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The Default Trap

November 8, 2011 Leave a comment

If there’s one thing worse than shelling out mortgage-sized payments on student loans each month, it’s not shelling them out. 

Here is the story of Casey Zimmerman Thompson, a resident of rural Maryland who borrowed a total of $7100 in student loans in the 1980s.  Zimmerman Thompson claims that she has paid approximately $18000 towards the loans since then.  Despite that, she still owes over $9800.  That’s right, 25 years after she took out her original loans, she still owes more than she borrowed.

The reason?  Due to various economic setbacks throughout her life, including a medical condition that ended a former career and unpaid child support from her abusive ex-husband, Zimmerman Thompson defaulted on her loans several times.  And, as anyone who has ever defaulted on a student loan knows, coming back from such a setback can be nearly impossible.  From the article:

“Short of a lottery win, for student loan borrowers like Thompson, there is literally no way out. The government can garnish the income tax refunds and eventually the Social Security checks of defaulters. Changes to bankruptcy law in 1984 and 2005 mean borrowers can’t charge off their obligations the way they can escape mortgage, credit card and even gambling debt when they file — unless they can prove “undue hardship.” But just 29 of the 72,000 student loan debtors in bankruptcy in 2008 were able to do so, according to Mark Kantrowitz, founder of the student aid website Finaid.org.”
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Some New Jersey Borrowers Now Forced to Make Loan Payments While in School

December 17, 2008 Leave a comment

I think this is the most depressing story I’ve yet seen since the economic crisis really started hitting the news a few months ago.  NJ.com reports that NJ Class Loans, a state-sponsored lending agency, will now require new borrowers to make student loan payments while they are still attending classes:

The state agency overseeing more than $1 billion in college financial aid will no longer allow students to defer payments until after graduation — a move that could affect thousands of students at a time when it is getting increasingly difficult to secure loans elsewhere.

I have heard of private loan companies doing this, but I’ve never yet seen this done in a loan program sponsored by the government, and I think it’s appalling.  I worked between 10 and 30 hours a week nearly every semester I was in college plus sometimes as many as 50 hours a week during the summers, and I never would have been able to make it if I’d had to make loan payments while in school.  My work money paid for rent, and books, and food.  I don’t know what kind of money college students are making in the minds of these policy-makers, but when I was in school you were considered very lucky if you found something a dollar or two above the minimum wage.  I think a lot of people are going to wind up dropping out of college if this becomes a trend.  Very sad.

Student Loan Defaults on the Rise – Let’s go to Vegas!

December 1, 2008 2 comments

After remaining relatively stable for several years, the student loan default rate is now on the rise.  The Wall Street Journal reports today that the downturn in the economy, especially the credit crunch, is forcing more student loan borrowers into default and the numbers could rise even further:

The fear is that default rates on student loans will increase, as seen in the mortgage and credit-card worlds. SLM Corp., or Sallie Mae, the largest private student lender, reported a delinquency rate of 9.4 percent in September, up from 8.5 percent a year earlier. “It’s clearly because of economic conditions,” said spokesman Tom Joyce. “The credit crunch has washed onto the student-loan beach.”

Until now, the default rate on federal loans has remained relatively stable. The most recent statistics, from 2007, show only 5 percent of students defaulting within two years after they leave school and begin repayment. Experts think that rate could begin rising as the effects of the credit crunch and slowing economy take hold.

In spite of yet another article on the problems of student borrowers, I’m beginning to think that the people in charge, or at least those reporting on them, don’t understand how troublesome the situation really is.  The article mentions some measures that students are taking to avoid default: getting second jobs, borrowing from parents, and, naturally, going to Vegas and hoping for the best.  Um, hello?  When people’s best option for making their loan payments is a lucky hand at blackjack, it may be time to start rethinking what we’re doing to America’s youth.

The article points out that even as the ability to pay plummets, student loan debt is higher than ever.  It also notes (very briefly) that student loans are one of the only debts with no bankruptcy protection.  But the solutions it offers are just more of the same – deferments, forebearances, and refinancing.  Even though some of the people interviewed for the article specifically note that their deferments or forebearances have run out, they are still being told to simply get a deferment or forebearance.  As for refinancing, it’s been widely reported, including on this blog, that the current credit crunch has drastically restricted that possibility.  And all of these options mean more debt since the interest will continue to pile up the longer payment is delayed. 

It’s clear that the current options for student loan relief are simply not good enough.  We need something revolutionary, a radical and total shift in the system.  How about a moratorium on interest?  How about a bail-out for those who have made good faith efforts to secure employment?  How about reinstituting bankruptcy protection after 10 years?  Something, ANYTHING, besides the old “Just put it off until later and pay double” mantra.  That’s what got us into this mess in the first place.