As Students Look at Financial Options for College, They Often Take Out Student Loans, But They May Not Know What They’re Getting Into
By Ross A.
With graduation coming, many high school students are getting ready to enjoy summer—partying, hanging out with friends, and anxiously waiting to go to college.
The last thing on their minds is paying for college. Their ignorance is bliss, for a while. Some of them will be able to glide through their university years on the wings of their parents’ bank accounts, but some will have to take care of themselves.
These students will most likely take out student loans. They will be getting a dose of reality, of capitalist America among the ranks of Citibank and Sallie Mae, two of the largest private student loan lenders, and there is some important information they need to know.
Many recent college graduates are finding out that they got in way over their heads during the process of taking out loans for school.
First, one must know that there are two different types of loans: federal and private.
Federal loans, such as Stafford loans, have much better options and protection than private loans. Some options include: Income Based Repayment (IBR) unemployment or economic hardship deferments, and forbearance.
You don’t have to fight hard for these options; if you meet criteria, they are your right under federal law. Sounds okay, right? You can make payments you can afford, hold off when you are having money troubles, and even wait for a while before you start paying.
The only problem with federal loans is that one can only receive so much money. A NYU graduate in a recent article in The New York Times could only obtain $20,000 in federal student loans, and racked up $100,000 in private student loan debt, which is now haunting her.
Private loans are dangerous territory for many reasons, beginning with their variable interest rates. These rates, which generally start low and get higher, fluctuate with the prime rate dictated by the Federal Reserve. The rates can range anywhere between a manageable 2.88% to an astronomical 11.85% or higher. When the interest rates are high, many people can hardly manage to cover the interest payments. Some are stuck paying this debt off for decades, while others are in trouble from the start and end up in default.
These high risk loans are made to students who have no guarantee of a job after graduation, and who may not find a job that pays enough for them to make their payments. Some think of filing bankruptcy. Although making that move would result in a credit score that wouldn’t even qualify them a loan for a new microwave, and would create even greater financial headaches, it may seem to be the only option. Little known to many, though, is that it is impossible to discharge student loan debt in bankruptcy court. Forgiveness is not an option when it comes to these private loans.
Why not fall back on your parents, who most likely cosigned the loan? Well, cosigners can be released after 12 months of on-time payments, leaving the students to pay off the debt completely for themselves, but even this option may not work for some families.
Sallie Mae, the largest student loan company in the country, is creating new options. The Smart Option Student Loan, for instance, makes cosigners liable for 24 months only, provides refunds for payments made and lower interest rates. But the decision is still risky. The best option would be for students to seriously consider their financial situation and decide accordingly. They can’t just go into the financial aid office, accept every loan they’re offered and expecting their debt to pay itself off.
Banks advertisements show “customers” with ear-to-ear smiles—happy couples gloating about their new house, young adults going off to college or driving away in a new car. But commercials convey very little of reality or what a loan entails. The college kid is only smiling because he hasn’t received his first bill yet.
So remember: when it comes to student loans, ignorance isn’t bliss forever.
