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Student
loans are commonly referred to as "good debt"
the kind of debt people take on for a college degree
and the promise of higher income that accompanies it.
But for
some, there is nothing good about private student loans.
Just ask
Kristi Nelson
and
Jennie Fisher
. Nelson graduated from
St. Paul's College
of Visual Arts in 2003 and has
$55,000
in private student loans.
Fisher
asked her father, John, and her grandmother to co-sign
her private loans to attend the
Minneapolis College of Art and Design
; they owe more than
$88,000
. They're all struggling to make monthly payments and
are closely watching renewed efforts to make private
student loans dischargeable in bankruptcy court.
The term
"private student loans" can be confusing. It's
sometimes used to refer to the Federal Family Education
Loan Program (FFEL), the government student-loan program
that's administered by private companies such as
Sallie Mae
and
Wells Fargo
. FFEL loans made news earlier this month when the House
passed a bill that would remove the banks and lenders
that act as middlemen and have the government handle the
loans directly instead.
The
private loans, or alternative loans that have Nelson and
the Fishers scrambling to make debt payments, are
different. They work more like credit cards, with
variable interest rates as high as 18 percent and terms
set by the lenders. Such loans have far fewer
protections and guarantees for borrowers than do
government-sponsored loans. Some critics consider
private student loans to be the subprime products of
higher education.
Because
the cost of college has grown faster than the amount of
federal loan money available, more and more students are
relying on private loans to pay a part of their
education. Private loan volume grew from
$7.7 billion
in 2003-04 to
$22.4 billion
in 2007-08, according to a policy paper by financial aid
expert
Mark Kantrowitz
.
Consumers
often "assume that something being called a student
loan makes it inherently safe, and that's simply not the
case," said
Lauren Asher
, president of the Project on Student Debt.
Asher
testified before the
House Judiciary Committee
on Wednesday about the need to treat private student
loans like credit cards and other consumer debt in
bankruptcy court. Unlike the consumer who racked up too
much credit card debt and the homeowner who took on an
unaffordable mortgage, college graduates with too much
student loan debt cannot, in most cases, discharge the
loans in bankruptcy.
"At
least if you put your tuition on a credit card, it would
be dischargeable in bankruptcy should you ever reach the
unfortunate point of needing such relief," she
testified. "Ironically, private loan creditors
remain fully eligible for the bankruptcy protection that
their borrowers are now denied," she added. Read
the full testimony of Asher and others at
judiciary.house.gov/hearings/ hear0909231.html.
These
private loans also aren't included in any of the recent
laws passed to make college more affordable, such as
income-based repayment plans and loan forgiveness for
certain altruistic occupations.
As the
wheels slowly turn on
Capitol Hill
, what can graduates strapped with private loans do?
Painfully little. "They are at the mercy of their
lenders," Asher said.
You can
call your lender to explore your options. Both Nelson,
49, and Fisher, 29, have loans with
Student Loan Finance Corp.
and postponed payment using forbearance or deferment. It
was a temporary and pricey fix, because interest accrued
on their loans during those periods. Since then, the
only advice Nelson said she was given was to make her
payments on time for the next 26 years. Fisher suffered
near-fatal blood clots in her brain this summer and now
is unemployed. When she called to ask for help, she
said, she was told "you're out of options." A
spokesman for
South Dakota
-based
Student Loan Finance Corp.
said he could not comment on specific borrowers' issues,
but said the company always tries to work with borrowers
having trouble repaying their loans.
Current
students should make sure they exhaust their federal
student loan options first. If private loans are
necessary, research options at
studentlendinganalytics.com and finaid.org. Make sure
you are clear on how the interest rate is calculated and
get your hands on the promissory note, or contract.
Calculate
how much debt you can afford to repay. A
Sallie Mae
study found that 58 percent of families did not consider
a student's expected starting salary when deciding how
much to borrow. When asked about their estimated monthly
loan payments, 23 percent of students had no idea and
the rest quoted payments that didn't jibe with the total
amount borrowed. If you realize you'll have trouble
repaying, tough choices must follow. Should you work
more, transfer to a different school, switch majors or
live a more Spartan lifestyle?
Fisher,
who lives in
Bloomington
and never has used her degree, wishes she had taken a
year off between high school and college. At age 19, she
said she "didn't fully understand" her loans.
Her father urges relatives to think twice before
cosigning a loan.
Nelson,
of
St. Louis Park
, cleans houses and teaches fitness classes. She wishes
she'd met with a financial adviser before taking on so
much debt. If she could do it over again, she would also
rethink her major.
"Check
on the job outlook for what you're going to school
for," Nelson said. "Art wasn't a good
idea."
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