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Before you sign for that loan, get educated

About 30 million Americans have student loans right now they’re paying off. But how do you help minimize student loan debt? Two experts offer some advice.
/ Source: Special to

Student loan debt has surpassed credit card debt, and only about a third of student loan borrowers are current on their payments. 13.8 percent of student loan borrowers defaulted on their loans within three years of starting repayment, according to new data released by the Department of Education.

The average student graduates with about $24,000 in student loan debt, which adds up to about $900 billion in student loan debt nationwide. In 2009, students at four-year colleges in Missouri graduated with an average debt of $21,360.

There’s a lot of factors at work  — the rising cost of education, a decrease in state funding and a decrease in income. This is not just a “student issue.” About 30 million Americans have student loans right now they’re paying off. But how do you help minimize student loan debt?

Paul Combe, president and CEO of American Student Assistance, and Allesandra Lanza of ASA weighed in on this topic and offered their advice. Combe says ASA’s mission as a nonprofit organization is to help students manage the education debt they get as they go through college. For Combe, it all comes down to communication.

Q: What would you tell any student that’s getting ready to take out student loans?

Combe: First and foremost, they should be looking at federal student loans first. Whether it’s the student or the parent, they should be borrowing from the federal programs because those programs have the most options for repayments and the most latitude for repayment. The second point is to borrow what you need and not more than what you need. Try to consolidate debt, don’t take multiple loans from multiple sources. You want to minimize the number of payments you have. If you take out two loans and they total $5,000, if it’s one loan, the payment may be $60 or $70 but if it’s two loans it actually could be $100 because you’re making two minimum payments.

Something like 65 percent of all financial aid is done through the form loans. Look at those loans as if you were a consumer and make sure you understand the rate, the responsibilities of the loan and the repayment terms. And if you do that and look at the Federal loans, you’ll be fine because they have the best terms.

Lanza: Think of a loan long term. If you are just starting out and you are a freshmen and are taking out loans for one year, you may be borrowing for more than one year, you may be taking out more debt, you want to come up with a strategy encompassing your whole college career and professional career.

What are some good strategies for repayment?

Combe: What we find is that very often, students, who haven’t paid attention to how much they are borrowing, and what they borrowing, and who they’re borrowing from, over the course of their college career, it’s very often it becomes overwhelming when they leave school and they begin to ignore it. You really want to stay on top of it and make sure you understand the payments.

Most borrowers get in trouble when they let it go and get delinquent and then down the road, some of your options and rights go away. The quicker you deal with it the better off you are. Just face up to it and deal with it.

Lanza: Try not to be too overwhelmed by the total amount you owe. There are a lot of repayment plans that make the debt more manageable. Too many borrowers think there is only one standard repayment plan that has to be paid off over 10 years and that they have to make that monthly payment and if they can’t make it, they can’t pay back their student loans. That’s when they might give up and just not pay it.

Combe: I can make the assertion that anyone with the federal student loans who is paying attention to it, should not default on that loan. Literally there is a solution. It is matter of getting the right information at counseling.

What should students keep in mind when considering various repayment plans?

Lanza: Think about what type of career you’re going into and what type of salary you’ll have. If you have high debt but you’re are going into a career with a lower salary, there is a new repayment strategy called income based repayment, where your payments are based on your income. This is geared toward people with high debt and low salary. Or if you are starting out and you think your salary will increase over time, there is a repayment plan where you start off your payments out less than the standard minimum but they gradually increase over time as hopefully your salary increases.

Combe: It’s a matter of making sure they are maximizing their rights and that they have to make sure they are in contact with their servicers, like ASA or the federal government to make sure they understand all the rights they have under this. I don’t know how many times people would have had an easy solution and by not dealing with it, those options have gone away and they are delinquent and can’t make up the back problems to solve the problems properly.

With the current generation of students, considering their career choices, as well as rising education costs, are you finding that these repayment strategies are working?

Combe: Our concern [at ASA] is that the Federal government, Congress and the Department of Education have provided all these remedies and solutions. The only thing they haven’t done  is provided a way to effectively communicate it to the borrower. Only 37 % of borrowers in 2005 are making payments on their loan today. The rest are in delinquency, default. And for that population with all the options, the number of repayments should be much higher than just 37 percent. The evidence is that they don’t know what the options are, and they hide from the problem, let it slide and it gets worse, the interest accumulates and so on.

At ASA we are dealing with people who took out loans in the 70-80s who are now having their social security garnished for the loans that was originally 2000 and now they owe 25-30,000. It is very important to focus on it and pay attention to it.

It’s a growing social issue. And yet there’s no comprehensive solution from the Federal Government, which by the way as part of our policy to access education is to use debt to finance it yet they have no formal polices of how to help the borrowers manage their debt once they get out of school.

Do you think the communication is the main problem? What are some other factors?

Combe: Oh definitely. We’ve been focused on education debt management since about 2000, and I will tell you that most borrowers who we can quickly get in communication with, it cuts delinquency and default in half. And it doesn’t matter what the communication is. The irony is everything we’ve ever tried, as long as you can actually make contact with the borrower, it works. Currently at ASA, we say debt management is a contact sport. It’s all about staying in touch, informing the borrower, getting them the right information at the right time, that’s it. It’s not hard. The solution is fairly straightforward.

I say that if the Federal Government is getting these borrowers into debt, they have some obligation to help them get out of debt.