How to avoid it in the first place, dealing with repayment, and what the Biden presidency might mean for your student debt
We’re going to talk about becoming “good with money” today. Which is tricky, because Americans hate talking about money.
Survey after survey shows that we’re more comfortable discussing our marriage problems, mental illness, addiction, race, sex, politics and even religion than we are talking about our finances, causing us to lie to our friends, our children, and even our significant others about our saving and spending habits.
This anxiety only really starts to make sense once you look at the shocking statistics around saving and personal finance in this country.
A staggering 69 percent of us have less than $1,000 in savings in our bank accounts, and 45 percent have nothing saved. Another survey found that up to 78 percent of Americans could be living paycheque to paycheque.
And that’s all data that came out before the COVID shutdown, during which up to 47 million of us have already lost our jobs.
If you’re like most Americans, chances are you don’t have very much saved and that you might not be making very much either.
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Over the last year, America’s student debt problem has transformed from a long-term crisis into a financial and political emergency.
Things were already bad going into 2020, when 44 million Americans held a total of $1.7 trillion in student debt.
Average monthly student loan payments reached $393/month this year, leaving an entire generation of American workers incapable of saving or investing, racked with anxiety, depression, and higher blood pressure, and uncertain about what exactly to do next.
Then COVID hit, and things went off the rails entirely.
First, the Secretary of Education suspended all payments and interest on federal student loans until December 31st, 2020 as a response to the shutdown (this was possible because most of America’s student debt—some $1.4 trillion of it—is held directly by the Department of Education.)
During the final weeks of the 2020 presidential election, Donald Trump and president-elect Joe Biden both announced that they would extend the deadline.
Biden also seemed to express support for the student loan forgiveness policies championed by Bernie Sanders and Elizabeth Warren, leading some borrowers to believe that they might soon find some relief.
Then another twist: in November, the Department of Education started sending out email and text message notifications warning borrowers that because president Trump had not extended the payment freeze, student loan payments would resume on January 1st, 2021.
By the time you’re reading this, the Biden administration could be pushing forward with student loan forgiveness. Or we could be stuck in another payment freeze, or worse, we could go back right to the way things were before COVID.
Regardless of what happens, it pays to know your way around the student debt problem and to be prepared for anything.
To do that, we’re going to approach this from three different angles:
Like the subprime mortgage crisis in 2008, many of the problems with student debt boil down to ease of borrowing.
Student loans are extremely easy to get these days. So easy that it can be tempting to max out on loans without exploring other funding options first.
In short: because colleges need you to.
As former University of Toledo president Daniel M. Johnson put it in the Harvard Business Review, “these institutions and agencies have erected a financing superstructure that meets the immediate needs of students and universities for cash, but dramatically fails the test for long-term cost effectiveness and economic sustainability.”
An admissions letter can be deceiving in this way. These days, it’s more like a bill or an invoice than it is a golden ticket.
Isn’t a college degree supposed to boost your earnings? Shouldn’t the extra money you make cover the cost of a loan?
Although it’s true that a university degree can still open lots of doors career-wise, data shows that wages simply haven’t kept pace with ballooning student debt.
So if the state won’t pay for your education and you’re not supposed to max out on loans, how else are you supposed to pay for college?
There are no easy answers when it comes to college affordability, but there are a few things you can do to maximize your non-loan funding:
The ‘Free Application for Federal Student Aid’ is your gateway to the most significant sources of federal and school funding—submitting one makes you eligible for programs like the Pell Grant, the Federal Supplemental Opportunity grant (FSEOG) and federal student loans.
FAFSA is also how you tell your college that you’re in need of aid. FAFSA is usually the first place your school will look when deciding which students receive need-based scholarships and grants.
Despite this, millions of students still forget or decline to fill out the FAFSA every year. According to NerdWallet, American high school seniors left almost three billion dollars on the table in aid for the 2018-19 academic year because they didn’t fill out the FAFSA.
Most of the scholarships, grants and other aid programs the FAFSA makes you eligible for have deadlines, so the sooner you submit, the higher your chances of getting them.
The most painful part of filling out the FAFSA involves getting all of you and your parents’ financial information together: stuff like tax returns, bank account records, information about investments and assets, etc.
Get started on this process early: it could take more time to get all of that stuff together than you think.
Make sure you’re crystal clear on whether the debt you’re taking on is a private or federal loan, and avoid getting a private loan if you can.
(For example: many people often assume Fannie Mae loans are government loans—they’re not.)
Accrued interest is when the interest on a loan grows.
$10,000 loan with 10% interest per year.
Annual accrued interest is $1,000.
Beware of capitalized interest- unpaid interest that gets added to your principal loan.
$10,000 loan with 10% interest per year.
Annual accrued interest is $1,000.
IF it becomes capitalized, your $10,000 loan is now $11,000 loan.
Annual accrued interest is now $11,0000 * 10%= $1,100.
The problem with federal loans is that there are borrowing limits (you can see these on studentaid.gov) that are usually far below the average annual costs of attending a top public or private school.
Examples of Private Loans
If you’ve exhausted all other options and need to get a private loan—hold up! As the Consumer Financial Protection Bureau points out, it’s possible to find funding in some unexpected places, including...
Some states like Connecticut, Colorado and California operate their own state-level student aid and/or loan programs that are separate from the Department of Education’s. Collegescholarships.org has a handy list of all state agency loan programs.
Some schools also operate their own loan programs: check with your school’s student aid office to see if they do.
Maybe you’re detecting a theme here.
Scholarship searches can be huge research projects, and figuring out where to start can feel overwhelming. But they can be well worth the time and effort you put into finding them, even if you don’t think you have the grades or accomplishments to win them.
Consult with the guidance office at your high school, talk to your university’s financial aid office, and make sure you’re exhaustive in your search for aid options.
If you’re stuck, try asking the following questions:
Do you belong to a visible, religious, national, cultural or ethnic minority? Are your parents immigrants? Do you go to church?
You’d be surprised by the number of different kinds of organizations that run scholarship programs. One good rule of thumb is: if you’re part of a community or group, make sure to check whether or not it has a scholarship program!
Do you play an instrument, make art or play a sport? Do you participate in any extracurricular activities at all? Is there anything you’ve done outside of school that you’re particularly proud of?
This is a great starting point for students who don’t have the most amazing grades, but lead a healthy, well-rounded life outside of the classroom.
Almost every state education agency has at least one grant or scholarship available to residents, and most states have more than one. Most of the time these awards are for students attending school in-state, but they might be worth checking out even if that isn’t your plan.
If your parents work for a large company or the government, chances are there’s some kind of scholarship program available to their children or dependents.
Although these scholarships are usually merit-based and competitive, they’re also sometimes not very well advertised, so they might be worth your while even if you think you don’t have the grades to win one.
Don’t let social or peer pressure to attend university “on schedule” be the only reason you aren’t taking a gap year to work.
Borrowers who drop out of college—sometimes specifically to avoid taking on more loans further into their degree—are one of the hardest-hit by the student debt crisis. Working for a year doesn’t just help you save and build up valuable work experience: it also gives you a chance to step back and consider exactly what it is that you want out of college.
Make sure you taken advantage of the school that’s giving you the best deal. If you think about college more as the “experience” and especially if you don’t think you’re going to get a network like Harvard, don’t OVERSPEND.
Community College has a bad rap, but it’s actually a very smart decision. Lots of universities accept credits from community college.
Now let’s fast forward to 6 months after you graduate, when the grace period on your subsidized federal loans ends and interest starts accruing on your loans.
First, let’s brush up on some student loan jargon:
The grace period is the time during which you don’t have to make any payments towards your loan—this usually lasts until six months after you graduate.
Repayment is when your loan provider expects you to start making monthly payments.
Deferment is what happens when your loan provider agrees to suspend your payments—because you can’t pay, went back to school, etc. If your loan is deferred, no interest accrues on that loan.
Forbearance is what happens when you defer your loan but interest continues to accrue on that loan.
Default is what happens when you don’t make loan payments for a long time—for federal loans it’s 270 days, and the consequences of doing so can be pretty severe.
(For example: the full amount of your loan becomes immediately due, your credit score takes a hit, and you become ineligible for any other federal loans.)
Loan rehabilitation is the process of bringing your loan out of default and back into regular repayment.
Consolidation is what happens when you combine multiple federal loans into one big federal loan—either to save money, decrease monthly payments or interest, etc.
Refinancing is what happens when you consolidate together federal and public loans.
This is the cornerstone of any debt reduction strategy, and it can make a huge difference if you’ve financed your education with different kinds of debt. If you don’t want repayment to turn into a treadmill, prioritize paying off higher-interest debt first.
The Department of Education has a variety of repayment arrangements and schedules to make it easier for you to chip away at your loan.
If you don’t do anything, you’re automatically shunted into what’s called the ‘Standard repayment plan,’ which divides your total repayment into 120 equal monthly payments to be made over the course of 10 years.
The standard repayment plan might be good for you: it generally costs less to repay a loan this way because you’re doing it fast, and the equal payments make it easier to budget and plan for the future.
But some people can’t afford to repay their loan in ten years, which brings us to your next option...
The standard repayment plan is one kind of level repayment plan: level just means each payment you make is equal in size.
One way to decrease the monthly payments on a level plan is to extend the length of the plan past 10 years, which could be an option for you depending on your financial situation.
Another way is to switch to a graduated plan, which starts off with low monthly payments and then slowly ratchets them up in size every two years.
If increasing the repayment period and switching to a graduated plan still isn’t enough, you might consider trying one of the income-dependant repayment plans, which adjust based on how much money you make.
Under the Income-Contingent Repayment (ICR) Plan, for example, you pay back your loan over the course of 25 years, and you pay no more than 20% of your income over those 25 years towards your loan.
The Income-Based Repayment (IBR) Plan is even more generous: you pay no more than 10% of your income over the course of 20 years.
The Pay As You Earn (PAYE) Plan is like the IBR plan, except your monthly payment size is capped at a certain threshold, usually whatever your monthly payment would have been under the standard repayment plan.
The revised Pay As You Earn (REPAYE) Plan is just like the PAYE plan, except if you’re a graduate student you get 25 years to pay off the loan instead of 20 for undergraduates.
The trick with all of these is that not all federal loans and borrowers are eligible for every repayment plan. Income-based plans are also highly contingent on your current income, family situation, and your total debt amount.
It’s really difficult to get rid of a federal student loan as an individual without paying for it. There are, however, specific loan forgiveness programs that could help you if you are:
If you’ve been good about your credit history and you have more income, get a better rate!
So now the question we’ve all been waiting for: will the Democrats cancel student debt in 2021?
Progressive candidates like Bernie Sanders and Elizabeth Warren have made big, bold proposals in recent years for cancelling student debt, and as the debt crisis has gotten worse, they’ve gotten more popular.
Senator Sanders has suggested making public colleges free and cancelling all student debt—public and private—by issuing an executive order to the Department of Education to forgive all federal loan debt on their books and purchase any remaining private debt.
Senator Warren champions a more moderate approach: she wants to cancel undergraduate debt for all low-income households and knock tens of thousands of dollars off of everyone else’s debt load.
Now that a Democrat is back in the White House, debt forgiveness is a hot topic of conversation—but what exactly have the Democrats committed to?
President-elect Joe Biden hasn’t committed to a comprehensive debt cancellation plan, at least not yet.
The most concrete thing he’s said about the topic is that he wants Congress to cancel $10,000 of everyone’s debt across the board—he even repeated after winning the election—but that’s about as close as he’s gotten.
A big problem is the current state of the Senate: we won’t know who controls it until the January 5th runoff election in Georgia. (Debt forgiveness isn’t likely to succeed in a Republican-controlled Senate.)
Joe Biden also hasn’t always been on this side of the debate. In fact he’s spent a lot of his career passing laws to make it harder for student borrowers to discharge their debt, including a landmark 2005 law that made it basically impossible for borrowers to get rid of their debt in bankruptcy.
In addition to the runoff election in Georgia, much of this debate will come down to whether or not legislators decide that the president has the authority to bypass Congress and pursue forgiveness directly, via an executive order to the Department of Education.
Cancelling student debt through an executive order used to be a much less popular opinion when Senator Sanders was the only candidate arguing for it.
But after President Trump himself issued an executive order to the Department of Education himself—in this case to stop monthly loan payments in response to COVID—proponents of debt relief say the road has been paved for President Biden to do the same.
Bottom line: although student debt forgiveness is vastly more popular as a policy than it was just a few years ago, there’s still a long way to go, and you shouldn’t bank on it.