The Student Loan Dilemma

Prior to the Healthcare Reform law, private companies that offered student loans which were subsidized and guaranteed by the federal government. Under the Healthcare Reform Law the government now lends the money directly to students eliminating the need for private lenders. The money will go towards providing more grants to students. However, this has caused an increase in companies offering private student loans.

Private loans require a credit check and cannot be discharged in bankruptcy. Private loans offered through college have higher interest rates compared to federal student loans and accrue interest while students are in school. Since the Healthcare Reform, Sallie Mae which offers private loans now offers a Smart Option Student loan with an interest rate of 2.8% and allow students to lower their interest rates by paying on interest which still in school. Wells Fargo offers private loans with variable rates and student can reduce their interest rate three quarters of one percent if the student graduates.

The student loan default rate has increased to 7%. Many colleges are controlled by privately traded companies on the stock exchange and investors are always looking for ways to exploit low-income students. According to a report by the Education Trust titled “Subprime Opportunity: The Unfulfilled Promise of For-Profit Colleges and Universities”, private for-profit colleges take advantage of students by offering high interest loans.

According to the report, only 22% of students who enroll in a 4 year degree program graduate within 6 years. A U.S. Department of Education report states that Arizona has the highest rate of student loan defaults in the country. In contrast, the student loan default rate in Missouri is 5.8% which it achieves through grants to institutions and financial literacy programs. Grants are used to teach students financial literacy. Assistant Commissioner Leanne Cardwell, states that financial literacy outreach is critical to reducing default rates and student debt load.

Getting private student loans for college should be a last resort. Here are 8 ways reduce college tuition and student loan debt.

1. Apply for financial aid. Apply for at least 50-100 college scholarships and apply for the FAFSA January 1.

2. Plan for college costs early. If you will have to pay for college yourself get a part-time job as soon as you are old enough to work and put at least 50% of the money in a high interest savings account.

3. Ditch the high bill. It is nice to attend an Ivy League school but the tuition will cost you. Consider attending a less expensive school.

4. Work at school. Research getting a job which in school through the colleges’ work-study program.

5. Student loan forgiveness. Research student loan forgiveness programs before applying for a job after graduation to see which industries offer the best program for you. You may have to delay that 6 figure job until your student loan debt is paid down. Visit finaid.org for more information.

6. Apply for federal loan. Apply for federal student loans first which offer lower interest rates and multiple repayment programs.

7. Read the fine print. Read the fine print on student loan applications especially the interest rate, default penalties, repayment options, balloon payments, and prepayment options.

8. School decision. If feel strongly about attending the school of your choice with a high tuition, attend a school that offers a higher starting salary. CNBC ranked 16 schools that offer high starting salaries upon graduation. For more information visit cnbc.com/id/40703034.

How to Pay Defaulted Student Loans

Student loan debt is one of the hardest debts to pay off. Many Americans pay on their student loans well into their adult life. If your student loans go into default, it can take a while to get them into good standing. You risk having your tax refund taken, your paycheck garnished or being taken to court.

Federal loans have more regulations and programs to help account holders pay their student loan debt. Private loans are not as regulated and offer very few programs or none at all depending on the company to help account holders pay their student loan debt. You cannot include federal or student loans in bankruptcy. Here are 9 ways to get current on defaulted student loans.

Private loans
1. Offer a good faith payment or a lump sum payment to use as negotiation to request that any fees or finance charges be waived. Also, request that your payment history is updated on your credit report.
2. Refinance. After paying your loan on time for at least two years you can comparison shop and sell the loan to another loan servicer or bank for a better interest rate.
3. When private loans go into default they are usually forwarded to a collection agency which may not be as willing to work with you to setup a payment plan. Negotiate and offer a payment plan that you know you will be able to afford each month. If they refuse to accept your payment plan you may have to provide documentation such as a budget or paystub to support your payment plan.
4. You may be charged fees by the collection agency but no more than 18.5% of the outstanding principal and interest.
5. If you are in the military and are on active duty there are limits on interest accrual.
6. If the collection agency is not adhering to the Fair Debt Collections Practices Act file a complaint against the company with the Federal Trade Commission.
7. You can consolidate loans to use the student loan forgiveness (or public service forgiveness) programs.
8. Ask for a copy of the collection agency's business license, proof that they have a legal right to collect on the student loan and proof that you owe the amount stated on the letter you received.
9. If the school you attended closed or you withdrew from school you may be eligible for a partial refund by completing an unpaid refund discharge application form.

Federal loans
1. After making payments on time for 9-10 months, your loan will be placed in good standing (rehabilitated) and you will be eligible for various programs such as deferment, forbearance and student loan forgiveness.
2. Determine how much you can afford to pay each month. This may require that you create a budget and reduce some expenses to ensure you make the payments each month.
3. If your loan has not been sent to a collection agency, send a payment to the Department of Education's Payment Center.
4. You can consolidate your loans into one loan which will put your loan in good standing.
5. Don't consolidate federal loans into private loans because you will no longer be eligible for deferment, cancellation, forbearance or income-based payment plans.
6. You can consolidate your federal loans into the Direct Loans government consolidation program.
7. If you default on a Direct Loan you must make 3 payments or agree to pay the loan using the Income Contingent Repayment Plan (ICRP) or Income Based Repayment Plan (IBR). If you sign up for the ICRP or IBR you do not have to make 3 payments before applying for consolidation.
8. You can only consolidate a Direct Loan once.