The 2008 financial crisis continues to affect America's economy. Because of state budget cuts (caused by decreasing tax revenues), public colleges and universities have steadily increased tuition. This leaves many recent graduates across the nation with increasingly large debt loads. This problem is compounded by an unforgiving job market. National unemployment for new graduates still hovers at 10%. Also, one in four 24-year-olds is unemployed.
According to the National Postsecondary Student Aid Study, more than two-thirds of students borrow money to pay for college. New graduates accumulate an average of $23,186 of undergraduate debt. Those who continue on to graduate or professional schools can have more than $100,000 in student loan debt. Because of such a bleak job market, new graduates should explore a number of options to stay in control of their student loan debt.
Income based repayment - For graduates with federal student loans, monthly payments may be capped at 15% of the amount of your income that exceeds 150% of the federal poverty level, regardless of the outstanding loan amount. For instance, if your salary is $35,000, then you exceed 150% of the poverty level by $18,755, and your payment would be $234 per month under the formula.
Deferment - If you are struggling to pay back your loans, you can request a deferment, or additional time to make monthly payments, or to delay such payments up to one year. Deferments are commonly granted for economic hardship and unemployment. Interest on your loan still accrues during the deferment period, but it provides effective short-term relief.
Forbearance - Forbearances work in the same manner, but the difference is that the forbearance period counts toward the number of months allowed to repay the loan. Essentially, the time that you have to finish repaying does not change. So if you request a 12-month forbearance and you agreed to a 120-month repayment period, you will have less time to repay the balance. This could lead to higher payments in the future.
Congress acknowledges the continuing effects of student loan defaults and is considering changing how such debt may be discharged in bankruptcy. Changes to the bankruptcy code in 2005 made it nearly impossible to discharge private educational loans (from Citibank or Sallie Mae, for example). However, with rising tuition costs creating a market for opportunistic lenders, making bankruptcy laws less strict could stabilize tuition costs and hold banks more accountable for making sound lending decisions.
While there is no evidence to indicate that students loan defaults would tie up bankruptcy courts, legislators remain concerned over whether bankruptcies would rise, whether banks would continue to lend and whether borrowing costs would increase.
If you have questions about your student loan debt, available payment options or whether you may be eligible to discharge educational debt through bankruptcy, contact an attorney.
