Finance for Young People

I have a love/hate relationship with student loans. I love that they make it possible for me to go to school. I hate that school is so expensive in the first place and I hate worrying about paying them back. But, I know my own situation is far better than the one that some students find themselves in. I don’t think I’ll have a terrible time paying back my loans, but others aren’t in the same boat.

A reader recently left an interesting comment on a post where I asked how much student loan debt is OK:

My question is that I’m worried about a friend who has $70K+ in college loans after graduating from undergrad due to out-of-state tuition. I’ve read horror stories online and you still have to pay student loans if you file for bankruptcy. What do people do if they absolutely can’t ever pay them back?

Scary to think about, isn’t it? I didn’t know the answer myself but with some Google-Fu, I found out a ton of information.

If your student loans are so bad you’re considering bankruptcy, you’re basically screwed. Sorry. Both federal and private students loans will only be discharged in a bankruptcy if you can prove a few things. Your friend probably can’t. In fact, I bet almost no one can. From www.bklaw.com, those things are:

1. that you cannot maintain, based on current income and expenses, a ‘minimal’ standard of living for yourself and your dependents if forced to repay the loans; This is usually the easiest prong to satisfy.
2. that additional circumstances exist indicating that this state of financial affairs is likely to persist for a significant portion of the repayment period of the student loans
3. That you made good faith effort to repay the loans. This does not just include making payments on the loans.  It requires doing things over time such as making efforts to increase your income (which includes going back to school to get additional degrees or experience), consolidating loans with the Direct Loan Servicing Center, and other similar efforts.

Editor’s note: Does that last paragraph seem dumb to anyone else? Isn’t it possible that going back to school and borrowing more could actually be the cause for the bankruptcy in the first place?!?

Up until 2005, private student loans were a lot easier to get rid of in a bankruptcy. But then the Bankruptcy Abuse Prevention and Consumer Protection Act was passed. That entire law was heavily supported by banks, credit card issuers, and other creditors. I don’t mean heavily supported as in “Yeah, I like Lady GaGa’s new song.” I mean they foaming-at-the-mouth-let’s-spend-100-million-dollars-get-this-passed liked it.

I couldn’t find any examples of what type of income and amount of debt would qualify for a discharge (shocker), but I bet anyone with a median US income or higher doesn’t qualify.

Why was this law necessary? The banks claim that bankruptcy protection is heavily abused – I’m not convinced. Most bankruptcies are caused by medical bills and/or job loss – not surprising in a country without universal healthcare. I’ve also heard the claim that medical school students were taking out hundreds of thousands in student loans, filing bankruptcy after graduation, and then going on to earn high salaries. But I can’t actually find any proof of that at all.

So bankruptcy is probably most definitely out for your friend. Quick question though – $70,000 doesn’t seem that bad. Is your friend having trouble finding a job or do they work in a low paying field? If so, I understand, but otherwise, I’d just focus on paying as much as I could each month.

Since you will pay back every cent you borrowed, it’s best to borrow from someone is going to be as easy going about repayment as possible. That someone is your Uncle Sam. Federal student loans are the best possible loans you could ever take out for one simple reason: you get to pick from a million different repayment options. This is a quick and dirty list:

• Standard – fixed monthly payment for 10 years
• Extended – Fixed annual or graduated amount over 25 years. You’ll probably pay more interest than what your degree actually cost. You also must have $30,000 or more to repay.
• Graduated – Payments start out smaller and increase every 2 years. Balance will be paid off in 10 years or less.
• Income Based – Required monthly payment is limited based on income and family size
• Income Contingent - Payment amount is adjusted each year based on gross income, family size, and amount of loans. Any balance remaining after 25 years (!) of payments will be forgiven. Doesn’t apply to Parent PLUS loans.
  

Quick note: Defaulting on federal loans is an extremely bad idea. The government WILL get its money. Remember that scene at the end of The Social Network where Sean Parker tells Eduardo Saverin “We will get the signature”? It’s just like that, only with the force of the US Government and you won’t receive a million dollar settlement like Eduardo. Default and think you’re getting a tax refund? You will never see a check. Default and you may not even be able to renew any professional licensees. CPAs & MDs – that’s you!

Damn, this post is getting long. I’m gonna wrap things up and just say that this should be a reminder to not borrow money like there’s no tomorrow. I know there’s pressure – and I think it’s a crime that every high school student in the country is told to borrow borrow borrow go to college, get a good job, and everything will be OK.

You can’t control the price of tuition and you probably don’t have $100,000,000 to bribe lobby politicians to pass laws you like, but you still have the final say in what you borrow. Consider state schools and community colleges to reduce the price of your education. Think about vocational training or starting your own business if the thought of writing another paper makes you want to stab yourself in the face.

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