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Are Student Loans Good Debt?
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A troubling trend is doing away with the conventional wisdom that student loans are good debt. It's a common belief that, like a home loan, student loan debt will turn into an asset. But it doesn't always turn out that way. Increasingly, people are finding themselves unable to pay off or falling behind on their loans.
The U.S. Department of Education recently reported that the national default rate on federal student loans rose slightly, to 5.1 percent in 2004 (the most recent year for which data is available), from the previous year's record low of 4.5 percent.
Although the current default rate is low compared with the all-time high of 22.4 percent set 14 years ago, the latest increase is still a signal that shouldn't be ignored.
Since the 1990s, the number of students graduating with more than $25,000 in loan debt has tripled, according to the student Public Interest Research Groups, which, along with several state student associations, last year launched the Student Debt Alert project.
There are some forms of relief available for borrowers sinking in debt, although bankruptcy is not an option. If you have a federal student loan, it can't be discharged in bankruptcy. If you have a private student loan, declaring bankruptcy is still not a viable option unless you can prove that paying the loan would result in "undue hardship," a test for which the criteria are nearly impossible to meet.
However, depending on the loan, there are several other options, such as graduated repayment plans, under which payments start out low and increase over time, typically at two-year intervals.
Some loans have income-contingent options. An income-contingent option gives you the flexibility to pay off your loan based on what you earn.
If you are experiencing economic hardship, you may be eligible for deferment. Under this option, you still have to pay off the loan, but you can postpone payments for awhile. Interest on the loan, or loans, will not accrue during the deferment period.
Another option is forbearance, which allows you to stop making payments for a set period of time. Unlike the deferment option, forbearance does not stop interest from accruing. But forbearance is easier to get.
In the meantime, if you have the cash, should you pay off your loan? Financial experts may have mixed opinions about this, but as the old Chinese proverb goes, "A good debt is not as good as no debt."
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Article Title : Are Student Loans Good Debt? |
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