I gave a talk to young journalism students last night, followed by a breakout session. I'm sure I was full of folksy, useless advice about working hard and keeping your nose clean and always calling mother on Sunday. But once piece of advice that I will now repeat, because they seemed so surprised too hear it, was financial: do not default on your student loans.
The temptation to just kind of forget to pay your student loans back when you're a freshly minted student is high, particularly in a job market like this one. Do not give in. This is phenomenally stupid. Defaulting on your student loans will put a gigantic black mark on your credit record that will not go away for seven long years. If you are a freshly minted senior, that means that missing a payment now will drop off your credit report just in time for your thirtieth birthday.
That means you'll have a hard time getting a cell phone: no iPhone for you once Mom takes you off the family plan. You'll have a hard time getting a credit card. You will have a hard time buying a car, particularly if the tight credit market persists. Don't even think about a house. You may even have a hard time renting, since landlords check your credit, and so do some employers. Any of those loans you do manage to get will cost you a lot more: trashing your credit score can mean an interest rate of 16% on a 5 year auto loan, instead of 6% for someone with top-notch credit. You can't afford much car at a 16% interest rate.
Nor can you default, trash your credit, go bankrupt, and recover in time for your 30th birthday. Lenders, and Congressmen, foresaw that this strategy might become attractive. So you cannot discharge student loan debt in bankruptcy. That's right--if you don't pay, they'll eventually garnish your social security checks.
There is no reason you need default. If you can't pay, call your lender. They don't want to take you to court or garnish your paychecks, so they will work with you. Not necessarily on terms you'll like--they'll lower your payment, or let you skip it altogether, but the interest charges will pile up. On the other hand, as we just discussed, the interest (and penalties!) will eventually be added to the bill that you cannot get out of paying. Much better to do it voluntarily and avoid a nasty mark on your credit report.
Copyright © 2009 by The Atlantic Monthly Group. All rights reserved.
Aren't you a bit young to be giving talks to young journalists? What's next? Ezra Klein?
Ezra Klein is a journalist?
Being a journalist is a way of doing things. For example, suppose you heard that Baltimore was suing Wells Fargo over nasty loan practices. A journalist would look into it, see what evidence they had, find out if other cities had such issues, etc.
Somebody with a blog would just post their prejudices:
I hear a lot of complaints that borrowers were shifted into rates "higher than their credit profiles" merited. But the articles never actually tell me what I want to know, which is: were these borrowers charged higher rates than their loan packages merited? Your FICO score is just one part of the package; others include things like assets and income, and the size of the loan relative to the house value. The sad fact is that, even in a (previously) decaying urban core like Baltimore, blacks are likely to have lower assets and income than whites. So far I've seen little evidence that, taking these things into account, banks are discriminating against minority borrowers.
& end up looking like a McTurkey when the evidence is unwrapped -
http://www.baltimoresun.com/news/local/baltimore_city/bal-md.wellsfargo04jun04,0,5155910.story
Are you seriously arguing that a journalist is not allowed to comment on an issue unless she does original reporting?
The problem is, some people aren't bright enough to understand the evidence that they see. (Setting aside that this is all one-sided "evidence," not subject to examination as of yet.) From the article, Megan's point is entirely accurate and substantiated by the "evidence": what is alleged is that Wells Fargo convinced people to take out bigger loans than they needed, which caused those people to need subprime loans -- not that Wells Fargo charged people subprime rates for regular loans.
(In either case, of course, we wouldn't want to put any onus on a consumer to shop around. That might be treating them like adults rather than children.)
Surely you know that he is a wonk, wonk, WONK! He only mentions it every other post.
Sage advice, Megan. I wish you could have spoken to my class in college. The problem there is that you would have been in high school....
Being someone who went through a traumatic financial period after my degree, I wouldn't necessarily give the same advice.
The default doesn't really affect rentals since they can just go to smaller landlords and/or pay higher cash up front. Especially in this rental market. And if they are buying a house in their 20's, they really don't have much to worry about...
As for a car purchase, at the time I was forced into buying a *new* car with my terrible credit rather than a used one for ridiculous reasons that led to GM's current plight.
I'm not sold on the worrying about garnishing Social Security payments either. As your link mentions, truly needy people can file for hardship and skip the penalty. Otherwise, it bears consideration that inflation will likely outstrip the low interest rates charged for student loans. Also, I highly doubt if today's graduates are planning their futures around Social Security.
I'm not defending default as an excellent plan, but it should really be looked at from a business point of view and could be a good gamble.
jayson
Jayson,
I bought my 250,000 house at 23 years of age with 60,000 in total household income and got a 6.5% 30 year fixed interest rate.
I put 10,000 down and had almost no safety net left.
So your statement, "And if they are buying a house in their 20's, they really don't have much to worry about..."
Does not ring true in my book.
My younger self would not have been able to comprehend that level of fiscal foresight. At 23, the only thing I knew about finance was how to get a quarter in a cup.
If you know how your parents instilled that in you, please tell. I would love to be able to pass it on to my son.
At 23, the only thing I knew about finance was how to get a quarter in a cup.
A man after my own heart (athough I was more of a Give One Take One guy myself.
I was 27 when my wife and I bought our first house, and most of my friends were already homeowners by then. A lot depends on the housing market where you live, I would think.
Your entire post makes no sense to me. A "business point of view" says that you don't take on debt unless there is a viable benefit to doing so, having taken on debt you do not default unless you have no other options, and having run out of other options, you extricate yourself in the cleanest way possible. As MM just explained, defaulting on student loans is not the cleanest way possible. In addition to all the extended credit damage that results, the debtload cannot be discharged, and most lenders will exercise certain forbearance if the borrower takes the intitiative to contact them before completely running out of money.
Indeed, Mouse. In my rush to anecdote, I neglected to observe that there is no such thing as default on student loans any more. Google-fu revealed that I need to modernize my views.
Megan,
I'm about to enter into a 2-year MBA program at Villanova University. I work for a small company; I have no tuition reimbursement.
So I face this prospect (about $45k out of pocket in 2 years) with some trepidation.
Alot of people advised me, "You can just take out student loans! It pays for itself in a few years!" To which I universally said, "Student loans are stupid if I can pay for it myself, and no the MBA will not add enough to my salary within the next few years."
I was instilled by my father with a deathly fear of student loans as the third of life's inevitabilities. I made it through undergrad with only $500 in loans and promptly paid them off.
I'm going to scrounge and save and try to pay $22.5k per year to Villanova. I just can't see paying interest on that amount....I wouldn't do it for a car, so why would I do it for a loan?
Joe
If you quality, you should at least take out the subsidized loans. That's free money. Not free money in the sense that you never have to pay it back, but free money in the sense that you can put it in a 1% savings account and still come out ahead.
Hi Peter,
Yep, fully planning on it. But I don't think I'm going to get offered subsidized loans.
My FAFSA form basically said that I should be fully able to pay for this myself without significant aid of any sort. I'd like to spell out my situation and how Federal aid is disbursed compared to someone like me.
My wife and I had a pre-tax income of about $103k in 2008 (since risen substantially, but that's for next year!). Our post-tax, union dues (she's a teacher), healthcare, 401k retirement savings, etc. etc. income was about $5000 per month.
We both drive 25,000 miles a year and therefore we own newer cars to keep us driving without problems. So we spend $680/month in two car payments, $400/month in gas, $100/month in car insurance. We pay $1900 per month for our home and $300 in utilities/phone.
So without getting into food and clothing, we spend $3400/month on home and cars. Which leaves me $1600 a month to pay for food, clothes, random stuff.
FAFSA says I should be able to pay for the $22000/year in graduate tuition without a problem.
I'm not complaining about my situation....I'm extremely fortunate. I'm just saying that I think our student aid system is very screwy. I'd much rather see large chunks of money being pumped into subsidized student loans OR a much better assessment of actual student needs.
Joe
P.s. I chose to go to grad school, so I choose to pay the price. No big deal.
It's been a long time since I went to college, so maybe it's different now, but my experience was this isn't true. I had saved a bunch of money working through high school summers, so I didn't need a student loan. But I figured, what the heck - no interest until six months after graduation, so I'll get 4 1/2 years of interest and then just pay it off. I filled out all the paperwork for a $2500 GSL and sent it off.
What arrived in the mail was a check for $2250. They had taken 10% straight off the top in loan origination fees. That was probably somewhere in the fine print, but I sure didn't see it. After the money spent four and a half years in CDs I did indeed pay it off. That money was a good emergency cushion, but in the end I just about broke even.
I made it through undergrad with only $500 in loans and promptly paid them off.
Five hundred bucks? Where did you go to college, Niger?
DEAR SIR,
HELLO I AM PRESIDENT OF THE FIRST BANK OF NIGER. IT HAS COME TO MY ATTENTION THAT YOUR UNIVERISTY OF NIGER BANK ACCOUNT WAS CREDITED WITH THE AMOUNT OF $10 MILLION DOLLARS. FOR A SMALL STUDENT PROCESSING FEE OF TEN THOUSAND DOLLARS I CAN HAVE THIS MONEY DISBURSED TO YOU IMMEDIATELY.
PLEASE CONTACT WITH UNDUE HASTE.
That joke never gets old and totally made my day.
Heheh, $500 was the one time I could find no other source of income and had to get through in a pinch. Otherwise, I was just very fortunate. My undergrad education was $40000 (including room and board) for 4 years.
I'll say this: I had a smallish student loan ($2500 if memory serves) and a largish student loan. The smaller company had my address wrong after law school, and it was nearly a year before I got the first bill. Because I figured that they just wrapped the two together (stupid, I know), I didn't inquire about it during the interim.
That black mark has been on my record until last year. It didn't affect my car or mortgage, but it did cause me higher insurance premiums, and when we went to get furniture one time, I didn't qualify.
There's always the South Korean alternative. Universities in South Korea are relatively expensive and there are no such things as student loans. It is not at all uncommon for the mother of a high school student to come to America for a year or so, and work in a rub 'n' tug massage parlor. If she lives frugally, she can save up enough money in a year to pay for her child's college education.
The PSA reminded me of this:
:)
I've sent a link to this post to my two kids still in college. The only better advice would be to avoid student debt in the first place. That's not always possible, but it usually is. I didn't take out a loan until my final year in grad school -- when my wife and I had two small kids and I was working three jobs and she was providing day care to other student families. We might not have needed that loan if not for the fact we were paying off my wife's student loans. (I married up in a lot of ways, but not financially.)
While not defaulting on your student loans is absolutely sound advice, I don't think we need to give recent grads a heart attack about a missed payment. It's not advisable, but it does happen (it's happened to me!), and it will not disqualify you from getting a cell phone, renting an apartment, or entering heaven.
That said, I recommend automated payments. Mysteriously, my student loan provider STILL sends me those stupid "coupon" booklets so that I can snail mail in a check each month. How quaint.
If I had one piece of financial advice for recent grads, I'd say automate as much of your banking as possible. Direct deposit, online bill pay, automatic transfers to your savings account. Whatever is left after that stuff is gone is your actual income. Depressing, but smart. The quickest way to get into trouble with your finances (provided you have an income) is to start asking yourself if you can afford a weekend away if you just postpone your cell phone bill until next month.
As noted in the post, you can usually receive forbearance on a student loan if you take the initiative to call first! Missing a payment and taking the credit blackmark is absolutely stupid if twenty minutes on the phone, and possibly the cost of a stamp to submit some hardcopy documentation, would result in no penalty other than accrued interest.
Admittedly, not all student loan operations are run well, but taking the position "they're out to screw me, so screw them" without even attempting to communicate can create large, steaming piles of unnecessary trouble.
If I had one piece of financial advice for recent grads, I'd say automate as much of your banking as possible. Direct deposit, online bill pay, automatic transfers to your savings account. Whatever is left after that stuff is gone is your actual income. Depressing, but smart.
Good advice, but I'd like to note one exception: Those of us of the entrepreneurial stripe (i.e. one-person businesses) might not be able to take advantage of automated payments. It's easy enough for someone with a consistent paycheck on the same day of each month to do that, but those of us whose income arrives on an inconsistent basis might have to keep a little more control over things.
While not defaulting on your student loans is absolutely sound advice, I don't think we need to give recent grads a heart attack about a missed payment. It's not advisable, but it does happen (it's happened to me!), and it will not disqualify you from getting a cell phone, renting an apartment, or entering heaven.
That said, I recommend automated payments. Mysteriously, my student loan provider STILL sends me those stupid "coupon" booklets so that I can snail mail in a check each month. How quaint.
If I had one piece of financial advice for recent grads, I'd say automate as much of your banking as possible. Direct deposit, online bill pay, automatic transfers to your savings account. Whatever is left after that stuff is gone is your actual income. Depressing, but smart. The quickest way to get into trouble with your finances (provided you have an income) is to start asking yourself if you can afford a weekend away if you just postpone your cell phone bill until next month.
Or better yet, minimize your student loan debt or eliminate it altogether by going to a cheap state school. Harvard, Stanford and MIT (and Penn, Megan!) might justify being an interest payment slave in your 20s and 30s, but most schools don't. And anyway, you can always splurge on a graduate degree.
That might be the best commencement address I've ever read. I know that, technically, it wasn't a commencement - but it should have been.
Enough with the "soar into the future" stuff. We all know that the grads want their diplomas, and want to party.
Give them five minutes of financial advice that matters, and you give them what they need.
It's a pity that they don't have a jumbotron for you to post some scary statistics on...
I worked through college. I don't feel the least bit of sympathy for people who coasted on loans taking easy majors that taught them no marketable skills.
My advice would have been: don't be a journalism major. The industry is dying.
You may even have a hard time renting, since landlords check your credit,
Yep. Even small landlords like me don't rent to someone without a credit check.
Yea, these people should have taken a worthwhile major. Like gone to law school where tuition is tiny and you can work at a pizza place on the weekend to pay for it. emiright?
I have to agree with TallDave- you missed one really good piece of advice for that particular audience, but it would have taken a great deal of courage to voice it.
"So you cannot discharge student loan debt in bankruptcy."
I'm a bankruptcy attorney and here to say: This is NOT true. If I could stamp out one bit of misinformation about bankruptcy, this would be it. It's difficult but possible. http://www.bankruptcylawnetwork.com/2007/08/23/what-is-the-brunner-test-for-dischargeability-of-student-loans/
The rest of your post is great.
Downfall, you're correct. However, when trying to put the fear of god into a group of kids about the absolute need to repay their student loans, adding in an exception or two tends to dilute the message. Besides, while it's possible to get student loans discharged in bankruptcy, most of the students Megan was addressing will never be in such dire straights to qualify for such relief. So, as a practical matter, Megan's summary of the law was accurate. If Megan were to say David can never win the Masters golf tournament; you'd be correct to point out that I could win the tournament some day if I played well enough. Correct, but misleading, since I'm old enough to qualify for the senior tour, play roughly 2 rounds of golf a year, and have never played a sub-par round in my life.
I respect your point, but the pervasive myth of student loan immunity from bankruptcy discharge prevents people who might qualify from even talking to an attorney. And besides that, some of those students may well qualify some day-- if they make a good faith effort to pay for a year, take a job without health insurance, get hit by a bus and lose the ability to work and repay their loans. It's unlikely, but not quite of the level of your Masters example. What's more, some of these people will undoubtedly know other people who would qualify, and may further spread this misinformation, and those people will attach undue relevance to the comments because, hey, they're journalists. I would love to see gallup surveys of how many people believe this 'fact.'
And besides that, some of those students may well qualify some day-- if they make a good faith effort to pay for a year, take a job without health insurance, get hit by a bus and lose the ability to work and repay their loans.
Only all that? Well, shoot, time to stop holding up liquor stores for those monthly payments and start jumping into intersections instead!
Seriously, we might as well stick with language along the lines of "effectively not dischargeable" and be done with it, as that exception most definitely does not fit anywhere into Average Joe's rump lawyering knowledge of Chapters 7 and 13, nor is he likely to ever access such a rare exception.
Mouse-- That was just a random example. I should probably have used "For example" or similar language, but neglected to do so. For more detailed information, see the link in my original comment explaining the Brunner test (very accessible to non-bankruptcy lawyers; I am in no way affiliated with the site, but I read it regularly).
I maintain an Average Joe should be aware that student loan debts are dischargeable in some circumstances, and that if repaying student loans is a significant burden, they should at least contemplate contacting a bankruptcy attorney. The pervasive misinformation-- spread in this instance by somebody who writes about economics-- prevents untold number of people who might qualify for a discharge from even talking to an attorney. It's a pernicious myth, in that it myth that prevents people from exercising their legal rights to get out of a bad situation. It's akin to the pre-Miranda regime, when people accused of crimes would give up their legal rights without even knowing it.
Okay, I admit I was tweaking you a bit, but "pernicious myth" and "pre-Miranda" are going too far. Not that I blame you for wanting to stick up for your profession, but that's a bit much.
Well, that example is ridiculous on its face, because it doesn't even require filing BK to get the loan discharged. If you are totally and permanently disabled, your student loan is forgiven. Now, they go with the Social Security administration determination of disability, so good luck with that. But hit by a bus guy probably at least has a closed head injury and physical injuries too and would likely get SSA disability certified.
I know next to nothing about bankruptcy law, but what prevents someone from paying off student loans with unsecured debt (e.g., credit cards) and then after legitimately attempting and failing to make the payments, wipe it all out with a bankruptcy? Is it really that hard to get around preferential transfer laws or is there some other road block? I can't be ther first one to think of this so why wouldn't it work?
I'm pretty sure the reason it won't work is precisely because you're NOT the first person to think of this. I don't know the policies of every student loan vendor, but mine only accepts personal checks or direct online money transfers. And I've a hunch that Visa would laugh in their face if they did try to process a lump-sum CC transaction, knowing full well what that would probably turn into.
How would you get a credit card limit high enough to pay off your student loans all at one go?
A discharge can be denied on the grounds of fraud or bad faith, and pulling a fast one would require getting one past both the US Trustee and the bankruptcy judge. Perhaps not impossible, but you certainly don't want to count on it.
I worked in college, two or three jobs at a time, and still have a heavy debt load. That being said, I don't regret it, since I have a job that I truly want, and I don't live extravegently so I'm able to manage...
Great advice. My college loan exit interview put the fear of God into me 10 years ago, regarding defaulting on loans. I've heard too many horror stories about people doing just that since then.
I don't know the policies of every student loan vendor, but mine only accepts personal checks or direct online money transfers.
Then you get a cash advance, deposit the cash in your bank account and you're good to go. Or, in the worst case pay as many bills as you can with your credit card and use your cash to pay down your student loans.
Then you get a cash advance, deposit the cash in your bank account and you're good to go. Or, in the worst case pay as many bills as you can with your credit card and use your cash to pay down your student loans.
Right -- if bankruptcy is possible, the student loans are the first payments you should keep up on. But...what would a bankruptcy judge do with somebody who had paid down student loan debt ahead of schedule with a lump sum payment and then taken bankruptcy not long afterward?
That was exactly what I was driving at. Is a bankruptcy judge or trustee (I don't know the proper titles or roles) free to set aside ANY transaction they don't like or is there a limited time period? Let's say, hypothetically, someone graduates from college and law school with $150,000 in loans. Let's say that they open up a private practice and make $40,000 annually. They have a small business, they have a law degree, so they're a decent credit risk, they get several credit cards with $125k combined limit. They max them out with cash advances and by purchasing assets that are easy to liquidate for near full value. Over the next year they pay off most or all of their student loans and keep the cards current with minimum payments since the interest rates will start low. This continues for a year. Then they default, their rates skyrocket and unable to make the minimum payments they declare bankruptcy. In this fact scenario, they discharged $150k of student loans in one year. Would this be likely to be set aside? I have no idea. Is it abusive or just bad money management?
This blog parrots the talking points of the loan industry, period. The threat to ruin one's credit because of student loan default reminds me of a pusher withholding crack--you're better off without it.
The student loan industry needs to be seriously re-examined and Congress won't pay a bit of attention until the system becomes so broken that have no choice. And you know what's finally getting their attention? Rising default rates.
Default, my brothers and sisters, default! Throw off your plastic chains!
http://www.youtube.com/watch?v=xtIM_TEQxwA&feature=channel_page
Melodramaticize much?
Someone is agreeing to lend a borrower tens or even hundreds of thousands of dollars at less than 7% interest (sometimes less than 5%) with no collateral. But of course the repayment terms are going to be unfriendly to the negligent borrower.
There are plenty of arguments to be made that the education industry has some deep structural problems reflected in the cost/benefit area, and that student loans are helping perpetuate the cycle. Try one on sometime, you'll like the fit better.
I've suggested to my daughter that she should be in no hurry to repay her (British) student loan, since one day a government desperate to win an election will repay it for her. Next year, perhaps.
Student loans should be as obsolete as health insurance. That's because higher education should be like health care: free, and rationed.
I've always believe just the opposite. Set tuition fees closer to full cost so people make more rationale decisions about it makes sense for them (and take it sreiously once they're there). But then provide significant offsetting loans and bursaries to the truly needy to keep it accessible. I really don't see the point of taxpayers subsidizing some doctor's son's quest to avoid responsibility and keep partying for four more years.
Interesting idea Sean. People could bid at auction for a spot in a program and bid what they think it's worth, with future income as ROI. Therefore, high paying professions and/or prestigious universities get higher bids, and lower paying fields and/or lower status institutions get lower bids. It forces the price to be closer to actual value in the marketplace according to what the market will bear.
Winning bidders (who are otherwise qualified for admission) get the seats, and lock in their program cost, as long as they keep passing and continue straight through. Otherwise, it's back to edBay.
Colleges and universities that need a predictable funding base or to keep price close to cost could set a reserve.
Good idea. Just what we need: more art history majors.
From the Senior Journal article:
The case was brought by James Lockhart, a 67-year-old disabled man from Seattle, Washington. The public housing resident said he needed all of $874 Social Security check to buy food and medicine, despite his $77,000 student loan debt that he had incurred between 1984 and 1989 under the Guaranteed Student Loan Program.
So . . . this old guy gets to service $77,000 in debt for only $874 x 15% = $131.10 per month? That's 2% interest with no principal repayment! Sounds like a good deal if you can get it.
Sure, but the way you get that good deal is destitution. Not exactly a recommended retirement strategy.
You know what's even better advice? Don't get stuck with those whopping loans in the first place?
Do 2 years at community college. Take summer school and graduate early.
Avoid places like Reed and Sarah Lawrence and degrees in Ethnic Studies.