I’ve read several things now about how students are defaulting on loans because they cannot pay them back.
I am not certain how this would ever happen, though.
Loan repayments are tied to income–they amount, per year, to fifteen percent of (your income minus (1.5 times the federal poverty level guideline)).
And after 20 years (10 if you work at a non-profit) there is no longer an obligation to pay anything, no matter how much or little you’ve paid so far.
These are, to put it bluntly, very good terms. How is it that anyone could default? If they don’t have a job, their payment is literally zero dollars. If they have a job with low income, their payment will be very small.
I mean, of course, one way to default is simply to stop paying. But what I’m asking is, what is happening out there that is causing students to need to do this?
IIRC, in the USA even bankruptcy does not remove the obligation to repay student loans.
Originally, it was simple - you come out of college, you’re broke, you have nothing to lose - declare bankruptcy and unload the obligation. After a while, you work off the bad score and can enjoy the perks of working life and get that house and car (on credit), without needing to pay student loans. The temptation for the less ethical was there. That’s why the law was changed.
I suppose the other issue is, if the terms are so good, it becomes the last thing to be paid off and hangs around forever (20 years?) not early, unlike other debts.
Where did you get this from? There are a few different options for repayment schedules, and payments can be delayed/suspended for a period of time in events such as job loss, but it isn’t directly tied to income. I had to select the repayment terms of my student loans when I took them out, well before I had a job or any income.
Over time, the repayment terms on student loans have become much more generous to the borrower via government regulation (esp. as a result of the Affordable Care Act). IIRC, the terms you quote only apply to loans made after ACA was passed 19 months ago. There was certainly nothing about income protection in the terms of the loans I took out in 1997 to pay for law school (paid 'em off yesterday!). Sure, student loan default is going to become less of a problem going forward for this reason, but it doesn’t apply to the millions currently paying loans made before 2010.
Are you still in repayment? Take another look at your options - if you make under a certain (fairly high) amount, you can qualify for income-based repayment. That’s my plan, and it works well. The options for temporarily suspending payments in the event of financial hardship (not just unemployment) are also very, very flexible.
I’m a lawyer, with a debt load that most non-lawyers would find truly staggering - but I don’t think I’ve ever found it unmanagable. And I’m on a civil service salary.
Some people, I’ve found, consider being indebted to be fundamentally disagreeable - regardless of the impact on their lives, the simple fact of debt is uncomfortable. And I can sort of understand that - but my own debt has never stopped me from doing anything I want to do, and I live quite comfortably.
I see - must have glossed over that one since I was initially selecting the repayment terms before I had a job. The OP made it sound like these repayment terms were automatically in effect though, which they aren’t unless you select them. So maybe there are others who don’t even realize it’s an option.
I’m not sure that this is a fact. Either way, this would be called “defaulting on your student loan.”
And those who take advantage of deferred payment plans may still be racking up more interest than will ever be paid under those plans. This can still lead to a default eventually.
Took out loans 1989-1993 for undergrad…cheap actually. Out of state for grad school round 1…really expensive. In state for grad school round two. Even with some scholarship and grant money, but with a bunch of crappy jobs, still 68K in debt and pay 398.98/month. Admittedly the interest is way low, but way low on a lot of money is still substantial.
I think those sorts of repayment terms (payments maxed out at some reasonable fraction of income) apply to the subsidized federal loan programs. But many (most?) students also have private student loans, particularly if you’re looking at those with the largest overall debt.
In my case, my Stafford loans have repayment options that let me lower my payment according to some fraction of my income. Note, though, that the loans still accumulate interest, so reducing payments now just increases the total amount I’ll have to pay in the long run, and leaves me with a loan payment for longer.
But the majority of my loans are from a private lender, which doesn’t have those nice terms. Or, if they do, the terms don’t stack. So if each will let me reduce payments to 15% of my income, I’m still paying 30% of my income in total.
Again, in my case, after graduating I was paying 25% of my income towards loans (10% to the federal loans, and 15% to private). I investigated the payment reduction plans, but decided they weren’t worth it – I might have been able to reduce my government loan payments modestly, but frankly I’d rather just suck it up and pay everything off as soon as possible.
I think there are some relatively good terms here, at least in terms of federal loans. I.e. if you pay 15% of your income and aren’t even paying the interest, the government will forgive the debt after several decades. Still, that can mean someone is stuck with an onerous payment for much of their adult life.
I worked in the student loan servicing department of a bank for a couple summers many years ago. They were very flexible in terms of deferments, etc, IF you called them backed and worked with them. If you didn’t return their calls then there was nothing they could do for you and your loan would default even if you were eligible for some way of avoiding it. I think there are a good number of people that fall behind and think that if they ignore the problem it will just go away.
These repayment terms are new to me, too. My loans came from both government and private sources, and the only repayment benefit available was deferment while I was in grad school.
But my point is that “defaulting on a loan” and “didn’t pay the full amount of the loan” are essentially the same thing. If the government has to forgive anything, then there has been a default.
I think school loans are really problematic. Few people entering college have the financial chops and life experience to make a well-informed decision about taking on tens of thousands of dollars of debt.
I am really really glad that I happened to be inclined toward computer science, and that I got a job that easily let me pay off my student loans within a few years of graduation.
I did not make an intelligent or well-informed decision regarding the debt burden I was taking on when I went to college. As an 18-year-old kid, I simply didn’t have a good sense for what tens of thousands of dollars of debt looks or feels like. If I’d gotten a degree in something that didn’t pay as well (or, even worse, gotten that sort of graduate degree), I would be in a much worse financial situation.
That’s not to say that everyone who gets a degree in a non-lucrative field is being foolish, or that every person taking on college debt didn’t think it through, but I think that is the case for a great many people.
Okay, so just to be clear about what I’m talking about:
In my own case, which I thought generalized, I was able to take all my private loans and consolidate them through the federal Direct Loan program (sorry, I’d forgotten I’d done that when typing up the OP) and was able to go on the Income Based repayment plan. This plan, AFAIK, is available to everyone for whom the plan would actually reduce your payments. If it wouldn’t reduce your payments, of course, it wouldn’t make sense to go on the plan.
Perhaps I am wrong, though, that this generalizes. Maybe not everyone can consolidate (again, apologies that I forgot about that aspect of my own situation). Or maybe there are strictures on IBR that I’m not aware of.
Mmm… I don’t think so, though maybe you’re relying on a technical definition I’m not aware of.
But “defaulting” is a bad thing with consequences for your credit. AFAIK the “no repayments after 20/10 years” part of IBR is not treated as a “bad thing” and has no consequences for your credit.
