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Student loan debt recently surpassed credit card debt as it now stands at over $1.3 trillion dollars.
Does this represent a crisis or not?
Unfortunately, the answer to this depends on which financial experts you ask.
Some say that student loan debt is like the mortgage bubble and will soon burst. But others say it will never cause our economy to crash.
Millions of people trapped
Student loans do bear a resemblance to the housing crisis in that they have millions of people struggling to pay them back just as the mortgage crisis left millions of people
underwater – or owing more on their houses than they were worth. However, many experts say that student debt might be a problem for individual borrowers but won’t affect our economy, as there’s no bubble that could burst. One senior economist noted that the way that student loans have grown is important but this is its only similarity to the mortgage crisis. He went on to say that student loan debt and mortgage debt were growing at about the same rate per year but that's where the resemblance ended.
A crisis for individuals
Student loan debt can certainly represent a crisis for some individuals. There are people stuck with $50,000 or more in student loan debt, people in their 50s that still owe on their student loans and people that have been forced to default on them. One example of what this can mean is that a person owing $30,000 in student loan debts at 6% would have a monthly payment of approximately $333 and for 10 long years. These debts have caused many young adults to forgo buying a house, having children or even getting married.
How did this happen?
There is no one simple reason why there is all this student loan debt. Part of the reason is clearly the increased cost of going to college. Just in the decade from 2002-03 to 2012-13 alone the tuition and fees at public four-year institutions rose at an average rate of 5.2% per year above the rate of inflation. And the cost of room and board increased by 2.6%. This means there was an average annual growth rate of 3.8% in total charges.
A second reason why student loan debt has grown so enormously is because how easy it is to get federal student loans. For example, just about anyone can get a Stafford loan, as they don't require any kind of credit check. These loans have low interest rates and borrowers are not required to start repaying them until after graduation. Some Stafford loans are even subsidized meaning that the government pays the interest on them so long as the student is in school.
"Everyone needs to go to college"
A third reason why we have more than $1 trillion in student loan debts is because of the pervasive advice that everyone should go to college. The unanticipated consequence of this idea is that many kids go to college, find out it's not for them and drop out owing thousands of dollars.
Why there’s no way out
Student loan debts are unsecured debts. This means borrowers are not required to put up an asset in order to get them. This makes them the same in many respects as credit card debt. The big difference between the two is due to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). What it changed is that bankruptcy could no longer be used to wipe out either federal or private student loan debts. The one exception to this is if the borrower can prove to a bankruptcy judge that he or she has what’s called an undue financial hardship, which is almost impossible to do. In other words once you take out a student loan you're pretty much stuck with it – until you repay the money or get a job that offers federal student loan forgiveness such as teaching in a low income area or working in the public sector.
The pros of BAPCPA
The proponents of this act argued that it was necessary in order to prevent bankruptcy abuse – that people would borrow thousands of dollars, wait a couple of years after college, declare bankruptcy and walk away with a "free" education. The losers under this scheme would, of course, be US taxpayers as they would be footing the bill for these deadbeats.
Supporters of this bill also said that this would lead to cheaper loans so that more people could go to college. Part of this turned out to be true. It encouraged more people to go college but the loans didn't get decidedly cheaper.
The cons of BAPCPA
Of course, the biggest con of this act is that it leaves people mired in debt defenseless with no ability to get it eliminated. It can be argued that these people got their student loans with their eyes wide open. They knew going in that they would have to repay them someday. However, 18- and 19-year-olds are not know for their maturity and are capable of making bad decisions – one of which could be borrowing thousands of dollars. To make matters worse, many of these students choose majors that will never pay off financially– leaving them not only deeply in debt but in careers that will cause them to be low earners practically forever.
The hardest hit
However, these are not the people that are hardest hit by their student loans debts and by the BAPCPA. These are people that bought into the idea that everyone should have a college education, went to school for a couple of years and then decided higher education wasn't for them. This left them stuck in debt and without a degree to show for the money. Others that have been hard-hit are those that fell for the advertisements of predatory for-profit schools, borrowed money to finance their schooling and then discovered that their degrees were basically worthless leaving them both unemployed and buried in debt.
There are options
If you're stuck under a pile of debt there is one good bit of news. You should be able to find a federal loan repayment program that would at least ease your burden. If you're typical you didn't pay much attention to your loans after you graduated so you're probably in what's called Standard 10-Year repayment. If so and if you find your payments too burdensome you could switch to one of the other five repayment programs available. One of the most popular of these is called Graduated Repayment. Choose this program and your payments would start out low and then gradually increase every two years. A second option is Extended Repayment, which would give you up to 25 years to repay your loans. You would have a much lower monthly payment but, of course, would pay more in interest because of the loan's longer term. Plus, you would still be paying on your student loans in your late 40s.
There are also three income-driven repayment programs. One of these, Pay As You Earn, would cap your monthly payments at 10% of your "disposable" income. If you find you're not eligible for this program, you could choose Income-Based or Income-Contingent repayment, which would cap your monthly payments at 10% or 15% respectively of your disposable income.
For more information about federal loan repayment options and about effectively managing you student loans debts, be sure to watch this short video courtesy of National Debt Relief ...
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Whether you borrowed all that student loan money for good reasons or it was a big mistake, the same holds true. You can't get rid of it by filing for a chapter 7 bankruptcy but there are other options that could at least reduce some of your pain.