Our economic system is inherently designed to create wealth for lenders by creating consumer debt. Problem is, that personal debts are at record levels, so much so that most of us will spend the rest of our lives being enslaved by it. Fresh out of high school, young adults are being solicited credit cards as if they were “free money”. Fact is, that with wages that have been stagnant for decades, people have been going into credit card debt to top up wages, just to keep up with the rising cost of living. In our over-credentialized society, we basically need a university degree to qualify for jobs that we could have gotten decades ago with merely a high school diploma. So, the problem is that people are faced with either working for minimum wages or going into debt to obtain a degree, just to have a middle class standard of living. University and college is set purposefully set up to be the only escape from a life of poverty. Unless young people are lucky enough to have affluent parents, getting student loans is the only path to getting the education they need. Student loan debt is effectively taking away the buying power of a whole generation.
Getting a university degree is the minimum necessity for entry into middle class life today, but the security that once came with that status is long gone. According to one study, the “Generation X” (of which I am one), now 25 to 40 years old, work almost three hours more per week than young baby boomers did way back in 1977. And all of those extra work hours aren’t adding up to enough additional earnings to cover the liability of student loan debts. Compared to 1980, the median earnings for a young worker 25 to 34 yrs old with a bachelor’s degree or higher were only 6.6 percent higher in 2004. During the same time period, student loan debt has more than doubled!
There are many things one can do to deal with student loan debt, such as typical student debt help strategies, like building a “debt snowball”. However it is an option that is difficult for those just starting out in a new profession as they may not have the earnings one needs to do this. Fortunately, there are other options for student debt help, such as Federal student loan consolidation, loan reduction programs, consumer proposals and bankruptcy. We can look at some possible angles to help you deal with student loan debt, first in the USA, and then in Canada. The best plan is Federal student loan consolidation.
How to Consolidate Student Debt in the USA
Students looking for student debt help with Federal student loan consolidation in the USA can consolidate their student debt through the D.O.E. The D.O.E., unlike a private predatory lender such as the “Sallie May” will be much fairer to deal with. If you have loans through private lenders like the Sallie May, you can still get the D.O.E. to consolidate your loans. From the D.O.E. website:
“To qualify for a Direct Consolidation Loan, borrowers must have at least one Direct Loan or Federal Family Education Loan (FFEL) that is in grace, repayment, deferment or default status…Borrowers can consolidate most defaulted education loans, if they make satisfactory repayment arrangements with the current loan holders or agree to repay their new Direct Consolidation Loan under the Income Contingent Repayment Plan. Borrowers who do not have Direct Loans may be eligible for a Direct Consolidation Loan if they include at least one FFEL Loan … or have been unable to obtain a Federal Consolidation Loan with income-sensitive repayment terms acceptable to them.”
This seems to say that if you call the D.O.E. and tell them that you are at your wit’s end because you cannot get a Consolidation Loan with “income-sensitive repayment terms” from your current lender, they are mandated to provide you with an “Income Contingent Repayment (ICR) Plan“, which is Federal student loan consolidation. In Income Contingent Repayment status, monthly payments are based on your adjusted gross income, your discretionary income, and the amount of your debt. Repayment periods can be as long as twenty-five years, after which, the unpaid amount is forgiven. Taxes however, must be paid on the amount forgiven.
Chances are that you might get someone on the phone (1-800-557-7392) who is unfamiliar or resistant to what you tell them. Just be persistent and call them daily and remind them of the above policy quote from their website until you do eventually get an operator who will provide you with an Income Contingent Repayment Plan, whereby you get “a repayment plan that bases your monthly payment on your yearly income, family size, and loan amount. As your income rises or falls, so do your payments. After 25 years, any remaining balance on the loan will be forgiven, but you may have to pay taxes on the amount forgiven.” The D.O.E. essentially assumes the risk and your private lender dumps you.
Now, back to the “debt snowball“. With lower payments you can use the proven debt reduction strategy that most financial experts recommend: pay off the debts with the highest interests first and then work on down to the nest highest interest, and so on. When you are in Income Contingent status, the good thing is that you can pay off more than the required amount, which would then go directly to the principle.
Under US law, as a person with student debt, you are entitled to the “income contingent” option under the law, but neither the government or private banks do not make this public knowledge. You must be diligent and persistent in demanding that the D.O.E give you income contingent status and thus let you sign the forms to let you consolidate directly through the government. The private banks do not make this public knowledge to their lenders for obvious reasons — they want to snow you under with as much debt as possible.
There are other ways of dealing with USA student loan debt such as loan forgiveness, or joining the Peace Corps, be in the military, that sort of thing. There are more radical options as well, like cancellation, deferment, and forbearance.
In a forbearance, the lender authorizes you to stop making payments for fixed periods of time. The catch is that the interest monkey still accumulates during forbearance. For this reason forbearances are easier to qualify for than deferments or cancellations, and also as they are not as tight on rules as cancellations and deferments are. Why would they care? They keep adding up the interest on you in a period of forbearance. All this can do is buy some time, while you wait to get the loans consolidated through the D.O.E. as outlined above. To qualify for forbearances, you have to either have poor health, an inability to pay within the maximum repayment term and/or have monthly payments that total more than 20% of your monthly income.
Then there are the other two options: canceling or deferring student loans. Like forbearance, a deferment pardons you from making student loan payments for a fixed periods of time because of a specific circumstances in your life due to hardships of some sort such as disability, going back to school, military service, economic hardship, permanent total disability, membership in a uniformed service, teaching needy populations though volunteer organizations or unemployment. The conditions to qualify for these are very stringent.
Update: Recently (spring 2011) it was released that the Government is offering information on its Student Loans Disability Discharge program. Their website, StudentLoans.gov, now includes a link, “Loan Discharge“, describing how to go about obtaining a Total and Permanent Disability (TPD) Discharge for borrowers and their doctors. The form itself seems pretty straight-forward. This is worth a shot if you qualify.
next: How to deal with student loans in Canada
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