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Recent articles by Liz Pulliam Weston: • How to blitz your holiday debts, 1/15/2006 • Why its smarter to buy than rent, 1/11/2006 • How to sell a car you dont own, 1/8/2006 More... |
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| The Basics | ||||||||||||||
| Uncle Sam cracks the whip on students | ||||||||||||||
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The stakes on student loans just got higher: Not only have rates soared, but the debt can haunt you all the way to the grave. By Liz Pulliam Weston If you're a student or parent and felt a little out of breath over the holidays, you weren't imagining things. Lawmakers and Supreme Court justices were busy putting the squeeze on you. Right before Christmas, Congress decided to slash $12.7 billion over the next five years from the federal student-loan program and boost interest rates on the most popular loans. (The changes are likely to become law in February.) A few weeks earlier, the U.S. Supreme Court gave the government even more power to go after delinquent student loans -- even if the borrower is elderly or disabled. These two developments have ominous implications for the millions of families who need to borrow money to pay for a college education.
"It's difficult enough as it is," said Ann Ngo, a University of Southern California student who struggles to make ends meet with a part-time job and $45,000 so far in student loans. "Why did the government have to make it worse for us?" So far, three things are clear:
Time to pay the piper Congress had been signaling for some time that the days of really cheap student loans were numbered. Allowing borrowers to lock in rates as low as 3% for 10, 20 or even 30 years through consolidation programs was simply costing too much, lawmakers decided. The government had to pay subsidies to student lenders for many of those consolidated loans and missed out on higher interest rates for loans it generated itself. "The government was subsidizing long-term loans at short-term rates," said Martha Holler, Sallie Mae spokeswoman. Related news and commentary on MSN Money
Rates on Stafford loans -- which make up 84% of all federal loans, according to lender Sallie Mae -- would have increased anyway on July 1, since the variable rates are based on 91-day Treasury bill yields that have been climbing. But Congress decided to fix the rate for all new Stafford loans at 6.8%. The new fixed rate will prevent future borrowers from benefiting if rates drop. The current variable rate is 4.7% for students still in school and 5.3% for graduates. (In 2004, rates hit a low of 2.8% for in-school students and 3.4% for graduates.) The new rate means the typical $20,000 student-loan debt load will cost as much as $2,500 more over 10 years after the rate change takes effect. Rates for PLUS loans, which are typically taken out by parents, were boosted even further, from a current variable rate of 6.1% to a fixed 8.5%. The PLUS program will be expanded, though, to allow graduate and professional students to borrow money. That could be a real boon for those students, who often face higher variable rates from private lenders. But the benefit to them doesn't offset the increased cost to parents and the cuts in the rest of the student-loan program. "I would say it's one step forward, four steps back," said Mark Kantrowitz, publisher of FinAid. A lifelong commitment Besides being more expensive, student loans have also become much more difficult to shed, so much so that lenders probably should slap on a warning label: "This debt can follow you to your grave." Unlike most other unsecured debt, student loans are all but impossible to erase in bankruptcy court. There's also no statute of limitations on how long borrowers can be sued over their debt, and the Department of Education can dock wages, seize refunds and take other steps to recoup what is owed. The recent Supreme Court decision is just another tightening of the noose. The Supremes decided that the government could continue taking 15% of Seattle resident James Lockhart's $874 monthly Social Security check, his only income. The 67-year-old disabled man had taken out student loans in the 1980s and still owes about $77,000. The fact that it would take him about 50 more years to pay off the debt didn't dissuade the court. The case underscores the importance of moderation when taking on student-loan debt. If you're not sure how much you can afford, check out "How much college debt is too much?" Crucial decision ahead If you're still in school, you'll need to make a tough decision. Consolidating now could save you money, but you'll also eat up some or all of your ability to defer your payments later. Here's how it works. To consolidate a loan in school, you have to ask your lender to put your loans in "payment" status. Then you can consolidate and lock in the current low rate. Next, you ask your lender for a deferral so you won't have to start making payments until you graduate. Typically, though, you can defer payments for a total of only three years. If you're a freshman or sophomore, you may not want to do that. If you have trouble finding a job after school or run into other financial setbacks, you might need that deferral. If you're a junior or a senior, though, consolidating now might be worth the risk. Here's what to keep in mind:
Chung So contributed to this column. Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader questions in the Your Money message board. | ||||||||||||||
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