Options for Dealing with Student Loan Debt
The average student from the class of 2010 has $25,250 in student loan debt, according to the Institute for College Access & Success in Oakland, California. Some graduates who fall into financial hardship are unable to make the monthly loan payments leading to a default on their loan. This can have serious financial consequences. For example student loan default can make you ineligible for additional federal student aid, federal and state income tax refunds can be withheld or it may even result in loan wage garnishment whereby your employer withholds a percentage of your wages for payment towards the debt. A default goes on your credit report and is similar to a charge-off, but unlike other loans student debt cannot be expunged in bankruptcy.
Fortunately there are options available for graduates who are experiencing financial hardship as a result of student debt.
Deferring and Forbearance
If you fall into financial hardship and cannot repay your loan you may have the option of a deferment or forbearance. Forbearance allows you to reduce or halt payments for a set period of time. However interest still accrues on the loan for the period that payments are not made so you can end up in even more debt by the time the forbearance ends. Deferment is preferable to forbearance as the interest is paid for by the government while payments are put on hold. You only have about 3 years of deferment or forbearance until it is used up so it should only be used to prevent defaulting on a loan.
If you work for the government or in a public service job you are entitled to have your loan forgiven or erased after 10 years of service and 120 payments. Unfortunately only students who took out federal loans are entitled to loan forgiveness. These include Stafford loans, Federal Direct PLUS loans and direct Consolidation loans.
Financial Hardship Payment Options
If your income is low and you are struggling to make payments you may be eligible for one of the following plans.
- Income Contingent Repayment Plan - The Income Contingent Repayment Plan calculates your payments based on your income. Your payments could be reduced significantly and any remaining loan payment after 25 years is cancelled.
- Hardship Repayment Plans for Perkins Loans - Perkins loans are federally backed loans given to the poorest students. A Perkins loan means you can pay as little as $40 per month and payment can be stretched out over a longer period of time resulting in lower monthly payments.
- Income Sensitive Repayment Plan - This plan is only available for the Federal Family Education Loan and means your payments are based on your annual income, total loan amount and family size.
- Income Based Repayment Plan - You can get an Income Based Repayment Plan but it is only available for Direct Loans and Federal Family Education Loans. An income Based Repayment Plan offers more options than under the Income Contingent Repayment Plan or Income Sensitive Repayment Plan and payments can be lower. Also your debt is erased after 25 years of payments and you can pay back less than the accruing interest. However you cannot obtain an Income Based Repayment Plan if your loan is in default.
Consolidation Student Loans
Student loan consolidation is a way of consolidating or combining all of your federal student loans into a single loan with one monthly payment. This makes it easier to keep track of your debt and it can have the added benefit of reducing your interest rate and helping you get out of default.
Cancelling Student Debt
It some cases you can cancel your student loans or part of your loan if you meet specific criteria. For example you were enrolled in a school that closed while you were in attendance, false certifications where the college did not make sure that you were qualified before starting the course or you are unable to work due to illness or injury that lasts five or more years.
For students who opted for a federal rather than a private loan there are a number of options available to make payment on a loan easier and less burdensome. Income based repayment, debt consolidation, and even cancelling student debt are some of the options for avoiding default.
Are Prosper Loans a Scam?
An interesting trend in finance these days is the rise of peer to peer lending, in which borrowers get a loan from individual investors rather than from a bank. In theory, everybody wins: borrowers get a loan at a lower rate than the bank would offer (or get a loan that the bank wouldn't offer at all), investors make a higher rate of return than they would otherwise, and of course, the facilitator takes a cut. These sites have been around for years - I originally joined prosper.com, perhaps the most prominent, over four years ago - but have been in the news lately, and have been featured in the Wall Street Journal.
So are Prosper loans a scam, and if not, how do they work?
At the time that I joined, Prosper loans were funded through an auction format. As a lender, you would find a loan that you were interested in funding, then bid both the maximum amount you would lend and the minimum interest rate that you would accept. Interest rates started at the buyer's maximum; once the loan was fully funded, lenders would automatically compete against each other in a sort of reverse Ebay, such that the entire loan was funded at the lowest interest rate that would still bring in sufficient funds.
In order to get funding, borrowers generally needed to write a detailed post explaining why they needed the money and how they intended to pay it off; Prosper also did a credit check and ranked borrowers on their creditworthiness. Many people participated on the site as both borrowers and lenders, taking advantage of their good credit ratings to borrow money and then lending it out again at higher rates.
So how well did it work? Well, I invested $1,000 into the site in 2007, in half a dozen loans. At the time, all loans were for a three year period. I reinvested the payments for my loans (which had an average interest rate of around 15%) back into the site, so pretty soon I'd lent out quite a bit more than my initial investment.
Unfortunately, this was in 2007, and towards the end of that year, the US economy fell into a recession and people started defaulting on their loans. By the time I pulled all my money out, half of my loans had defaulted and I got back only about $750 of that original $1000.
So are Prosper loans a scam? I'd say no; the site seems to work as promised, and I got my money back right away whenever I cashed out. I lost money, but I also knew and accepted the risks involved, and until the start of the recession I had no loans in default. If a loan isn't paid back, the company turns it over to a private collector, but the percentage successfully collected tends to be low.
Prosper itself is still around, but with a slightly modified business model; the company was rumored to be facing bankruptcy last year, but obtained more capital and resumed lending. They now claim over a million members and nearly a quarter billion dollars in loans.
Do I recommend the site? It's hard to say. A lot of people are here because they can't get credit elsewhere, and sometimes that's for good reason. Some people might like knowing that they're providing credit to those who otherwise wouldn't be able to get it; however, you can also get that from microlending sites such as Kiva that are strictly charitable (they return your money, assuming it's repaid - which the microloans almost always are - but without interest). Prosper, on the other hand, has a significantly higher loss ratio than traditional banks. Still, it provides a nice way to diversify, and the site claims actual returns averaging 10.4%. I wouldn't put a huge amount of money into it, but if nothing else, it can be an interesting place to stash a small part of your portfolio.
Unsecured Tenant Loans
Tenant loans are loans designed for people who don't own property; these are generally unsecured loans with a higher interest rate than homeowner loans such as mortgage loans. However, they tend to have lower interest rates than credit cards, which can make them attractive for paying off credit card debt. Tenant loans are a form of personal loan; the term is mostly used in the United Kingdom.
As with any personal loan, a tenant loan will come with an agreement that specifies the interest rate, payment schedule (including payment amounts) and any conditions and late fees that apply to the loan. Like a mortgage loan, a tenant loan can sometimes take over twenty years to repay.
Loans for the unemployed
There's no doubt about it; being unemployed sucks. Obviously, you have no money coming in. It's not uncommon to suffer from feelings of depression and loss of identity. To make matters worse, if you find yourself in need of money, it's impossible to borrow because nobody wants to lend money to someone without a job!
If you're unemployed and need to borrow money, there are options. Unfortunately, most of them are bad. Those companies that advertise loans for unemployed people know you're desperate, and they take advantage of that. If you absolutely must have a loan, what do you need to watch out for?
A guarantor loan is one in which the person taking out a loan has someone else guarantee the loan for them; that is, that person is also responsible for the loan. Why would you want to do this?
If you're not able to get a loan on your own, due to either bad credit or no credit history, a guarantor loan allows you to get the credit you need as it will be based on someone else's credit rating. Even if you could get the loan on your own, this may allow you to receive a better interest rate as you're lowering the bank's risk. Then, because the loan is in your name, you can improve your own credit by making payments on time.
Before you read this article, let me give you the bad news: there's no secret way to magically repair bad credit. If you've screwed up your credit rating, it's going to be bad for a while no matter what you do; anyone who tells you otherwise is just trying to get your money. Anyone who tells you that a specific law firm or credit repair company can magically fix your credit is scamming you for a commission.
Credit Score Scale
As we've mentioned, you're entitled to a free credit report from each of the major credit agencies once per year, and can obtain your credit scores as well for a small fee. But what does that score mean? It helps to have an idea of that what credit score range looks like so you can get an idea of how your credit stands up.
High Risk Personal Loans
Getting a loan is difficult enough in this economy, but when you have lousy credit, it's even worse. Many legitimate banks won't want to lend to you, seeing you as a bad risk, and borrowing from a loan shark can be taking a bad risk! Still, that doesn't mean it isn't possible to get a loan even with bad credit, but keep the following tips in mind.
First off, there are a number of places offering to help you get a loan regardless of your credit score. It goes without saying that you shouldn't trust them, particularly if they charge a fee to apply. You are the customer - the lender expects to make money off of you. You might have to pay a loan origination fee when you get the money, but you should never pay a fee simply to apply for a loan.
Debt Consolidation Tips
Having a large number of bills come in every month can be overwhelming. Debt consolidation is a way to cut down on that, bundling everything into one large bill to keep things simple. Many companies also advertise that you can lower your monthly payment by consolidating your bills; while this is sometimes true, many factors must first be considered.
Low Cost Personal Loans
Here at Twenties Retirement, we advise people to avoid going into debt if at all possible; it's always a lot easier to get in than it is to get out. Unfortunately, it's not always possible. If you must borrow money, what is the best way? Read the rest of this entry »