Wally Wollangk got his college degree, but not his diploma.
The 28-year-old Mission Viejo, Calif., man owes $3,000 in student loans to the University of La Verne, where he graduated in 1996 with a bachelor’s degree in communications. He’ll get the parchment only when he repays the loan.
But looming ahead of him is an even bigger student debt: a $23,000 federal Stafford loan he defaulted on.
Wollangk is learning what everyone with student loans should know: Their options for repaying those loans and the stiff consequences if they don’t meet their obligations.
Even before he graduated, Wollangk had been nervous about repaying his loans. Once out of school, he didn’t land the broadcasting job he dreamed about and instead struggled to make ends meet with odd jobs. When the loan was handed to a collection agency, Wollangk was distressed. And when his $1,100 tax refund was withheld, he was shocked.
“I didn’t take (the loans) seriously at first. I thought, `What could they do to me? I didn’t have a job.’ “
It’s the sort of rude awakening that experts say many young adults are in for if they don’t keep track of their student-loan debt and sidestep avoidable problems.
If you default on a federal loan, as Wollangk learned, the government can snag your tax refund and apply it to your debt. In other cases, a percentage of your wages can be sliced off to pay the loan. Your credit record will be shot, which will make it tough to get a loan for a home or a car. And forget about qualifying for any more federal student aid.
It’s easy for young adults to leave school enmeshed in debt. Student loans add up quickly, with the average running $10,000 to $12,000 for four years of undergraduate school. Those who borrowed for graduate school will owe, on average, an amount ranging from $20,500 to $31,200, according to a 1997 national student-loan survey sponsored by Nellie Mae, the fourth-largest holder of education loans.
Student-loan volume has more than doubled in the past 10 years. In fiscal 1998, 5.9 million students borrowed $38 billion in federal loans, according to the U.S. Department of Education.
Tens of thousands of recent graduates fall behind on student-loan payments and then default on the loans altogether. In the most recent tally, the national student-loan default rate in fiscal 1996 was 9.6 percent, representing 197,338 borrowers in default from a survey of more than 7,000 schools. That was down from a rate of 10.4 percent in fiscal 1995.
“A lot of people are surprised by how much they owe when they get out,” says Patricia Scherschel, director of policy research and consumer issues at USA Group Inc., the nation’s largest student-loan guarantor and administrator.
Students preparing to graduate need to figure out how much they owe as well as how many and what types of loans they have. A budget is a must. The more you know about your loans and your financial situation, the better equipped you’ll be to choose a repayment strategy.
The best way to get rid of student-loan debt is to pay the loans back as quickly as possible, because interest starts building up as soon as the loan is taken out.
That’s a fact that’s not immediately obvious to many students, because almost all student loans have a grace period before payments must begin.
For example, students with federal Stafford loans, the largest student-loan program, don’t have to start repayments until six months after they leave school.
But if you can afford to prepay, do it, experts say. There are no penalties for paying off your loan early.
If you have an unsubsidized federal loan, you are responsible for paying all of the interest that accrues. Interest rates vary depending on the type of loan you have and when you got it. A Perkins loan for financially strapped students carries an interest rate of about 5 percent. The rate on a Stafford loan is 8.25 percent.
Many students get a nasty lesson in interest when their first statement arrives. They didn’t know that interest accrued while they were in school, even though they didn’t have to make any payments. If you can afford to pay the interest as it accrues while in school or during those postponements, you’ll be a little ahead when it comes time to repay your principal. USA Group estimates accrued interest adds about $70 per year for every $1,000 you borrow in student loans.
If you’re having problems repaying a student loan, here are some options:
Check with your lender to see if it offers incentives or rate discounts. Borrowers with the Student Loan Marketing Association, or Sallie Mae, loans who make their first 48 monthly payments on time get a 2 percent interest-rate reduction on the remaining term of their loan. If borrowers allow monthly loan payments to be automatically deducted from their bank accounts, they’ll receive a 0.25 percentage point cut on their rate. If you owe $7,500 and took advantage of those two Sallie Mae incentives, you’d save $590 at the end of your 10-year payment schedule. Other lenders offer similar programs.
If you can’t make payments, let your lender know. Even at the slightest hint of trouble, “pick up the phone and call,” says Janet Waters, an account executive at Sallie Mae. You might be eligible for a deferment or forbearance. Both are ways to postpone payment on your student loans.
Pick a repayment plan that works for you. After graduating, borrowers should use the grace period to figure out which plan best fits their financial situation.
Borrowers need to consider how much debt they can afford to repay based on what they expect to earn. If you owe money for a car or have a big credit-card debt to repay, factor in those financial obligations when figuring out which repayment plan is for you.
The most common way to repay a loan is via the 10-year level plan, or standard plan. Borrowers pay off their loan in equal monthly installments over 10 years.
Some borrowers might opt for a graduated repayment plan, which allows them to start out with low payments that gradually increase as their ability to pay more grows.
Or students might choose to repay their loans over 12 to 30 years. The longer time period means you’d pay less in monthly installments than under a 10-year plan, but you’ll pay more in interest over that long haul.
Let your lender help you rethink your payment plan if you find yourself in a financial pinch.
If you have several loans, you might want to consider a consolidation loan. If your loans are with different lenders, consolidating lets you make one monthly payment instead of several. Consolidating can also lower the total of your monthly payments. But since you’re spreading the payments out over a longer period of time, you’ll pay more in interest expenses, and the total cost of your loan increases.
The main goal for all borrowers, however, is to steer clear of delinquency and default.
“Every day your payment is late, the interest meter still ticks away,” Schershel says. And on top of the interest that accrues, you’ll pay various late-payment penalties and collection fees if your loan is in default.
At Sallie Mae, late fees can run $5 to $10 a month, Waters says. Once your loan moves to a collection agency, you will probably face an 18.25 percent collection penalty on the outstanding balance.
Use a new federal tax break for student-loan interest. Some borrowers might be eligible to take a deduction for part or all of the interest paid on a student loan on their tax return. But this tax break comes with many stipulations and requirements. It’s best to consult a tax expert to see if you qualify.
If you do default on a federal loan, there is still a way out. You’ll need to contact the collection agency, work out a payment schedule and stick to it.
That’s what Wollangk is doing. Right now, his job as a loan consultant pays him enough to make a $100 monthly payment on the Stafford loan. That just covers the interest and doesn’t even begin to touch the principal, though.
However, if he can increase his payments to $267 a month for the next four or five payments, Sallie Mae will take him out of collection, Wollangk says. Then, he can work with Sallie Mae on a new payment plan.
But that’s a steep increase for Wollangk, who makes about $1,800 a month and has his 1-year-old daughter and her mother to support. He’s yet to figure out exactly when he’ll be out of debt.
“Education is a great thing and I don’t regret mine. But I regret how I approached paying my loans back.”
