Bubbles seem to be bursting all across the economic landscape. First we had the housing bubble, then the automobile industry bubble, then came the credit card bubble. Pretty soon we’re liable to have a “bubble” bubble, where our heads explode over all the financial fires popping up everywhere.
So it’s with extreme caution that I broach the subject of one more economic bubble: the student loan crisis.
I know what you’re thinking. “Cramer, we can’t take any more bad financial news, especially about student loans. It’s just too much!”
Well, you got the “too much” part right. Too much student loan debt coupled with too much financial stress is triggering a larger burden for student loan borrowers.
As usual, the numbers tell the story. According to the College Board, total student loan borrowing has more than doubled from 1998 to 2008: $85 billion, compared to $41 billion ten years ago. The amount of privately funded student loans, which usually include higher interest rates and higher repayment amounts, have also risen over the same time period, from 7% in 1998 to 23% of all student loans in 2008. Meanwhile, the Wall Street Journal reports that subsidized federal aid is treading water at about $42.8 billion per year.
Those ingredients make for a witches' brew for cash-strapped borrowers in 2009. Saddled with debt, and facing layoffs and loss of income, student loan borrowers are falling behind. Sallie Mae (Stock Quote: SLM) reported a delinquency rate of 9.4% in the third quarter of 2008, compared to 8.5% a year earlier. How much do you want to bet that gap continues to widen in 2009?
But if you’re late on your student loan debt, take heart. The last thing that shell-shocked lenders need is for you to default on your student loan debt. More and more of them are willing to talk about delaying payments and renegotiating terms. So you don’t want to be delinquent on your loan. That could hurt your ability to borrow money later, kill your credit score, leave you open to IRS garnishments and stop you from getting a professional license in your chosen field.
I’ve got some ideas for you, but before we go there, you need to understand the different levels of “late” student loan payments.
Seven to 10 days: Anything seven to 10 days late is generally okay. Lenders usually give you a grace period of about a week. No harm, no foul.
15 days: Any payment that arrives at the lender past 15 days will likely incur a late fee. I hate late fees with a passion—you’re essentially paying interest on your interest, and that’s no way to create wealth.
30 days: If you’re 30 days late or more, you’re starting to sink in financial quicksand. You’re still accumulating late fees, plus you’ve got two months worth of payments to handle.
60 to 90 days: If you’re two or three months late on your student loan bill, your lender can really start to turn the screws. By law, lenders are allowed to take your loan interest and actually add it to your loan principle. When you hit the 90-day mark, your loan starts to take the shape of a mob gambling debt, as your lender can begin charging you extra interest on top of the interest you already owe.
Anything after 90 days: You’re really in hot water. The delinquent loan will likely show up on your credit report, and you reduce the chances of having your lender grant you forbearance, where your loan is temporarily put on hold until you get on your financial feet again. If the clock keeps ticking, and your account is 270 days past due, the loan will likely go into default, and then all bets are off.
Learn Your Options
Assuming that your situation isn’t that dire, you’ve got some options, probably more than you think. The key is to dip into that arsenal as early as possible.
Start by contacting your lender. More gasoline is tossed onto small loan fires because the borrower didn’t pick up the phone or email his lender. Like I said, most lenders want to hear from you when you’re in trouble with a loan, and will often defer the loan until things get better. You might have to prove economic hardship, or agree to keep paying the loan (but in smaller amounts), but chances are you can buy yourself more time.
If you have multiple school loans, you can consolidate them into one loan with one payment. With consolidation, you can lock in a lower fixed interest rate as well. Again, don’t wait to consolidate. If your credit score is shot because you’re late on your loan, getting a new loan—especially in this harsh credit environment—could be a migraine in the making. Visit a site like our partner site, BankingMyWay, to calculate whether you should consolidate your student loan.
Ask about gradual payments. If you have a student loan that pays out in fixed amounts and are having trouble making payments, ask your lender if you can switch to a graduated payment plan where you are allowed to make smaller payments first, then pay more as your salary increases.
Also, if things are really dire and you’ve graduated into a rough employment climate where you can’t find work, consider going back to school and increasing your learning and job skills. Most college loans aren’t due if you’re attending school, even on a part-time basis. But you’ve got to make decision soon after graduation, before your loan demands kick in, and before you consolidate any loans.
My take? Late student loan payments are serious business, but not a deal-breaker financially. But that holds true only if you get on the problem early and keep your lender in the loop.
—Brian O’Connell contributed to this article.