Class of 2014, the time has come to find a job and start
paying down your student loans. Like many young graduates, you probably don't
feel like embracing this particular change. If that's the case, I'd like to
suggest you at least consider shaking its hand.
Commencement season is here, which means a torrent of
speeches about risk-taking and being bold on life's journey -- with a laugh
line here and there about the student loans new graduates will have to start
paying down. However, given today's job market, most folks wearing caps and
gowns will fail to see the humor.
Almost universally, commencement speakers tell the newly
graduated not to worry too much about being perfect, but to always do your best
as you wend your way through the vales of Not Failing toward Success. That
said, one of the first places many graduates will encounter failure in 2014 is
in the job market.
A recent Slate article joined the murmuring throng
of pieces about the job prospects for new graduates:
"It used to be that more than half of these
overeducated young workers would find themselves in 'good' jobs -- meaning that
they'd pay at least $45,000 in today's market. Today, less than 40 percent do.
Meanwhile, more than a fifth of this group were in low-wage jobs, meaning they
paid $25,000 a year or less."
For many graduates, the first dose of reality hits when they
discover that the amount of money they actually make is radically different
than that which they estimated would be their likely starting salary when they
originally took on the burden of those student loans.
The big problem here is that there is rarely an elegant exit
from most student loan debt (for example, if you become totally and permanently
disabled, or if you die -- to name a couple of possibilities -- your debt might be
discharged). Otherwise, for the most part, the only way to get out from under
that dark mountain is to pay your way out. That said, there are always people
who think they can game the system and avoid paying.
Here are three ways student loan borrowers try to escape
their fate and why they won't work.
1. Not Paying
Difficult as it may be to fathom, many people have tried
this tactic. It seems simple enough. "I mean hey, what can a lender really
do to me if I don't pay?" How about plenty -- and none of it is good.
When you don't pay, the debt hangs around like a really bad
canker sore in a mouth full of hot sauce. Unlike credit card debt, there is no
real bankruptcy option on the horizon for student loan debt. With penalties and
interest accruing, the obligation keeps growing and there's no escape. It's a
modern day version of owing your life to the company store.
Additionally, this approach will prove to be an albatross
around your neck when you try to get a mortgage (or even rent) down the
line. That's because student loan payments tend to be some of the first credit
accounts new graduates have to their name. If you miss payments, it will hammer
your credit score -- one of the first things lenders (and landlords) look at
when determining whether to lend or rent to you. If you want to see where your
credit currently stands and how your student loans are impacting your scores,
you can see two of your credit scores for free every month on Credit.com.
2. Paying With Credit Cards, Then Declaring Bankruptcy
Here's another misconception that will cost you -- big time.
The rates on your credit cards are much higher than those on student loans. So
unless you have an unquenchable thirst to waste your money on unnecessary
interest payments, the only reason to pay your student loan debt with credit
cards would be a feeble and misguided attempt to change the character of the
obligation and discharge the debt in bankruptcy.
Make no mistake, the bankruptcy court will see right through
this scheme. The student loan debt will still be due, and you will have seven
years of ugly credit.
3. Using a Home Equity to Pay Off the Loans
For some borrowers who have returned to school later in
life, they may think that using equity in their home will help them consolidate
their student loans and lower their monthly payments. While this option may
work, it's most likely not a good one, and actually could have disastrous consequences.
The hitch here is that most student loans have comparable
interest rates to what banks are charging homebuyers right now. You're not
paying off debt, just trading it in for some new debt tied to your home.
Another consideration is that by encumbering real estate
with further debt, you could be putting your house (perhaps your only asset) on
the line. Missing a student loan payment is bad enough, but if you miss
mortgage payments you put yourself at risk for foreclosure.
If you're having trouble meeting your obligations on federal
student loan debt there are options out there ranging from
Income-Based Repayment and Pay as You Earn plans to Income-Contingent
Repayment. There are ways to legitimately satisfy student loan debt. After
making income-contingent payments for a long period of time you can qualify for
relief. If you work for a qualified employer -- the government or a
tax-exempt non-profit -- you may qualify for public service forgiveness after
120 qualifying payments.
The bottom line when it comes to paying down student
loans in an anemic job market: You are not alone -- tens of thousands of
new graduates are in the same boat. You are going to have trouble meeting
obligations that you made long before you even decided upon your major. While
the seas will be rough, you don't have to feel like you bought a ticket on the
Titanic. If graduates face repayment in an open way, communicating regularly
with lenders, there are solutions -- although none of them get you a Get Out of
Debt Free card.
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