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 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.
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.
|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 7 years of ugly credit.
|Using Your 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.
Adam Levin is chairman and co-founder of Credit.com and Identity Theft 911. His experience as former director of the New Jersey Division of Consumer Affairs gives him unique insight into consumer privacy, legislation and financial advocacy. He is a nationally recognized expert on identity theft and credit.