Coping with Crushing Student Loan Burdens

I’ve been reading more and more stories lately on how the high interest loans are putting an extraordinary burden on recent graduates paying off what they thought were federally controlled student loans. These loans were extended via private companies, but carried variable interest rates that, like a lot of mortgages, fluctuate with current interest rates. The ending result? Sky rocketing interest rates on loans for tens of thousands of dollars and none of the benefits you get with federal student loans like deferment and locked-in rates.

The LA Times published an interesting article about a young woman who recently graduated with a degree in photography. After taking out $140,000 in loans, she now has to pay out $1,700 a month towards these loans. And with some of these loans at a debilitating 18% interest rate, paying $1,700 a month isn’t going to go all that far.

To give a frame of reference, if she had taken out the entire $140K in private loans at 18% interest, she would have to chuck away $2,010 a month towards her loan, and then she would only be able to pay it off (at that same rate) after 30 years, all the while racking up a total bill of $618,464 — almost five times the original amount! Add in a missed payment one month, and you can see how this issue is gaining momentum as one of the most serious problems for new graduates — coupled with low employment rates.

While I think that loaning organizations are practicing dubious policies and purposely muddling the information that is given to the students who apply for loans, I also believe that a large part of the blame should go towards schools for not educating students on how to effectively finance their college education and what to realistically expect after graduation. FinAid, an online comprehensive financial aid guide, says that a good rule of thumb for taking out loans is that “…your total education debt should be less than your expected starting salary.”

I think that most students would pass up $100,000 in loans for a photography degree if they understood that they’d likely be making less than $40,000 in their first job after school. It’s unrealistic to think that a six-figure loan will be easily paid off after school unless you’re diving into a career in banking — and I don’t think that colleges are cementing this understanding to their students. According to a quote from the LA Times’ piece, Luke Swarthout (a former advocate at the U.S. Public Interest Research Group) said “The students think it’s an investment in their future, and the colleges are willing to let them borrow heavily because it helps them fill in their enrollment.”

I, for one, was never required to take any classes or lectures on how student loans work or where to look for financing. It was just assumed that you would take out loans and they pretty much had the paperwork ready. All they required was a signature. I guess I was lucky that I did indeed have a Federal Stafford Loan with a locked interest rate of 6%. I also went to a state school with relatively low tuition, so my student loan bills were far less of a burden than many of the students that I’m hearing about now.

So, just for argument’s sake, where do you guys believe the fault lies? Is it in the hands of the private loan sector for purposely providing confusing information and not disclosing full loan amounts? Does the blame go to the college for not providing better financial aid counseling? Or does it belong to the students for being too naive when agreeing to these terms?

Six Benefits of Bill Consolidation

Many people think bill consolidation is synonymous with financial defeat – happening when you aren’t able to pony up the cash for your monthly credit card statement. But the truth is, bill consolidation can be the catalyst that propels you to really tackle that growing pile of debt. Bill consolidation has been a huge boon to my financial wellbeing, and it can do the same for you. Keep on reading for six reasons why debt consolidation can make a huge difference in your finances.

1. Easier Maintenance of Payments

Trying to keep up with a myriad of bills can be a daunting – even overwhelming – task. You’ve got various due dates that may or may not correspond to your pay schedule. Take all those bills and consolidate, and you have a single bill with a single due date to remember each month. If you’re an auto pay fan, it reduces the hassle of overseeing multiple debits to ensure that you’re not overcharged. Managing one payment: easy. Managing eight: not so much.

2. Lower Interest Rates (more money towards principle)

Ever tried to haggle a better interest rate from a credit card or student loan lender? Not an easy feat. Consolidation companies, however, have a little more pull when it comes to negotiating better interest and fees. Creditors understand that when a consolidation company is involved, it’s a sign that their client is serious about paying off their debt. This gives them a bit of leverage to work out cheaper interest rates from you since they know for certain that they’ll be getting a payment in each month. In return, this lower interest means that more money is going towards paying off the principle (the original debt) which will knock down the debt more quickly.

3. Cheaper Monthly Payments

Since a good chunk of the total bill is cut down once you lower the interest rates, minimum payments go a longer way. For example, I consolidated three years ago and started out with around 15K in debt. My monthly payments were around $500, but Consolidated Credit was able to get one of my credit cards down from a 21% interest rate to an 11% interest rate (as long as I agreed to freeze the account). Multiply these savings by three or four creditors, and you have a significant monthly savings. Once I consolidated, my monthly bill went down to $350.

4. Peace of Mind

Creditors’ phone calls are no fun. If you’re ever been more than 120 days past due on a bill, you know that creditor phone calls can become a daily occurrence. There is nothing like the stress of someone calling multiple times a day asking you for money that you don’t have. Especially if it’s gone to collections and they demand the payment in full. In a relatively short amount of time, consolidating companies can make those call go away.

5. Improved Credit Rating

No one knows exactly what the algorithm is that’s used to determine your credit score, but one thing we do know is that paying off debt increases your debt to credit ratio. Your debt to credit ratio is the amount of money you owe in comparison to the amount of credit you have. Decreasing your debts puts a bigger gap in between what you owe and what the amount of credit you’ve been approved. This makes you more stable looking to credit companies, and in turn, increases your credit score.

6. Support Network

Surprisingly enough, a debt consolidation company can provide a network of support for debt repayment. I found that when I called the consolidation company each month to update them on the status of each bill, they were always really encouraging and mailed out budget advice and tips on a monthly newsletter. A network is crucial to staying on track. There are lots of distractions to keep you from your debt repayment goal, but others in your situation and people who’ve successfully gotten out of debt can provide the right advice at the right time.

Cancel that Cable! Save Hundreds with Hulu

A few years ago, I decided to cut out the overpriced advertising circus that is cable TV. It was way too expensive, as I was living in the Lower East Side (where I also paid way too much for a bedroom), and made less than $40K–besides, most of the shows were crap anyway. I’ve been pretty happy since, although there are definitely times when I just want to come home and veg out to thirty minutes of mindless sitcom. Sometimes a DVD just doesn’t cut it. Read more