Advice on Handling Education Debt
FARAI CHIDEYA, host:
So what are the best ways to reduce student loan debt after college? We're getting answers from Robert Williams, a bankruptcy lawyer and personal finance expert.
He joins us from member station WDUQ in Pittsburgh, Pennsylvania. Good to have you back.
Mr. ROBERT WILLIAMS (Bankruptcy Lawyer; Personal Finance Expert): Good to be here, thank you.
CHIDEYA: We know that there is all these financial aid options. There are scholarships, grants, federal loans, private loans. What about options in paying off loans?
Mr. WILLIAMS: One of the biggest things that students really need to take into consideration is, once they get out of school, they really want to take a look at the consolidation of their student loans to be able to get those rates fixed and get them brought down.
There are even some options for students to consolidate the loans while they're in school. The changes have started to come about, I think those new changes are going to take effect in July. So that some of the great rates that we used to have out there for students who consolidated, they're not going to be around a whole lot longer.
The hope would be that once the new Congress comes into session that they would be able to make some of the changes that they have at least suggested that they would like to, so that we can continue to see some good refinance rates for students who want to consolidate those loans.
CHIDEYA: In terms of the kinds of rates and repayment options you have, are there any differences between federal and private loans?
Mr. WILLIAMS: Absolutely. The federal loans are typically a much better rate. And federal loans are also not looked at from the standpoint of your credit worthiness. Private loans are, and what students will find is that those loans are going to be a lot more stringent on the rates. When you get back into the repayment, sometimes they can be a little tougher to deal with as well.
Now the other thing that you also want to take into consideration as a student is you don't want to consolidate your private loans along with your federal loans, Stafford loans, if you will. When you do that, the higher rate is going to apply; and if you consolidate the two of them, you may have lost a lot of benefit from those federal rates that you did have.
CHIDEYA: So, in a way, it makes more sense to kind of pay off the private loans first. Is that what I'm hearing from you?
Mr. WILLIAMS: I would do separate consolidations.
Mr. WILLIAMS: You can consolidate your private loans without having to tie in your federal loans. When you start tying in the federal loans with a private lender - they'll be more than happy to do it, but they're going to do so at a higher rate.
CHIDEYA: Some people who I've met, who will remain nameless, have just said well, I'm just not going to pay. What happens to your credit rating then?
Mr. WILLIAMS: It's gone. That's not a good option for dealing with student loans at all. The student loan agencies, they are more than willing to work with former students, be they students who have dropped out of school or those students who have graduated from school.
The key thing is to communicate with your lender to let them know what your current financial situation is. There are all sorts of tools and mechanisms that are available to students in order to be able to either postpone the immediate payment or to establish a payment plan so that they can actually handle it. But if you are not communicating with the lender, you're absolutely not going to see these loans go away. They just don't disappear.
CHIDEYA: What about bankruptcy for people who may have had a setback? You are saying that, basically, talk your lender. But is bankruptcy a good option for people who were in real trouble for one reason or the other, or is it only a total last resort?
Mr. WILLIAMS: When it comes out to student loans, bankruptcy is really not even a last resort tool anymore. In the late ‘90s, the bankruptcy laws changed a bit as it related to student loans, stating that student loans were no longer going to be considered dischargeable under the Bankruptcy Code.
In essence, they gave you a hardship exception but it's rare to see a hardship case really come through. In essence, what you need to be able to prove for a hardship case is to show that you can't restructure or make any kind of payments on these student loans at all.
The bankruptcy law that went into effect last October in fact made that even more difficult for students to deal with because before these loans we're really only talking about federal loans. And there was a discrepancy between whether the federal loans were the only ones which were exempt from discharge, or were all loans that were education-related exempt from discharge.
CHIDEYA: Let's, briefly mention deferment. We spoke with Dr. Joanna Robbins, who's 27 years old. She's got $200,000 in debt and, you know, she is deferring her federal loans. Is that a good long-term strategy? Short-term strategy? Neither?
Mr. WILLIAMS: It might be the only strategy that works right now. Whatever you defer, I believe you're still accumulating the interests that those loans have. So you can defer and make interest-only payments or you could defer or not make payments at all. The problem is it's still there and you are not really dealing with the root of the problem.
The root of the problem is that you have this enormous amount of debt. Doctors, lawyers, engineers and those students who go to postgraduate school tend to have a lot more debt than those students who go just to undergraduate school. But there is still a great deal of debt out there for everybody.
I know that when I was in law school, one of my advisers told me something that was very, very important at this point in my life. She said if you live like a lawyer when you are in law school, when you become a lawyer you're going to live like a law student.
Meaning, simply this, the loan limits are very high these days for students to be able to take care of their housing, perhaps their transportation, their books, in addition to their tuition. You don't have to borrow all of the money that's there. We look very carefully at the schools that we choose to go to. We should also look very carefully at the money that we borrow to go to school. And we just simply don't do that. We have a way of taking the money because it's available and it's there for us to take without thinking about it down the road.
CHIDEYA: Well, Robert, thank you very much.
Mr. WILLIAMS: Thank you, Farai.
CHIDEYA: Robert Williams is a bankruptcy lawyer and personal finance expert. He joined us from member station WDUQ in Pittsburgh, Pennsylvania.
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CHIDEYA: And coming up on our Roundtable, Kofi Annan has his say on the Bush administration, and it's not pretty. And later in the show, singer Natalie Cole remembers her father at Christmas.