Poor people have a harder time paying back loans.
That’s the unsurprising gist of a new study by Equifax, which looked at student loan delinquency rates to determine who isn’t paying. But what is surprising is how much more likely part-time workers are to default on their loans — between three and four times.
Borrowers who earn less than $30,000 per year, are employed part-time, or have worked at their jobs for less than a year are all more susceptible to student loan delinquency, the study found.
Data from the Department of Education indicates that 13.7 percent of students who began repaying their loans in 2011 had defaulted in less than three years. That’s high — higher than it’s been in two decades. Equifax recommends these borrowers look into income-based repayment plans, but that may not be the best option for today’s grads.
The pros and cons of income-based repayment plans
The Equifax analysis concluded the system for income-based repayment plans is “too reactive” when it needs to be proactive.
“We need to find and help at-risk borrowers before they fall into delinquency, thus breaking a vicious cycle that could negatively impact the borrowers’ credit worthiness and financial health,” said Naser Hamdi, director of market insight and strategy at Equifax, in a statement.
The whole concept of IBR is reactionary — basically, it’s like saying, “You took out way too many student loans for a job that doesn’t pay you enough to pay them back, so just pay them back a little at a time.” It’s obviously better for borrowers in the short-term, because they avoid defaulting on their loans and won’t completely wreck their credit. But in the long run? They will end up paying a lot more than they borrowed, and how much more depends on which income-driven plan they choose.
Ways to avoid taking out loans in the first place
1. Apply for as many scholarships as you can.
There are some really weird scholarships out there, including for tall people, pumpkin carvers, redheads, and Catholics named Zolp. The point is, applying for scholarships doesn’t take much time or effort, and can really benefit you down the road since you don’t have to pay them back as you would a loan.
2. Find an employer that will pay your way through school.
Starbucks has set the standard for employee-sponsored tuition. The Starbucks College Achievement Plan allows Starbucks employees to enroll in online courses at Arizona State University — for free. A four-year degree at ASU usually runs about $60,000, so that’s a significant amount of savings, and students can pick from 49 online degrees offered.
Chrysler is the latest company to make this kind of announcement. Employees at the 2,400 Chrysler dealerships across the country will be eligible for free tuition at Strayer University in Virginia, beginning later this year.
But before you start applying to companies that offer tuition assistance, make sure you check out the fine print of their programs. With some companies, this isn’t a real benefit, but a referral to a bank or vendor that will make you a high-interest loan. Others only cover your textbooks or part of your loan payments, but none of the tuition.
3. Don’t go to college at all.
Clearly, this isn’t a good option for those who really want a bachelor’s degree — but many people find out too late that they don’t need one for a job that pays well. If you’re willing to go to school for a shorter amount of time and get your associate’s degree, and don’t mind being a technician or assistant, there are plenty of jobs in fields like healthcare and electrical engineering that have seen a surge in growth. And some of these jobs, like elevator repairmen and power-line installers, don’t require any degree at all.