NEW YORK (MainStreet) -- This spring’s college graduates have had their summer goof-off time and are now buckling down to their first real jobs. Well, maybe not.
Jobs are scarce, and especially the good, career-track jobs. It may take many months, possibly years, for a recent grad to get a good financial start. So what happens with that government-backed student loan?
Unfortunately, there’s not much wiggle room. You either keep up with your payments or face severe, long-lasting consequences.
Government figures lag considerably, with the latest showing an 8.8% default rate for borrowers who were to start repayments in the 2009 fiscal year. That was up from 7% the previous year. With the job market so weak, it’s not likely things have improved. Typically, four of five defaults come after the first two years following graduation.
Borrowers who got used to easy or no-payment terms during their student years can be shocked by what awaits them in the real world – an unforgiving approach to missed payments. In fact, defaulting on a student loan can be worse than defaulting on a mortgage.
The IRS, for example, can intercept your tax refund, diverting it to repay your loan. This is very common, amounting to hundreds of millions of dollars a year.
The government also can take, or “garnish” a chunk of your pay, getting it directly from your employer. It can grab lottery winnings, and even take Social Security benefits. Of course, you could be sued as well.
But wait, it gets worse: Unlike other kinds of debt, student loan obligations are not wiped out by bankruptcy. And there’s nothing comparable to a foreclosure, which can clear away mortgage debt. With a student loan, you’re on the hook for life.
And so are your parents if they co-signed the loan. A default can be devastating for the entire family, ruining both the student’s and parents’ credit ratings, making it impossible, or very expensive, to borrow for a car or home.
So, repaying needs to be a top priority, even if it means buying a cheaper car, living with roommates instead of on your own, skimping wherever you can. If default is looming, you may be wise to take a job that’s available rather than hold out for something better.
Fortunately, there are some ways to ease the burden.
One is a relatively new program that caps the borrower’s payments at 15% of discretionary income. If you keep up with payments for 25 years (or 10 if you’re in a public-service job), the balance of the loan will be forgiven. In 2014 the terms will get even better, allowing forgiveness after 20 years, with only 10% of income going to payments.
Also, a default can be cleared from the borrower’s record if payments are brought up to date and kept current for nine months.
As with any loan problem, you are better off discussing it with the lender rather than just stopping payments and going silent. The lender may agree to a reduced-payment plan or to allow a temporary suspension of payments, or suggest consolidation of various loans into one.
For information on default alternatives and remedies, check out the site for the Department of Education’s student-loan ombudsman.
And be sure to check out MainStreet’s look at 7 Money Terms College Students Should Know to make sure your finances don’t get taken by surprise!