I’ve received letters from students asking this question, so I would like to make a definitive statement about this:
That is such a wicked bad idea at this point in time.
At least wait until you have all the facts, and complete the “assigned reading:”
The Student Loan Scam: The Most Oppressive Debt in U.S. History and How We Can Fight Back
by Alan Collinge of StudentLoanJustice.org. He documents why your credit card lender won’t negotiate with you for your current loan: It is more profitable to them if you DO default.
The 2005 Bankruptcy Abuse Prevention and Consumer Protection Act also held a special surprise for students: student loans NOT guaranteed by the federal government cannot be discharged in bankruptcy. This became law on October 17, 2005.
Amendments to the Higher Education Act eliminated all statutes of limitations for the collection of student loan debt, so if you have old unpaid student loans from the 70′s and 80′s? Surprise! It’s again a collectible debt!
Student loans are exempted from coverage under the Truth in Lending Act (TILA). They were also specifically exempted from state usury laws…lending money at an unreasonably high interest rate. Can you spell “l.o.a.n S.h.a.r.k?” Most student loan guarantors do not have to adhere to a 1988 Federal Trade Commission legislation requiring an adherence to Fair Debt Collection and Practices in pursuing defaulted borrowers.
And if you don’t like the lender you chose when you were in college, because they were on the Preferred Lender list, or you found another lender who will offer cheaper terms? Tough. Legislation was passed that requires borrowers to consolidate their loans with the original lender only (if there was only one original lender). Even the tiny loophole that once existed in federal law whereby a borrower could transfer his/her loans through the Direct Lending program, and into the FFELP program with a different lender, has been closed in 2005 by (you guessed it!) Sallie Mae and other large banks.
In addition to having no consumer protection, “collection rates” of up to 25% can be applied on top of the debt. If you were unable to afford what you owed already, you will certainly not be able to afford a 25% “surcharge,” in addition to principle, interest, fees and penalties.
In 1976, there was a provision in the student loan law that set a 5-year time period, after which the loans could be discharged, and also a provision that permitted bankruptcy if the debtor could prove undue hardship, but that was removed. Even the mob can’t do half of what the banks can now do to collect your defaulted student loans without a court order. They can grab your wages, garnish your social security and disability payments, seizure tax refunds, and even suspend of state-issued professional licenses and termination your public employment. Hoping to practice as a psychologist/nurse/teacher/hairdresser etc? You can’t if you don’t have a license. Were you hoping to have your loan forgiven by working as a teacher in a “needy” neighborhood? Defaulters don’t qualify for loan forgiveness programs.
One million private student loans are estimated to be in default, with an equal number of private loans perilously close to defaulting. There are over 5 million publicly insured defaulted loans on record with the U.S. Department of Education. These borrowers are embarrassed, humiliated and intimidated when their loans spiral out of control, or when they are trapped in predatory lending situations, so they are less likely to be proactive on their own behalf. However, that’s exactly what needs to happen.
Here’s one of over 2000 case histories you can read at StudentLoanJustice.org:
There is David, a chiropractor in Texas, who originally borrowed $70,000 for college. After a period of unemployment in the mid 90s, David’s loans defaulted, and to date have escalated to about $400,000. The state of Texas has suspended his license to practice medicine, and he has been unable to negotiate a reasonable settlement of the debt. In David’s words, “It doesn’t make sense. It’s almost like the government doesn’t want me to practice medicine-never mind that it’s the only way I can reasonably even have a shot at paying this mountain of money back!” David is currently driving trucks in Amarillo to make ends meet.
So do you recommend students simply stay out of debt and save the cash ahead of time for college?
One writer put it this way:
“I certainly advise avoiding loans at all costs. It is frankly safer to put college costs on a credit card…At least there are bankruptcy protections (if something horrible happens) and the ability to refinance the debt under more competitive terms if the lender is treating them badly.) There is also a statutes of limitations, truth in lending requirements, and coverage under state usury laws in the use of credit cards, all of which are null and void for federally guaranteed student loans thanks to Congress.”
Don’t default on student loans, and if you are seriously considering it, at least read Collinge’s book and join StudentLoanJustice.org if you do.
I was completely blown away by learning about the student loan situation, which is why I put up a reminder about the Jokes, Humor, Ridiculous page on prior to this entry. I needed a laugh, so I though all of you student borrowers might, too.