10 Questions for … a Student Loan Consultant
Is there ever a point at which you advise people to forgo additional student loans to avoid taking on more debt?
I don’t look to establish an absolute threshold with my clients, but I do advise them to consider two key things: The first is that many experts caution strongly against borrowing more than you expect to earn in your first year of postgraduate employment. And the second is that borrowing over the limit on federal student-loan programs—up to $57,500 for undergrads and $138,500 for graduate and professional students taking out Perkins and Stafford loans—usually means not just greater debt, but worse debt that lacks the flexible payment provisions and protections of federal student loans.
What percentage of a person’s gross income is a reasonable amount to pay each month toward a student loan?
In general, the longer it takes to repay debt, the more the debt will cost over time, so there are distinct advantages to repaying debt fast … if you can. That said, you need a monthly payment amount that you can afford, and determining which repayment strategy is best for your circumstances depends on a lot of different factors, including total debt burden, income and projected future earnings.
Defaulting on federal student loans triggers significant collection powers: wage garnishment, tax-refund intercepts, social security seizure and penalties.
Income-based repayment plans can help a lot of people with federal student loans, and they are surprisingly underutilized, in part because they can be tricky to navigate. These “pay as you earn” plans set monthly payments at 10 or 15 percent of someone’s “discretionary income,” which is calculated based on adjusted gross income and family size. They are particularly good options for people who have relatively high debt-to-income ratios, and for people who may benefit from the relief afforded by public-service loan forgiveness, such as borrowers working in government and the nonprofit world.
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Are there any instances when deliberately defaulting on a loan can work to a borrower’s benefit?
Not many. Defaulting on federal student loans triggers the government’s significant collection powers: wage garnishment, tax-refund intercepts, social security seizure, and huge penalties and fees.
You won’t hear this from your lender, but I can imagine scenarios in which it makes sense to stop paying a private student loan. If a person simply can’t pay every bill that’s due, it makes sense to first cover basic needs like housing, food and utilities. With the exception of the special treatment that private student loans enjoy in bankruptcy proceedings—in 2005, the bankruptcy restrictions that were conferred upon federal student loans were expanded to cover private ones, as well—these loans aren’t much different than other unsecured consumer debt.