The latest writing on student loans is equal parts crazy and useful. Here's what you need to know.
In the past week, three major media outlets have dished out advice for dealing with student loan debt. But only two of them are realistic, and only one is very helpful.
Let’s start with the most radical proposal, because that’s the most interesting…
Proposal No. 1: Ignore the system
Salon picked up a story called Give student loans the finger: A new solution to a massive generational outrage from a place called Third Rail News — and it’ll definitely give you a jolt. The gist…
The best solution to the student loan crisis is a very elegant and simple one: stage a collective refusal to make good on student loan debt. Such a boycotting of payments is well within the power, not to mention the rights, of the American citizenry, and it makes good sense to take such a collective action. […] It is incumbent on Americans to resist debt, up to and including, if possible, refusal to pay. Just as laborers, suffragists and civil rights advocates rallied for equal rights and fair treatment, debtors must unite with a single purpose.
It’s not really clear that a free college degree is a human right on par with letting women and African-Americans participate in democracy. And nobody would really appreciate it if their employer suddenly saw it as a moral imperative to “resist” paying them.
But it is pretty clear people can’t just choose to not repay federal student loans they took counseling for, signed a legally binding contract for, and willingly borrowed. The government’s going to get its money back by:
- Taking your tax refunds, and your spouse’s if you file jointly. (Spouses can fight to get their portion back.)
- Taking most other federal payments, including military pay and Social Security.
- Taking 15 percent off the top of your paychecks in wage garnishment. (That’s on top of taxes.)
Additionally, there’s all the damage to your credit. As someone who couldn’t pay off $150,000 in law school debt and has been in collections for eight years put it: “Most likely, I’ll die still owing money for law school. I can’t do ‘normal’ things like get a Discover card or answer my unlisted telephone. But once you get used to it, it’s really not that bad.”
Aside from having to budget with precision and panicking over emergency expenses, he says. And not being able to rent a car, or buy one without a lot of cash. Or rent an apartment without paying for several months up front.
Yeah, let’s all suffer that together, for the greater good — because collectors are aggressive, universities have bloated bureaucracies, and some companies abused their financial crisis bailouts. (These are all justifications the article gives.)
Proposal No. 2: Play the system
U.S. News and World Report published 5 Strategies to Dig Out of Student Loan Debt, but there seems to be a lot of digging sideways. While they’re all worth knowing about because they can help you manage debt, only one of them actually reduces it — and most people can’t take advantage. The others just delay the inevitable or make it worse.
First, there are deferment and forbearance. Recent college grads are probably already familiar with these terms — they mean the lender is giving you permission not to make payments on your loans for a while, usually when you’re fresh out of school or struggling. This gives you time to find work and get finances in order, but it doesn’t mean your debt is going down. On the contrary, it might be growing.
With subsidized federal loans, deferment usually means interest charges are being covered by the government. That keeps your debt at the same level. But in some cases, certainly if you have unsubsidized federal loans or private loans, that interest doesn’t stop growing and you have to pay it.
With forbearance, you’re responsible for the interest no matter what kind of loan it is. And if you aren’t paying it, it becomes part of the balance — so you start owing interest on your interest.
There’s also consolidation, which combines multiple loans into one and opens up new payment plans. This simplifies things, but probably doesn’t make them cheaper in the long run — the interest rate will be the average of your old loans, on a new higher combined balance. Your monthly minimum payment will likely be lower, which gives you more opportunity to run up more interest charges. And you may lose any discounts or benefits attached to the original loans.
U.S. News also mentions bankruptcy, but admits it’s almost impossible to get, you’ll have to pay for a lawyer, and “odds are, you’ll emerge [from bankruptcy] with your student debts in tow.” Plus terrible credit.
The most valuable strategy on the list is student loan forgiveness, but that’s only for certain public-service professions (nurse, teacher, firefighter, police officer, etc.) and takes at least 10 years of payments to earn.
Proposal No. 3: Learn the system
Out of the student loan proposals, this is the most practical read. The Washington Post put out a fairly comprehensive Guide to paying off your student loans, which includes stuff you don’t see in many student loan articles — we read a lot of them, so we should know. Some of the stuff worth checking out…
- A 3-minute video that uses dominoes to show why it’s in your best interest (pun intended) to make extra payments any way you can. It’s not just about getting out of debt faster, but about paying much less overall.
- A quicker and better summary of the payment plans than the government’s huge chart.
- Practical advice on speeding up repayment — like living at home as long as you and your family can stomach it after graduation.
- How to consolidate private loans, and why you should never pay to consolidate federal ones.
Of course, as we’ve written before, the real problem isn’t how student loans work — it’s how much people have to take out to earn a degree. In other words, insane tuition hikes are the problem.