Iron bubble: Student loans help some, crush others

With the federal government supplying 93 percent of student loans, the ability to get those loans is not drying up.

Many of the media stories looking at student loan debt focus on students with huge amounts of debt. Yet, two-thirds of college seniors who graduated in 2011 had student loan debt, with an average of $26,600 per borrower, according to The Institute for College Access and Success. While $26,600 may seem like a lot of money, Kantrowitz doesn't think so.

"For most people, this is going to be an affordable amount of debt," he says, "It's about the same as a car payment. In fact, the vast majority of students are able to repay their student loans."

Students who graduate with six-figure debt are the exception, Kantrowitz says.

Default

"There is no rational reason for a student to default on their federal education loans," Kantrowitz says.

There are contingencies in the case of temporary financial difficulty, such as the economic hardship deferment (up to three years) and forbearances (up to five years) that temporarily suspend the repayment obligation. Kantrowitz says forbearance should only be used for the short term because interest for most loans will continue to grow.

"That just digs you into a deeper hole," he says.

The standard repayment plan is 10 years, but people can apply for extended repayment plans that go up to 30 years. This reduces the monthly payment, although it will increase the amount of interest paid. Going from a 10-year loan to a 20-year repayment plan will reduce the monthly payment by about one third while more than doubling the amount of interest paid.

Income-based repayment first became available in 2009. It was a way to make sure minimum payments were not unbearably high for people with lower incomes. Now President Barack Obama is fast-tracking a different version of the plan. It used to be that people in certain hardship circumstances could lower their payments to 15 percent of their income and would be forgiven of any outstanding balances after 25 years. Now payments can be lowered to 10 percent of income with the rest forgiven in 20 years.

Using this method is better than defaulting, because the federal government is then likely to use a 15 percent wage garnishment anyway until it gets everything.

"The government also has incredibly strong powers that force you to repay the loan," Kantrowitz says.

Jan Miller remembers when he worked for a company that serviced student loans. He was amazed when people would default on their loans without even trying the various programs available to help people with financial difficulties.

Miller, an expert on student loans and the CEO of Miller Student Loan Consulting in Salt Lake City, says people sometimes make poor initial choices when they don't know the difference between federal student loans and private student loans.

There are many programs in place to help people with federal student loans. That's not the case with private student loans.

Federal student loan borrowers can get multiple types of deferments and forbearances. Unemployment forbearance is even open for people who are employed less than 30 hours a week.

Power to take

But as forgiving as the student loan process can be (try getting forbearance, deferment or alternative payment plans from credit cards or for a mortgage), the federal government will not be denied. It can intercept income tax refunds, it can take up to 15 percent of Social Security benefit payments and the loans are rarely dischargeable in bankruptcy. People who default on a federal education loan can't enlist in the military. They can't get an FHA or VA mortgage. Renewals of professional licenses may be turned down.