To finance their education, deserving students receive grants, scholarships and loans. Grants and scholarships come at no cost and are free, but loans must be repaid, together with accrued interest, within the stipulated period. Failure to make loan repayments could instigate legal action against the defaulter among other negative consequences. Student loan debt ranks among the highest consumer credit debts; dragging both individual and country finances. A number of factors contribute to the increase in the student loan debt and policy makers seek to come up with policies to reduce this debt.
Factors contributing to increasing student loan debt
No single factor can be blamed for the rising student loan debt, but a combination of the following factors might explain the trend. First, the 2007 Great Recession reduced people’s assets and finances that could have been used to finance education, thus forced people to seek student loans. The development of lenders’ protection laws, on student loans, saw many lenders lend out loans to even less creditworthy people. A third aspect could be the increased enrollment of students in profit-making learning institutions, which charge high fees, causing people to rely on loans. A shift in student composition, many low/ middle income earners seeking education, increases the need for loans to finance education.
To finance loans, whether federal or private student loans, loanees need jobs/ income generating activities. Students need sound financial advice to repay their debts, avoid defaulting on their loans and or reverse their defaulted loans statuses. The most common student loan payoff option is making payments through payment plans such as the Income Based Repayment Plan, Pay As You Earn and Income Contingent Repayment Plan. Elusive jobs, or availability of low paying jobs, however, render most students unable to meet their loan repayment obligations. Plans that can be employed to payoff the debt, in this case, range from the loan defaulter filing bankruptcy, the IRS holding tax returns and or the government garnishing that person’s wages. The IRS usually gives defaulters a 65 days notice to refute the claim, make repayment plan(s) or pay up, but the wage garnishment plan does not have to inform the loanee.
A person can defer his/ her loan repayment if s/he does not have the means to repay, but only for a time. Failure to repay the loan, when due, leads to loan delinquency, and if the loan delinquency extends to over 9 months (270 days) the loan enters a default state. A defaulted loan not only sparks increased charges/ penalties, but can also cause a legal action to be taken against the loan defaulter, in addition to ruining his/ her credit. This minimizes his/ her chances of qualifying for future loans and or other services.
Reversing a default loan status
For the above reasons, a person must seek to avoid defaulting on a loan by negotiation with his/ her lenders; on more lenient repayment plans. Alternatively, if and when a person already has a defaulted loan, s/he can reverse the situation by entering a rehabilitation program. The program requires the loanee to make at lest 9 on-time payments for the loan to be reversed to a repayment status. Depending on the agreement, part of the loan can be forgiven after some time of faithful repayments, and the person can access other credit services.
Interest rate policies
One of the policies that seek to solve the student loan debt issue, centers on availing loans to more students, but at a higher interest rate. While this helps many helpless students access education, it costs them and their families more money in the long run. This might plunge them into more debt, defaulted loans and a limitation of their future access to other loans/ services. All in all, loans go a long a way in enabling people access education.
Joshua Turner is a writer who creates informative articles in relation to business. In this article, he describes a few policies surround student load debt and aims to encourage further study with a NU Master in Public Administration.