Mark Kantrowitz, a student financial aid expert, is the publisher of FinAid.org.
By Eleanor Chute Pittsburgh Post-Gazette
Kelly Bousson of Chaska, Minn., started college 21 years ago, is now 39 years old and figures she will be paying on her student loan until she is 64.
"If this does not constitute indentured servitude, someone please tell me what does," Ms. Bousson, who graduated from Minnesota State University, Mankato, in 1992, wrote the Post-Gazette in an e-mail.
As some former college students discover, paying for student loans can be a part of life long after leaving campus, making it critical that students and parents understand the ramifications before they borrow and their options if they run into financial trouble.
"What happened? Life happened," wrote Ms. Chaska, who majored in communications and English and works in the insurance industry. "Jobs that I have had since graduation have never supplied the kind of salary that would have allowed me to pay what [the lender] was asking. Actually, I could have made the loan payments, but not in addition to buying food, shelter and clothing.
"Add a divorce to the quandary, and here I am now," wrote Ms. Chaska, who owes more than $40,000.
A few tips for borrowing money
Here are some tips if you're thinking of borrowing money for school:
Borrow only as much as you need. "Live like a student while you're in school so you don't have to live like a student when you're not a student," said Mark Kantrowitz, publisher of finaid.org.
Exhaust sources of federal loans before taking on any private loans. Federal loans tend to cost less and usually have more flexible repayment terms.
Be realistic about what school you can afford. If you would have to take out a potentially crushing debt, consider a cheaper school.
Some lenders recommend that monthly student-loan payments not exceed 8 percent of the borrower's pre-tax income. Try to realistically estimate your future pay.
Don't ignore any mail from your lender.
If you are eligible for deferment or forbearance to delay federal loan repayments, be sure to apply for it. You won't get them without applying.
If you have any difficulties paying the loan back, contact the lender immediately to see what options are available. If you delay, late fees and collection charges may be added.
If you have a dispute with a federal student loan lender, contact the Federal Student Aid Ombudsman's office, www.ombudsman.ed.gov.
You may take out a loan with one lender, but it may later be sold to another lender. You have no control over this but need to be certain you send your payments to the correct address.
If you want to make extra payments to pay off the loan sooner, make sure you notify the lender in writing that you want them applied to the principal.
When you have paid your loans in full, save the proof that you have done so in case any questions are ever raised.
Even if borrowers are in serious financial trouble, federal and private student loans are among the hardest debts to get rid of. They have to meet a tougher standard than other consumer debt in bankruptcy court. Borrowers who miss multiple payments can be assessed large collection and late fees.
And if you think a loan problem couldn't happen to you, consider this:
Eighty percent of students who took out loans are late with at least one payment during the first three years -- anecdotally most often the first payment -- according to Mark Kantrowitz, the Cranberry-based publisher of FinAid.org, a financial aid information Web site.
Just missing one payment can cause some borrowers to lose out on incentives, such as lower rates as a reward for on-time payments.
In addition, up to 10 percent of borrowers get into serious financial trouble -- sometimes partly because of borrowing too much compared to the expected starting salary -- which can lead to default, Mr. Kantrowitz said.
"Even if you borrowed very carefully entering school, there's no guarantee what's going to happen in your life or our economy after you graduate," said Lauren Asher, associate director of the Project on Student Debt, a program of the nonprofit Institute for College Access and Success, based in Berkeley, Calif.
Alan Collinge, founder of a Web site called StudentLoanJustice.org, a grassroots organization, has heard from about 3,000 people struggling with student loan debt. "These folks are trapped in debt that typically has exploded far and away above anything they originally borrowed."
Mr. Collinge, an engineering grad from the University of Southern California and a resident of University Place, Wash., figures his student loans have ballooned above $100,000, ruined his credit ratings and prevented him from getting a security clearance needed for a job.
"I literally live in an RV on the wrong side of the tracks, on the bad side of town. I'm one step away from being completely off the grid."
Many of those in the most difficulty have defaulted on their loans. A federal student loan is in default if a monthly payment is 270 days late.
On a defaulted loan, the lender can levy collection charges of up to 25 percent in addition to late fees of up to 6 percent of each late installment.
For federal loans, the two-year default rate is 4.6 percent for borrowers within the first two years of entering repayment.
Federal student loan default rates generally are lower at four-year colleges than at proprietary schools, which are for-profit schools typically offering certificates or two-year degrees. On average, people with more education earn more money, thus making them better able to repay loans.
(Rates for individual schools from the U.S. Department of Education can be found by searching "official cohort default rate for schools" on Google.)
When a longer period than two years is considered, the default rate worsens. For federal loans originating in 1996, the U.S. Department of Education estimated that anywhere from about one in 20 to nearly one in two defaulted over 40 years, depending on the type of school and loan.
As for private student loans which are growing in popularity, Deanne Loonin, staff attorney with the National Consumer Law Center, a Boston-based advocacy group for low-income consumers, said, "There's just very little information out there. We don't really know the scope of the problem yet."
Private loans, also called alternative loans, do not have the same rules or borrower protections as federal ones. Late fees and collection charges are subject to state usury laws.
While federal loans do not have co-signers, some private ones do. Anyone who co-signs a student loan faces the same consequences as the student does. Many lenders will send a duplicate bill to the co-signer.
Private student loans are just as hard as federal ones to discharge in bankruptcy. An attempt to change that failed last week in the U.S. House of Representatives.
If any borrower has trouble paying back any student loan, procrastinating could cost thousands of dollars.
"At the first sign of trouble, call the lender," said FinAid.org's Mr. Kantrowitz. "The lenders have lots of options to help you out. The worst thing you can do is default on the debt because that removes options from the table."
He also advised, "If you've got a choice paying student loans and credit cards, pay your student loans. The consequences for default are much more serious on the student loans than on the credit cards."
For federal student loans that go into default, the government can take serious steps to force repayment, including garnishing wages up to 15 percent of disposable pay and withholding tax refunds.
Credit ratings suffer as well, and it may even make finding a job tough because some employers check credit reports.
Federal loans have some tools that can be used to avoid going into default, but borrowers must apply for them. Payments can be deferred in certain cases, such as enrollment in school for at least half-time, inability to find full-time work for up to three years and economic hardship for up to three years.
If the borrower is ineligible for a deferment, he or she still may be able to apply for forbearance in which the lender postpones student loan payments for periods of up to 12 months at a time, for up to three years. In some cases, lenders are required to grant forbearance, such as to borrowers who are in a medical or dental internship or residency, or have student loan payments that are at least 20 percent of their monthly income.
However, depending on the type of loan or circumstances, interest may continue to accrue even though the payments are postponed.
There is no statute of limitations on student loan debt, but there will be some relief when a federal law takes effect July 1, 2009. Many federal loan borrowers -- particularly those with Stafford loans -- will be able to choose an income-based option in which payments will be limited to no more than 15 percent of income that is above 150 percent of the poverty line (now $15,315).
If the loan is still not paid off in 25 years, then the remainder would be written off and treated as taxable income. Currently, there are some other income-sensitive and income-contingent payment plans available in some cases.
Those who have defaulted on a federal loan sometimes can rehabilitate it by making nine of 10 consecutive agreed-upon monthly payments on time. Then, the loan can be consolidated, with a charge of 18.5 percent of unpaid principal and accrued interest.
Even if borrowers seek bankruptcy, they are still likely to be stuck with the student loan.
Donald Calaiaro, certified bankruptcy specialist and chair of the bankruptcy section of the Allegheny County Bar Association, said it is "absolutely" harder to get student loan debt discharged than other debts.
"The congressmen have made it next to impossible to discharge student loans," he said. "Their attitude is they're protecting a federal trust. These monies are used for students. They don't want a depletion of that trust in bankruptcy."
Mr. Caliairo believes the rules are too harsh. He recalled a man who was collecting Social Security disability because of Epstein-Barr syndrome and still could not get his student loan discharged.
"The court said that wasn't enough. He might be able to be employed in the future," Mr. Calaiaro said.