Loans help, but not only option
Every year, college students eagerly anticipate graduation and the perks that come with having a college degree.
They look forward to finding a job that utilizes the skills they have acquired, that they enjoy and that pays well; one that will allow them to get out from under the umbrella of debt they’ve amassed over the years.
With college enrollment expected to continue rising and an unemployment rate of almost 10 percent, the work force is more competitive than ever and finding a quality job in many chosen career fields is easier said than done. Many students are left unemployed or in hourly jobs with low pay, coupled with monthly loan payments more expensive than their paychecks. Many graduates eventually default on their loans and are forced to file bankruptcy.
There are a plethora of so-called ‘risk free’ private and government programs to help students repay their debts. In July, the Department of Education created an income-based repayment program. Eligible borrowers’ payments will be capped based on their incomes and the sizes of their loans. Rarely will payments exceed 10 percent of the borrower’s income.
If someone enters a career such as the Peace Corps, they may be eligible for public service loan forgiveness after 10 years. To make IBR seem even more appealing, the government will continue to pay interest on Subsidized Stafford Loans for a person’s first three years in IBR. If graduates still haven’t paid off their debts in 25 years, they might be eligible to have them discharged.
So what’s the catch? Government programs tend to have one, and IBR is no exception. While IBR does offer some hope, there are significant drawbacks. For one, reduced payments generally mean that a person is taking more time to pay off his or her loan, giving it more time to accumulate interest.
If a graduate’s income rises to a point where they no longer qualify for IBR, any of the unpaid interest on the account will be capitalized, and they will basically be paying interest on their previously accrued interest. Borrowers must also be aware of the fact that parents who take out Parent PLUS loans are not eligible for IBR. And as with all government programs, IBR is a tedious one that requires reapplication every year.
Students also run a big risk with private programs such as SafeStart, which claims to provide an interest-free line of credit for up to five years, only requiring upfront payments of $40 to $60 per $1000 of debt. It also says it provides benefits such as credit protection and avoids accrued interest charges. Borrowers are required to purchase a SafeStart every time they take out a Stafford loan.
This means those who are fortunate enough to pay for their student loans out of college are simply out of the money they used to purchase the SafeStart. The program also claims to offer an interest-free line of credit for five years, but only allows for 36 monthly payments within that time frame. IBR allows for three years of interest free payments at no initial cost to the borrower.
Students should start preparing themselves for the grim future of potential unemployment and student-loan repayment now. It is important to remember that student loans are not free money and students should only borrow if they have no other options.
When students take out loans, they should be aware of their interest and payment dates as well as their consolidation options. Students should not have to worry about spending the first few years of college desperately wishing they hadn’t taken out that extra loan to go on a booze cruise in Mexico one summer.
Liz Price is a communication junior and may be reached at [email protected]