Student Loan Surprises

By Staff


As you approach your college years — applying to schools and start receiving things like financial aid awards — you start hearing about things that may be a little unfamiliar, especially if you’re a first generation college student. Some of the financial aid concepts, like student loans, come with their own particular sets of pitfalls that can be really easy to land in.

Now is the time when many high school seniors and their families are learning about their financial aid options from colleges and have to make some big decisions. For many, taking out student loans is the only way to bridge the payment gap.

But as a report released last month by the Consumer Financial Protection Bureau (CFPB) shows, student loans can send you into a deep hole if you don’t tread carefully. The report spotlighted “surprise defaults” that can hit people who have private student loans. Often private student loan borrowers need a co-signer – usually their parent or grandparent – in order to secure a lower interest rate. What they may not know is that if the co-signer dies or goes into bankruptcy, the loan servicer has the right to put them in default – even if they’ve done nothing wrong.

“The provisions are written deep in the fine print,” Rohit Chopra, the CFPB’s student loan ombudsman, told the Daily News. With May 1st – National Decision Day – when many high school seniors make their final college decisions, in the rear view and aid packages in hand, here are a few things you should know about student loans:

You might be eligible to have your co-signer released. Consider this option to avoid the shock of an unexpected default.

Some lenders will allow a co-signer to be released after the borrower demonstrates that he or she can carry the weight on your own.
Every dollar you borrow will cost about two dollars by the time you repay the debt.

Lenders generally don’t advertise this option, so you’ll have to ask. But don’t expect it to be a walk in the park. “Borrowers report that it is very difficult to qualify for co-signer release,” college financial aid guru Mark Kantrowitz, the publisher of Edvisors Network, told the News. “Lenders are very strict because they are concerned that the borrower will default after the cosigner is released from his or her obligation.”

Explore federal loan options first before taking out a private loan . Federal loans generally have lower interest rates and more flexible repayment options in the event that times get tough and you can’t make your payments.

Keep in mind, student loans are generally not dischargeable in bankruptcy. But with a federal loan, you might be able to get some kind of relief.

“With federal student loans, if you are not making much money, you can take advantage of repayment plans, like income-based repayment that lets you cap your payments as a percentage of your income,” Chopra said.

Do the math before taking out a loan . Research starting salaries in your chosen career to get a handle on what you might be earning when you graduate. “Total student loan debt at graduation should be less than your annual starting salary, and ideally a lot less,” Kantrowitz said. “So long as total debt is less than annual income, the student should be able to repay his or her loans in ten years or less.”

Another way to look at it: Your student loan payments should only be a small percentage of your expected salary when you graduate. The rule of thumb is 8%, says the U.S. Department of Education.

Borrowing is expensive. “Every dollar you borrow will cost about two dollars by the time you repay the debt,” Kantrowitz noted. “So before you spend student loan money on anything, ask yourself if you’d still buy it at twice the price.”

You will be on the hook, regardless of what the future holds. When you sign on the dotted line, you are agreeing to repay according to the terms of the loan terms. You are obligated to pay up even if you don’t finish school or you can’t get a job.