Crushing debt: Students finding solutions to avoid or survive loans

Published: Saturday, Oct. 13 2012 12:00 p.m. MDT

Michelle Naef, front, right, and Mercedes Solari, center, join others in the English 1010 class at Salt Lake Community College in Taylorsville. Graduation rates Monday, July 30, 2012

Scott G Winterton, Deseret News

Student loan debt has stolen the pleasure from Stephanie Schroeder's life. She likes lattes, but doesn't buy them. She doesn't dine out or get her nails done, either. At age 49, Schroeder lives from paycheck to paycheck working as an editor at a New York City public relations firm; there are no extras.

The phone rings incessantly in Schroeder's Brooklyn apartment. When she answers, the conversation is always the same. An accented voice recites a robotic script, hounding her about her overdue student loans. But the caller has no answers for her questions.

Government-backed student loan debt has mushroomed in the United States, as have defaults on those loans. About 5.9 million people nationwide are at least 12 months behind on student loan payments, up by a third over the last five years, the New York Times reported on Sept. 8. One-sixth of student loans with a balance are in default, amounting to $76 billion, according to a survey of state-high education executives.

There are strategies that can help student loan debtors avoid default and its consequences, although recourse is less available than for other debt types. Avoiding over-indebtedness remains a better option than any of the cures. Advance planning can help college students and their families minimize or avoid college loan debt, said Mitchell Weiss, author of the book "College Happens: A Practical Handbook for Parents and Students" and an adjunct professor of finance at Connecticut's University of Hartford.

For Schroeder, 49, it might be too late. She has explored the options for addressing her debt, from deferrals to forbearance to income-based payments. Like millions of student loan debtors, she borrowed when times were better, and the ability to repay seemed certain. And, like many, she bet her future on a high-paying job that never materialized.

Postponing day of reckoning

Deferments and forbearances offer ways to skip loan payments during unemployment, a return to college or military service, said Allesandra Lanza-Cosgrove, spokesperson for American Student Assistance, a non-profit company that assists students in managing college loan debt. Deferments are preferable to forbearance, if requirements can be met, because interest does not accrue, she said.

Borrowers should postpone payments only when imperative, though, as reducing monthly payments extends the life of the loan and results in larger interest payments over the long run. "Retire the debt as soon as possible," Lanza-Cosgrove said. "But, if you can't, it's much better to postpone than go into default."

When a person defaults on a student loan, the IRS can intercept income tax refunds, and the government can garnish paychecks, take Social Security retirement benefits, or sue. The borrower's credit rating will be harmed, making it difficult or impossible to get a credit card, buy a house or finance consumer purchases.

Schroeder knows. She can't get a credit card or a mortgage, and feels that her future holds little promise.

"I'm scared," she said. "I'll never be able to retire. I'll have to work until the day I die."

Income-based payment plans on government loans provide another way to avoid default, Lanza-Cosgrove said. Those who meet financial hardship requirements can have loan payments capped at 15 percent of discretionary income, though interest continues to build over the length of the payment period. After 25 years of repayment and 300 eligible payments, any outstanding balance is forgiven.

ASA's website explains the repayment options. For Schroeder and millions of others, they don't solve the problem of college loan debt, though.

Reality therapy

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