It’s time for Marc Lichtenfeld’s Oxford Club Radio, the hardest-hitting half-hour about you and your money.
Our guest today is Bruce Mesnekoff, one of the foremost experts on student loan debt and the co-author of The Ultimate Guide to Student Loans. Bruce, thanks so much for joining us today. I was talking about the perception of a student loan debt bubble that could pop at any moment and significantly impact the economy. Is that accurate?
Bruce Mesnekoff: Hi, Marc. Glad to be here. You hit the nail on the head. There’s over $1 trillion in student loan debt now. It’s bigger than credit card debt, believe it or not. The only debt larger in this country is mortgages. And there’s definitely a bubble brewing. At least 10% of people with student loans are already in default, and millions more are struggling. With the power the government has to collect on these loans, which are trickling down to effect people in other areas of life, it’s already making an impact.
Marc Lichtenfeld: Let’s talk a bit about that impact. What power does the government have to collect on these loans, and do we have to be worried about a massive default rippling through the economy?
Bruce Mesnekoff: The defaults are already coming in staggering numbers. And our government’s power to collect on them is unbelievable. If you don’t pay your credit card debt, for instance, you go to collection. If you decide to ignore it, you can declare bankruptcy and wipe some of it out. Other people just ignore it until the collectors stop calling. With student loans, however, what happens is you go into default, which is the government’s term for “collection.” The government immediately raises the interest rate from 3% to 7%, to over 18%. Then it takes your tax refund checks as payment. And that return usually isn’t extra free money for people; they’re counting on it to pay their bills. Yet it’s gone. It’s called a tax offset. The government will also start to garnish your wages. If you’re working, it will take at least 15% of each paycheck to apply to your loans. Yet with your rate now at over 18%, that’s often barely enough to cover the interest. It’s a process that’s very difficult to get out of. It can be utterly devastating.
Marc Lichtenfeld: It’s amazing that they’ll more than double your rate when you’re already struggling to pay the loan.
Bruce Mesnekoff: Yeah, it is. And here’s the double-edged sword. These loans are given out indiscriminately upfront. There’s no credit check. It doesn’t matter if you’ve never had a job or if you have horrible credit. It doesn’t matter what your major is or if you’ll have a chance to pay this back in your chosen career path. Yet the powers-that-be have incredible control over getting their money back. It’s not like other debts, where the collector has to go to court and get a judge’s approval and so on. They can do it with a letter and a 30-day notice. Just like that, the garnishing begins. A lot of people wouldn’t be able to go to college without these loans, but the power they have to give up to get that money is incredible. So it’s a tough issue.
Marc Lichtenfeld: What options do people have for paying these loans if they haven’t yet gotten a job, or if they’re in a job that isn’t paying particularly well?
Bruce Mesnekoff: Fortunately, there are great programs out there. The government has a fantastic consolidation program that offers what it calls income-driven repayment options. That’s been a buzz-phrase this political season. What it means is you can get a plan that’s based on what you can afford, not on what your loan value is. Each year, it reevaluates how much money you make, how many kids you have and so on, adjusting your payment accordingly. You can have extraordinarily high balances, but if you’re in a job where you’re not making much, you might just have a $50 or $100 monthly payment because it’s based on what you can afford. There are also forgiveness programs. If you work in public service or for nonprofit companies, you can get your loans forgiven – tens of thousands of dollars off your loans after paying for a reduced amount of time.
But the government has done a horrible job publicizing these awesome programs. Nobody knows about them. That’s why everyone’s going into default and staying there. They don’t know what to do. My biggest piece of advice is: Do not ignore these loans like you might do with other debts. Don’t ignore them. They just get worse. They destroy your credit. Once your loans are in default, you can’t go back to school again until you get them out. With these programs I’m talking about though, not only will they help you avoid going into default, they can also get you out if you’re already there. We call it a “get-out-of-jail free card.” Now, you can use it just one time. It’ll reset everything and give you a second chance. It’ll start you off fresh, but you have to be proactive. You have to go out and find it and do it.
Marc Lichtenfeld: It’s funny you mentioned that the government hasn’t done a good job publicizing this. Because, just yesterday, I saw President Obama address college newspaper reporters. He mentioned this program, which was the first I’d heard of it. How do people get in touch with the organizations consolidating these loans to get out of default?
Bruce Mesnekoff: You can do a basic online search for federal student loan consolidations, where you’ll find the government’s program. I encourage people to call companies like ours. We’re the Student Loan Help Center. We look at your situation and get you pointed in the right direction. Because even if you know about the government’s programs, they’re not so easy to navigate if you’re not familiar with how the system works. Some people get involved and it doesn’t go so well for them. So I encourage you to reach out to someone with experience. Call us anytime at 855.280.0850, or we have a website: www.quickconsolitation.org. I can’t stress enough that the wrong thing to do is ignore your loans. There is help. Many people qualify for zero payments, where they don’t have to pay anything because they can’t afford anything. Yet they’ll stay out of default and their loans will still stay current. That’s a real option through these programs, but you have to be proactive.
Marc Lichtenfeld: Wow. Sounds like you’re doing great work. I’m so glad there are solutions because it’s a very scary-sounding thing. So thank you very much for joining us. Again, this was Bruce Mesnekoff, and the website is www.quickconsolidation.org.
My thanks to Bruce Mesnekoff, Curtis Daniels, Alex Moschina and all of you for listening. We’ll be back the same time next week. Until then, I hope your longs go up and your shorts go down. I’m Marc Lichtenfeld.