We're told over and over again that student loans are good debt. The conventional wisdom says that, like a home loan, student loan debt will turn into an asset. But what happens when it doesn't turn out that way? What happens when people increasingly can't pay?
Sometimes, they stop paying or fall behind on their loans. The U.S. Department of Education recently reported that the national default rate on federal student loans rose slightly to 5.1 percent in 2004, the latest year available, from the previous year's record low of 4.5 percent.
Since the 1990s, the number of students who graduate with more than $25,000 in loan debt has tripled, according to the student Public Interest Research Groups, which along with several state student associations last year launched the Student Debt Alert project (www.studentdebtalert.org).
Rising student loan levels are so troubling, it's time we stop saying this is good debt.
Sinking in debt, borrowers want to know their options. They look deflated when I tell them. Pay it as agreed over 10 years and live below your means, or stretch the payments for up to 30 years.
And no, bankruptcy is not an option. If you have a federal student loan, it can't be discharged in bankruptcy. If you have a private student loan, it's still not a viable option unless you can prove that paying it would result in "undue hardship," a test that is nearly impossible to meet.
There is some relief, even if temporary. Depending on the loan, there are several options - such as a graduated repayment plan - where payments start out low and increase, typically at two-year intervals.
Some loans have an income-contingent option. That gives you flexibility to pay off your loan based on what you earn.
If you are experiencing an economic hardship, you may be eligible for deferment. Under this option you still have to pay the loan, but you can postpone payments for a while. Interest on the loan or loans will not accrue during the deferral period.
Another option is forbearance, in which you can stop making payments for a set period of time. Unlike the deferment option, interest continues to accrue. But forbearance is easier to get.
What if you have the cash? Should you pay off your loan? That's what a number of people wanted to know during the online chat. Take a look:
l "I am a 30-year-old single female, who owns a condo, has no credit card debt, donates to charity, maxes out her 401(k) and has $10,000 in emergency savings and $2,000 in regular savings. I also have $49,000 remaining on my law school loans, which were over $140,000 when I graduated. Should I take $10,000 of my emergency savings and put it toward the loans?"
Answer: I would not totally deplete my emergency stash of cash, but I would take about half of it and put another dent in that debt.
l "I'm about to receive $30,000 of the life insurance money that my father requested I use to pay off the student loans. I have $39,000 in loans with interest rates below 3.5 percent. Should I invest it and pull from what grows to continue to make the regular payments? Or should I just pay off a massive chunk of the student loans?"
Answer: Your father did know best. Pay down the debt.
I think all the questions, on some level, stem from the belief that student loan debt is good debt. It's not. Debt is bad, even when necessary.
Conventional wisdom should follow this old Chinese proverb, "A good debt is not as good as no debt."