Some borrower’s monthly payments could even double or triple, and when this happens if the economy has not made a drastic rebound, default rates will continue to increase by leaps and bounds.
3. Record use of hardship forbearance options: Economic hardship options temporarily allow borrowers to cease making payments for a few months up to a couple of years. This is a great option to have for borrowers in a real financial crisis. However, interest continues to accrue during the time payments are suspended – so in reality the inevitable is just being postponed and more debt is rung up in the process. Since 2008, record numbers of borrowers have chosen to defer their loans, exhausting the length of time a lender allows a forbearance option to continue.
4. No way out: You cannot discharge student loans in bankruptcy; there is no way to escape repayment of student loans.
5. Extensive means of debt collection: Student loan lenders have several means of collecting student debt that they carry out everyday. These means include suing defaulted borrowers, garnishing their wages and confiscating their federal tax return.
6. Destroyed Relationships: Most private student loans have attached cosigners, as most students have no credit at the time they take out the loan. Parents are most often the cosigners. While many parents are understanding of their graduate’s financial hardship, many are not. Many parent/child relationships have been destroyed over defaulted student loans and subsequently ruined credit.
7. Extremely Limited Options for Consolidation: For years, no banks even offered private student loan consolidation. Currently only Wells Fargo offers a consolidation loan, and it’s extremely hard to qualify for and comes with a variable rate. Thanks to a new government funded program, Federal student loans are now very easy to consolidate. However, options for private student loan consolidation are extremely limited.
If you’re currently in college or about to enter college, think long and hard about taking out any private student loans. Exhaust all federal student funding options first, work part time during college, or choose a college with a smaller and more affordable price tag. Learn from the previous generation to save your financial future.
Jessica Drew is a freelance writer and editor who blogs about a variety of money making and finance topics such as private student loans.