This is the time of year when students and their parents begin taking out student loans in preparation for starting or returning to college next fall. It's a good time to pause and reflect on a few things, especially the fact that student loans cannot be discharged through bankruptcy. If you name is on the dotted line, you will have to repay every penny of the loan amount, plus interest.
This can have very unpleasant consequences for parents and students alike. We heard just this morning from Tim, who co-signed for his daughter's student loans, which now total more than $180,000.
"I will never retire at this point," Tim said. "I have been threatened by Navient (Sallie Mae) after my daughter was a day late paying her loans. They called me on that day and continued for five days while the payment made it through their system. I just don't know what to do. Everyone talks about how not to get into this situation. How about if you are already over your head in this situation?"
Sadly, there's not much Tim can do, except hope his daughter isn't majoring in art history. He can also learn about consolidating student loans here. For everyone not yet over their heads, there are steps you can take to maintain some semblance of financial health while seeking a higher education.
The most obvious way to hold down debt is to live at home and attend a community college for two years. In many states, students who successfully complete two years of community college are automatically granted admission to four-year state schools and can complete their education there. Avoid for-profit colleges, which generally charge more and deliver less.
There is also the little matter called working. It used to be fairly normal for college students to work part-time. While this may result in lost sleep and socializing, it can also result in sharply reduced debt later in life.
Scholarships and grants can help relieve much of the cost of college for those who are diligent students. Be very careful with grants, though. Many -- even those promoted by the U.S. Education Department -- have been called "legalized theft" by students who did everything they promised but failed to cross a "t" or dot an "i" on the annual paperwork and found themselves facing an unanticipated debt.
The college financial landscape is filled with scam artists. Students should be very cautious of private companies that charge for loan services that are available for free elsewhere.
It is not necessary to pay a private company to assist with student loan applications or consolidcations or to submit the Free Application for Federal Student Aid (FAFSA). In fact, anyone who is college-bound should be able to fill these forms out themselves, checking with their high school counselors if they need help.
Students should be sure they understand what they are signing. Loan documents mean what they say. Don't assume it will be easy to repay $100,000 or more after graduation. Large debts can be a lifelong burden.
Co-signers, like Tim, should be especially careful. It's one thing for a 22-year-old to be saddled with a six-figure debt. It's something else for someone who is 50 or 60 years old and may face an impoverished old age because of a child's student debt.
Presidential candidates may promise to forgive student loans, but wise consumers know they can't take those promises to the bank.
California Attorney General Kamala Harris recently issued tips to prospective students, including:
- Do not sign a loan document electronically without first reviewing and understanding the terms of the loan agreement. Make sure to understand how much money is being loaned, the interest rate of the loan, and when the loan will need to be repaid. Inquire about the available options if loan payments cannot be made on time.
- Be aware of the differences between federal and private student loans. Federal student loans may offer lower, fixed interest rates, while private student loans may have higher, variable interest rates. Additionally, federal student loans generally do not need to be repaid until the student graduates, which may not be the case with private loans.
- Beware of companies that charge an application fee and monthly fees for assisting with consolidating federal student loan debt. Consolidating federal student loans is FREE through the Federal Direct Consolidation Program.
- Ask about the student loan’s grace period and be aware that the grace period may change depending on circumstances. Engaging in active military duty, returning to school, and consolidating loans may alter grace periods.
- Defaulting on student loans will adversely affect credit and will impede the ability to make purchases down the road. It is important to stay in touch with student loan servicers, especially if there is a difficulty in making timely payments.
Follow these steps and you may avoid the financial morass Tim now faces.