Student loan default is increasing as borrowing for college is compared to the environment that led to the subprime loan crisis. Flickr photo.

Student loan default is exploding and people are starting to wonder if the investment is worth the return. Hundreds of thousands of students are graduating from college this month heavily in debt. They are preparing to enter a U.S. economy saddled with a stubbornly high U.S. unemployment rate. Job creation  is stagnant. The jobs that are being created are unskilled, low-paying positions. Higher end jobs are disappearing as U.S. graduates compete with foreign workers willing to work for far less money. A lack of lending standards and naive borrowing for college has the student loan crisis being compared to the subprime loan crisis.

Borrowing for college out of control

Student loan debt, a crisis brewing in the shadows of the financial and housing meltdowns, is in the spotlight now that thousands of graduates borrowing for college  can’t pay back their loans. The New York Times called student loan default an echo of the subprime loan crisis. Students and their families made emotional, not reasonable, decisions borrowing for college. Their predicament is similar to subprime borrowers who assumed the value of their houses would always go up. Universities enrolled students without verifying whether they could afford tuition and set them up with lenders who made big loans without any idea of what students would earn after graduation–just like the mortgage lenders who didn’t ask borrowers to verify their incomes.

College degrees losing value

A recent student loan debt study by the College Board’s Trends in Student Aid found that 10 percent of people who graduated in 2007-8 had borrowed $40,000 or more. The median debt for students with a bachelor’s degree was $22,380. The Los Angeles Times reports that government surveys indicate the vast majority of job gains this year have gone to workers with only a high school education or less. The Bureau of Labor Statistics projects that seven of the 10 fastest-growing employment sectors over the next decade won’t require more than on-the-job training. These jobs include health care aides, customer service representatives and food preparers and servers. Meanwhile, well-paying white-collar jobs such as computer programming have become vulnerable to outsourcing to foreign countries.

Student loan bankruptcy

The student loan debt crisis has many graduates facing bankruptcy as they put their expensive degrees to use at the local Starbucks. In an opinion piece for Forbes.com, Daniel L. Bennett of the Center for College Affordability and Productivity said the colleges, not taxpayers, should be held accountable for student loan bankruptcy. Bennett said colleges are signing naive students up for loans destined to fail. It’s doubtful that borrowing $100,000 with an interest rate of 10% to pay for an undergraduate degree will have a happy ending, yet colleges enroll students with these debt loads all the time. Bennett said the schools should share in the financial fallout of student loan bankruptcy.

Student loan defaults climbing

Student loan defaults will continue to climb according to Education Department projections. A report on federal loan borrowers who began loan repayments between October 2007 and September 2008, and who defaulted on their loans by the end of September 2009 show that rate climbing to 7.2 percent from 6.7 percent in 2007 and 5.2 percent in 2006. The higher rates, if they continue to climb, suggest that increasing numbers of institutions could find themselves at risk of penalties as the government begins following defaults over a three-year instead of a two-year window, beginning in 2014.

Student loan reform

As the student loan debt crisis unfolds, colleges are currently protected when the borrowing for college backfires. But the department of education is preparing guidelines that would revoke eligibility of for-profit colleges from federal loan programs if the incomes of their graduates won’t finance their student loan debt.

The struggle to handle student loans

There is a catch-22 for recent graduates who got their educations for higher-paying careers. Though many targeted law or medicine as their perfect careers, now they are having a hard time finding jobs. Without finding jobs, paying back the higher cost of their education is next to impossible.

There are a growing number of consumers who are falling into this category, and the economy isn’t doing much to help. When it comes to other forms of debt, there are some outs to help ease the strain. For example, mortgage payments can be negotiated or properties sold to ease the tension. Credit card debt can be paid off or eliminated in bankruptcy. Car loans can be eliminated via a discharge in bankruptcy, negotiation or payments, or if necessary, selling off the vehicle. Then there are student loans. There really is no such thing as getting rid of student loan debts. They can’t be discharged in bankruptcy or negotiated down. The amount can’t be touched and neither can the interest rate charged to hold them. That means that consumers are never going to find a way out of paying for their student loans without some legislative changes.

Reworking the student loan

Due to issues with student loan repayment there is a growing consumer base hoping to revamp rules regarding the debt. In fact, a Facebook group that calls themselves “Forgive Student Loan Debt” is making a case for an economic stimulus plan to forgive outstanding student loan debt. There are plans of attack to help manage mortgage, credit card and unsecured loans, so they believe there should be some relief with education expenses.

They are basing their argument on the fact that education is good for society. Elevating the skill sets of mass groups can be a powerful tool for economic advancement. By allowing some negotiation option or payoff, the Facebook group hopes that consumers under heavy student loan debt would be able to focus on using their education, rather than stressing over how to pay for it. They are calling on the government to make changes that would bring a stimulus target to former students under a capped level of debt.

Will negotiating student loan debt become a reality?

Whether student loan debt will be looked at by legislators has yet to be seen. With growing numbers of defaulting and deferred student loan accounts though, there is a strong call for some changes to benefit recent graduates who are struggling. The fact that those holding mortgage, credit card and unsecured loans have government-built options and those with student loans don’t may be the best argument for change.

Start your unsecured loan application HERE!

If you’re in college or have a child who is, you know all too well how expensive it is to get a degree or diploma these days. Tuition, books, computers, housing, food, transportation – it all adds up to a boatload of money. If you’re eligible for a student loan, getting one can make a huge difference in your ability to afford a good education. Student loans have to be paid back, however, which can strain your finances after graduation, especially if you don’t land a good-paying job right away.

Grants are essentially free money

Before you start school, find out whether you’re eligible for a federal or state grant in addition to a loan. The great advantage of a grant is that it’s yours to keep, so long as don’t drop out of school when you’ve already received your money for that semester. Educational grants are based on financial need, of course, and not everyone can qualify for one. Even if you qualify, you can miss out if you don’t apply early, because there are only a certain number of grant dollars available each year.

Federal Pell grants

The Pell program accounts for the lion’s share of the student grants issued in the United States. Each college in the Pell system receives grant funds that it distributes to eligible students. Depending on your income and the availability of funds, your Federal Pell grant could be anywhere from a few hundred to several thousand dollars a year.

If you’re a science, math, or social science major and are receiving a Pell grant, you might also qualify for an Academic Competitiveness grant worth up to $750 in the first year of your academic studies, and $1300 in the second year. Third- and fourth-year math and science majors can apply for a National SMART grant that pays up to $4000 a year.

Federal Supplemental Education Opportunity grants

If you’re a student with demonstrable economic hardship, ask your campus financial aid office about Federal Supplemental Education Opportunity grants. Students who qualify stand to receive from $100 and $4000 a year.

State student grants

Each of the 50 states offers a variety of educational grant programs. Most states try to help low-income students who perform well academically by awarding grants based on a combination of their individual financial needs and GPA scores. Many states also offer grant money or loans with concessionary terms to students who are studying specific subjects or who belong to certain minority groups.

For example, if you get an education degree in California, you could have your loans reduced by as much as $19,000 after you graduate if you work in a low-income area, or teach a subject for which there aren’t enough teachers. In many parts of the country, there are grants specifically designed for adult students who didn’t get a college education in their youth, for disabled students, and for African-Americans, Hispanics, and Native Americans.

Your state government offices or student-aid website will have details about the state grants that might be available to you. In many cases, you can apply for student aid online.

Institutional grants

Many colleges administer privately funded grant programs. In additional to serving as a form of supplementary aid for needy students, institutional grants are sometimes used by colleges to attract students with exceptional academic records or athletic abilities. If you think your amazing athletic skills or perfect math scores may be of interest to a particular school, check to see whether the school has an institutional grant program that applies to you.

(Photo: flickr.com)

Whenever you purchase something on credit, whether it’s a product or service, we all find out about the magic of revolving credit. Whether it’s a mortgage, student loan, car payment or credit card payment, you’re paying two different things if you don’t pay off the credit in full immediately: principle and interest. Pay off the former and you’re done. If you’re only paying the latter, your adventure has just begun. It may leave you with a bit more cash til payday in the short run, but you’ll end up having to pay much more in interest charges over the long haul. The reverse – which is the more healthy financial decision – means that while you may find yourself in need of a cash til payday loan once in a while, you’ll be saving much more money over the years.

Go above and beyond

The best way to quickly reduce the principle balance of a loan or line of revolving credit is to make payments that go beyond the minimum monthly payment. This is contrary to what most Americans do, however. Making the minimum payment each month may free up short-term cash for consumers, but it ends up costing much more in the long term, thanks to compounding interest.

But won’t that leave you broke?

Not if you budget properly. As everything is expensive these days, it’s understandable that people aren’t looking to part with additional funds each month. This is typically the kind of thinking that goes into making minimum payments each month on loans and credit. Yet the best way to protect your finances long-term is to pay more than the minimum each month. That way, both interest and principle are paid down more quickly.

Get a jump on your financial future

If getting a jump on those interest and principle balance payments is your goal, some planning is in order. The best way to do this is to look at your budget. Once you’ve taken care of the monthly essentials, see how much you can afford to pay above and beyond the monthly minimum. If you’re used to paying a minimum of, say, $900 per month on your mortgage, try $1,000. With credit cards, try to pay at least double the minimum if you can, as these cards typically bear high interest rates. The more you can pay now, the less you’ll be paying for months and years. Sure, use a cash til payday loan if you need in an emergency… the end result will be all the sweeter. I’ll even give you a magic button you can use to apply for one, in case you’re in that spot right now

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Like anything else, making radical changes – in this case to your budget – requires a significant adjustment period. Be patient and understand that unexpected expenses do happen. Be flexible; you will have to adjust on the fly. Once you get the hang of it, however, you’ll be well on your way to paying off your major purchases. Paying off a 30-year mortgage or a 48-month car loan before their time ends up costing you much less in the long run. Who wouldn’t want to do that?

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