Student Loan Repayment Struggles
As the recession drags on, students who took out loans for school have been hit especially hard.
According to Education Department data, 7.2 percent of borrowers who entered repayment in the 2008 fiscal year defaulted, up from 6.7 percent a year before. Also, the 2008 default rate was higher for borrowers who attended for-profit institutions (11.9 percent) than for borrowers who attended public colleges (6.2 percent) or private colleges (4.1 percent).Factors contributing to this alarming trend include higher-than-average unemployment among younger workers, lower paying jobs, and cut backs in loan forgiveness programs offered by many states.
Most students (65.7%) turn to loans to pay for some or all of their college costs. Studies report that borrowers who graduate from 4-year schools carry loans averaging about $22,500 and 10 percent have $40,000 or more in student loans.
The last-ditch option available for many other forms of debt - discharge relief through bankruptcy - is not easily available for student loans. Folks with student loans must claim an "undue hardship" to gain bankruptcy protection from their student loans. This standard applies to both federal and private loans. A proposal before Congress aims to change that for private loans.
There is no statute of limitations for collection of student loan debt and lenders have very strong powers to collect on defaulted student loans. For instance, lenders can garnish up to 15 percent of take-home pay, seize your federal and state tax refunds and prevent renewal of professional licenses. For these reasons, paying back student loan debt is a financial priority. There are also financial incentives to paying back student loans - you can claim up to $2,500 in student loan interest as an above-the-line deduction. This means that you can claim this deduction even if you do not itemize deductions on your income tax return.
Folks struggling to repay student loans should not simply give up. Student loans offer more flexibility and repayment options than any other debt and credit obligations. For example, folks with student loans can apply for deferment or forbearance where loan payments can be temporarily suspended for hardship situations such as unemployment. The bottom line: there are many options available to borrowers to make their student loan repayment more manageable. Later this week I'll write about a few of them.
Ray Martin
View all articles by Ray Martin on CBS MoneyWatch»
Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS Moneywatch.com and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.
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