Owe Shit

You don’t want to read this, but if you attended an institution of higher learning recently, a student-loan company probably owns a large piece of your ass.

Now, don’t turn the page! That won’t help. You’re not alone-millions of others like you don’t want to face the terrible truth: When student loans go bad, and they often do, they can absolutely destroy your life. So bite the bullet and take five minutes. After talking to hundreds of people trapped by the Mafia-like student-loan establishment, I know it’s a lot better to deal with this earlier rather than later-because you might not have any later, once they’re through with you.

Here’s the grim reality: Fall behind on your loan payments for more than 30 days (known as delinquency), and penalties and fees start to mount immediately. Remain behind for more than nine months without making a payment and you’re officially in default, a very ugly and very expensive word. The amount owed could quadruple or more, and your interest rate could rise to as much as 28 percent. With the full power of the U.S. Department of Education backing them, student lenders, including Sallie Mae and Citibank, can take a cut from your wages without even taking you to court. They can seize tax refunds, federal disaster-relief payments, and even your Social Security to pay off what they say you owe. If your credit score is ruined by a bad loan, you could have trouble getting a job or buying a house or car, or even lose your professional certification, depriving you of your livelihood. As Harvard law professor Elizabeth Warren has said, student-loan “debt collectors have power that would make a mobster envious.”
Just as if you owed Tony Soprano, there’s no getting out of it until the day you die, and even then, they might come after your grieving mother and lean on her for the dough. And unlike other types of consumer debt—credit cards, car loans, mortgages-declaring bankruptcy on student loans is not an option.

Don’t let it come to that. Here’s our five-step plan to sanity.

Step 1 – Admit You Have a Problem
You are powerless over your student loans. But don’t worry, you’re not alone. Sure, you’ve got a fat credit-card bill, the bachelor party in Vegas next month, and a hot new girl to wine and dine. That loan for Kalamazoo College is probably the last thing on your mind. Now that you’re making money, you want to enjoy the fruits of your labor, not pay off your tuition.

That’s totally understandable. It’s also a huge mistake. Take a deep breath and open up one of those monthly statements that have been piling up on the floor. Ignoring how much you owe and what you are expected to pay every month is a guaranteed road to disaster. Do not ignore your bills. Read the statement and find out what’s expected of you.

But what if you can’t find your statement? Not to worry. There are two Websites that can help you find out the status of your student loans: the National Student Loan Data System and the National Student Clearinghouse (see box on page 65). Your school’s financial-aid office also can help.

You might be in a better financial position than you feared. Or it might be worse-but by knowing the facts, you are 100 percent better off than if you remain in the dark. When it comes to student
loans, ignorance is never bliss!

Step 2 – Come Clean
Always be up front and aboveboard with your lenders. They will be more helpful when future problems arise if they see you’re responsible and communicative. Sending your regular payments on time is, of course, the best way to stay in touch.

Always make sure the companies listed on your statements have your current contact information. If you move and lose your bills, they’re not going to forget about you. They will find you and hold you responsible for interest and late fees-on top of your loan. Why do that to yourself for no reason?

Always put things in writing when communicating with your loan company. Print out all e-mails. Keep a file folder with copies of letters, canceled checks, statements, and other documents-chances are, if there’s a mistake, it won’t be in your favor.

Step 3 – Make a PaybackPlan
You do have some power to adjust your payments if you con tact your lender while you’re still in good stead. (Sense a pattern here?) The goal is to set a monthly amount that you can consistently keep up with on your current income. You can even have this amount direct-debited from your bank account so you won’t miss deadlines. Pay off the loans too slowly and you’ll shell out two or three times more on interest than you originally borrowed. Get in over your head with towering payments and you’ll be zinged with late fees and penalties.

If you’re lucky enough to have extra cash lying around, consider paying down your loan now. A quick rule of thumb: The higher the interest rate on your loan, the better it is to pay it off quickly. But if you’re paying, say, four percent interest, you should invest in something more lucrative, like mutual funds.

Payment Plans Decoded
There are lots of ways to stretch out your payments on regular student loans, fewer with private loans. Read the fine print before committing to a plan. Some people are stuck with “income-sensitive” plans in which their monthly payments don’t even cover interest, so over time, the total amount owed actually goes up.

Extended plans stretch out the payments for up to 30 years. Graduated plans start with lower payments that increase over time. Direct Loans only features Income-Contingent Repayment. It ties your payments to your income, family size, and total debt. Interest is capped and the loan is forgiven after 25 years. This is one of the only ways you can ever walk away from a loan.

Consolidation combines multiple loans into one new loan, with one monthly payment and one fixed interest rate. Since you can only consolidate once and interest rates are currently high (but heading down), it’s a good idea to hold off on this right now. An exception is if you have a low income. Then you might be able to consolidate into the Direct Loan program and take advantage of Income-Contingent Repayment.

Get a deferment, a break from your payments, while you’re in active-duty military service, enrolled at least half-time in school,or if you’re unemployed or living in poverty (for up to three years). If you’re not eligible for deferment, you may be able to get temporary forbearance for many reasons, including illness. This suspends payments, though you are still obligated to make interest payments to keep the interest from being capitalized (added on top of the debt). Remember: Applying for special payment plans, deferment, and forbearance is not a sure thing. Continue payments until your application is officially accepted.

Step 4 – Get A Handout
Can you get a helping hand with your payback? The GI Bill provides up to $65,000 for active-duty soldiers and up to $21,000 for National Guard members (but you might want to wait until the war in Iraq ebbs before signing up). AmeriCorps service pays up to $4,725. Public-spirited nurses, teachers, doctors, and lawyers may be eligible for help through various state and school-based programs. Some private employers also offer education benefits-don’t be shy, ask your recruiter or humanresources department.

Step 5 – Make Amends
Okay, let’s say you’re reading this article a few years after graduating, and instead of dealing with your loans, you moved across the country and pretended they didn’t exist. It may take a few months, but once the lenders catch up with you and turn the bills over to a collection agency, your credit score will go down the toilet. Don’t let this happen!

If you’re behind on even one payment, call your lender right away. Ask, “What will it take for me to get back in good standing?” Offer an immediate good-faith payment of at least $50. As long as they think there’s still blood to be squeezed from a stone (that’s you), they’ll keep the
loan active.

This cannot be stressed too strongly: Don’t let those bills pile up! And if you have a disagreement with your lenders over payment histories, fees, or anything else, contact the Federal Student Aid ombudsman (see “Getting Help” box). You can also consult a bankruptcy lawyer-some specialize in student loans. But whatever you do, do something. If you keep ignoring those bills, you’ll be toast.

Once you have a new plan, don’t screw it up again. Nine months of on-time payments should be enough to get you out of default. And avoid those credit counselors who advertise on late-night TV. They’ll charge you handsome fees for doing what you could do for yourself.

By Anya Kamenetz