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Student Loans: How to avoid defaulting.
September 9, 2012 2:04 PM

With total outstanding Student Loan debt exceeding credit card debt now ($1 trillion vs. $800 billion), and with the Federal Government no longer outsourcing the loan process, we now have the situation where the Feds are coming after ex-students who are defaulting on their loans:

At a protest last year at New York University, students called attention to their mounting debt by wearing T-shirts with the amount they owed scribbled across the front -- $90,000, $75,000, $20,000.

On the sidelines was a business consultant for the debt collection industry with a different take.

"I couldn't believe the accumulated wealth they represent -- for our industry," the consultant, Jerry Ashton, wrote in a column for a trade publication, InsideARM.com. "It was lip-smacking."

Lip-smacking, indeed. Yuck!

The number of targets for these lip-smackers is up 30% in the past five years:

As the number of people taking out government-backed student loans has exploded, so has the number who have fallen at least 12 months behind in making payments -- about 5.9 million people nationwide, up about a third in the last five years.

Six million defaulters. Double Yuck! What a disaster!

But there is a program to help these folks (and potential defaulters):

Though there are programs in place to help struggling borrowers, the companies hired to administer federal student loans are not paid enough for lengthy conversations to walk borrowers through the payment options, critics say. One consequence is that a government program called income-based repayment has fallen short of expectations. Under the program, borrowers pay 15 percent of their discretionary income for up to 25 years, after which the rest of their loan is forgiven. But participation has lagged because borrowers are either not aware of the program or are turned off by its complexity.

Many borrowers were never told about the income-based option, and many others have been frustrated by the onerous requirements. So far, 1.6 million borrowers have applied for income-based repayment; 920,000 are active participants and another 412,000 applications are pending.

And this income-based option is getting streamlined further, which seems like a decent deal:

Under proposed regulations, debt collectors would be required to offer borrowers an affordable payment plan. And, the department vows to do a better job of publicizing income-based repayment, including telling borrowers about the plan before they leave college.

In addition, borrowers will be able to apply for income-based repayment online rather than going through their loan servicer. Monthly payments will be reduced to 10 percent of discretionary income, down from 15 percent.

Ten percent of discretionary income for 25 years could work, right?

Or we could just make higher education cheaper by raising taxes on everyone to help pay for what should be a right - and is considered one in Europe.


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