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What America’s $1.4 Trillion Student Loan Crisis Means To You

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Darla Mercado, Student Loan Crisis
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With Darla Mercado, Personal Finance Writer for CNBC, covering Financial Planning, Life Insurance, Annuities, and Retirement Plans

America Faces A Student Debt Crisis With $1.4 Trillion In Cumulative Student Loans

Most Americans borrow money to fund the high cost of a college education, which includes tuition, college supplies, room and board, and other expenses.  In fact, America has a bit of a student loan crisis, with $1.4 trillion in student loans outstanding.  With this big a market, there are a lot of firms cashing in, many for their own greedy good.  To understand this topic better, Steve speaks with Darla Mercado, a personal finance writer for CNBC who covers financial planning, life insurance, annuities, and retirement plans, and has done some work in the student loan arena.

Steve starts out by noting that 44 million students have borrowed more than $1.4 trillion to fund their studies.  The average outstanding loan balance stands at $37,000, with some students owing hundreds of thousands at the upper end and others owing a few thousand at the lower end.

Interest Rates Expected To Go Up For Student Loans

While there are different types of student loans, Darla says that interest rates vary based on factors such as when the loan was taken and terms of that particular loan.  She also notes that interest rates will increase, effective July 1, from 5.31% to 6% for direct unsubsidized loans, where interest starts to accrue as soon as the borrower takes out the loan.

What If You Can’t Pay Your Student Loan?

Steve also points to a student loan crisis and notes that loan defaults increased in 2016 to over 4 million, from 3.6 million in 2015, and asks what students should do as soon as they realize they can’t make their loan payments?  Darla says the quickest route would be to go directly to your lender or loan servicer, let them know what’s going on, and negotiate with them directly.  This could result in lower, income-based payments or a forbearance that allows you to temporarily stop making loan payments or having your payments deferred.  So your loan servicer is your best and most immediate point of contact because they already have your records, know the details of your loan, and will work with you for free.

Steve wonders if students should go to debt settlement companies that promise to favorably renegotiate debts and how students can tell which companies are legitimate.  Darla suggests starting with non-profits, such as the National Foundation for Credit Counseling, where credit counselors help you look at the bigger picture of your finances and place debt management within the context of that bigger picture.  Typically, non-profits help you for free or charge a minimal amount.

Learn How To Pick A Reliable Debt Settlement Company

Aside from non-profits, Steve wants to know how students can protect themselves if they are in a loan crisis and how they can choose a reliable debt settlement company.  Darla says debtors should look for a counselor who is bonded and insured, educates you, and prepares a comprehensive financial action plan.  She warns students to watch for obvious red flags such as when a debt settlement company starts asking for personal information off-the-bat, such as your Social Security number or wants you to give them power-of-attorney over your accounts or asks for upfront fees just for submitting paperwork that you could otherwise do on your own for free.

Steve reasserts that if anybody asks for your Social Security number, that should be an immediate red flag.  He also warns against granting any company power-of-attorney so they can make payments on your behalf unless you really understand what’s going on.  Granting power-of-attorney can put you in a very dangerous situation because rogue companies may not make your payments and may direct payments somewhere else.  So be very careful there.

See How You Can Get Out Of A Rogue Debt Settlement Situation

If you find yourself in a situation where you have, unfortunately, granted power-of-attorney to a rogue firm, Darla says you must immediately notify your current loan servicer of what’s going on and take back control.  If you’ve given them your bank information or access to your bank account passwords, immediately change your passwords and undo other forms of financial information access.

Do Not Ignore Your Debt Under Any Circumstance Because The Consequences Are Dire

Steve wants to you be very careful about the debt because ignoring it can have dire consequences that can add you to the student loan crisis in this country.  For example, if you default on your loans and take no action, your entire unpaid balance may come due and that can be pretty daunting.  Clearly, if you couldn’t handle a three digit or four digit payment each month, paying the entire balance would be impossible.  Moreover, you’ll lose your credibility, may no longer be eligible for repayment programs, and may also have your tax refunds and wages garnished.

When it comes to student loans, Steve opines, lenders are going to get their money.  And if you have a federal student loan, it’s extremely difficult to purge the debt, even if you file for bankruptcy—you’d have to prove, in court, that repayment would impose an undue hardship on you, and that’s a very hard argument to make.

While student loans have helped millions of Americans get an education and, consequently, higher paying jobs, students must do all they can to pay off their debts and avoid a student loan crisis.  In the unfortunate event of genuine financial hardship, students must immediately reach out to their loan service providers and renegotiate loan terms.  Be wary of debt settlement companies, and watch for red flags.  And, under no circumstance, should you ignore letters and notices tied to student loans.


Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital.  Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions.  Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances.  The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.

Read The Entire Transcript Here
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Steve Pomeranz: We all know there is a bit of a student loan crisis.  As a matter of fact, there is $1.4 trillion of loans outstanding in the student loan area.  Unfortunately, as can be expected, there are a lot of firms cashing in on this, and many are in it for their own greedy good.  Darla Mercado is a personal finance writer for CNBC where she covers financial planning, life insurance, annuities, and retirement plans.  And she’s done some work in this area, so we asked her to join us today.  Welcome, Darla.

Darla Mercado: Thank you.  How’s it going?

Steve Pomeranz: It’s going good. So 44 million students have borrowed more than $1.4 trillion.  How does that average out to the average student, how much do they owe?

Darla Mercado: That I believe comes out to about $37,000 in balances outstanding.

Steve Pomeranz: Mm-hm, so that’s an average, so I’m sure some people have hundreds of thousands and some people have just little bits.  But what are the interest rates on those loans?  I know there’s different tiers of loans, different structured loans.  But what are the interest rates they’re paying?

Darla Mercado: Well, that can vary across the board, depending on when exactly they took out the loan, as well as the terms of that particular loan.

Steve Pomeranz: Mm-hm.

Darla Mercado: I do understand that we’re coming up on an increase in interest rates that will take effect on Saturday for loans that are taken out after July 1st.

Steve Pomeranz: What is that rate gonna be?  Do you know?

Darla Mercado: July 1st and, in that sense, they’ll be paying 6% for a direct unsubsidized loan.  This is a loan that begins accruing interest as soon as the borrower takes out the loan.

Steve Pomeranz: Boy!

Darla Mercado: Yeah, and that’s up from 5.31%.

Steve Pomeranz: All right, well, there are more than 4 million debtors last year that were in default, and that’s up from 3.6 million in 2015.  So, obviously, we know that this is an ongoing problem.  We’ve read a lot about it in different news outlets and so on.  So what do you do if you can’t pay now?  How does one deal with this situation, and we’re talking about some of the firms that are out there that are trying to help you.  But, what are the first things that someone should do if they have a loan outstanding and they can’t pay now?

Darla Mercado: Well, the quickest route would be to go directly to your lender or your loan servicer and let them know what’s going on.  And in that sense, you can negotiate with them directly, notify them of your situation.  This might mean that maybe you need to apply for income-based repayment.  It might mean that you’ll need to apply for a forbearance or to have your payments deferred.  And that’s going to depend on the situation that you have, but the loan servicer would be your best and most immediate point of contact.  They already have your records on file.  They’re the firm that’s handling your debt already.

Steve Pomeranz: Yeah.

Darla Mercado: And, again, those are services that you can apply for for free.

Steve Pomeranz: Right, and there are a lot of other companies out there now.  Hundreds of companies that are out to act as debt settlement companies.  They’ll promise that they can take care of your debt; they can negotiate your debt.  Some of them are legitimate, but others are not.  Let’s start with the legitimate ones.  How do I know whether a company is legitimate?  What should I look out for?

Darla Mercado: So what you’d want to look out for would be nonprofit credit counselors.  So, for instance, the National Foundation for Credit Counseling.  And, in that sense, they can help connect you with somebody who gives you a comprehensive approach to dealing with your debt.  And this is an individual will help you look at the bigger picture of your finances and place that debt management within the context of that bigger picture.

Steve Pomeranz: So, by being non-profit, they’re going to probably have no charge or a very low charge.  But this is not a for-profit enterprise where you know that they’re going to be looking to charge you fees and other things that may be seen or may be hidden but are really not necessary for you to pay.  When talking to a company, a debt settlement company, what are the things that you want to look out for to protect yourself that you don’t get in with the wrong crowd?

Darla Mercado: Well, you’d want to look for certain behaviors.  So, for instance, as I’ve mentioned earlier, you would want to work with a counselor who’s bonded and insured.  You would want a counselor who’s offering you consumer education.  And, again, a comprehensive financial action plan that’s written.  What might set off some red flags would be if, let’s say that you have this debt, a debt settlement company approaches you and right off the bat, they start asking for very personal information, which might include your Social Security number.  They might want you to sign over power-of-attorney over your accounts, for instance.  And, of course, they might also want upfront fees just for submitting paperwork that you could otherwise do for free.

Steve Pomeranz: Right.  I think if anybody asks you for your Social Security number, that should be an immediate red flag.  Your student loan ID information, not as bad, but really why do they need that?  I guess they can make a case for it.  But never grant any company, unless you really understand what’s going on, power-of-attorney so they can make payments on your behalf.  That’s really a very dangerous situation to get into because they may not make those payments, and they may direct those payments somewhere else.  So be very careful there.

Darla Mercado: Precisely, precisely.  And if you find yourself in such a situation where you have, unfortunately, granted power-of-attorney to one of these firms.  Of course, you want to go back, undo that, and notify your current loan servicer of what’s going on.

Steve Pomeranz:  Yeah, and if you’ve given them your bank information or access to your bank account passwords, you can immediately change your passwords, other personal details, and tell your loan servicer what’s going on so they can be aware of it as well.  One thing you want to be very careful about is to make sure that you don’t ignore this debt.  If that money is owed, it could have tremendous consequences for not taking care of your responsibility.  What are some of those consequences?

Darla Mercado: Well, one major problem that might pop up if you decide to default on your loans, for whatever reason, your entire unpaid balance may come due.  And that can be pretty daunting.  Clearly, if you couldn’t handle a three digit, four digit payment each month, to have the entire balance come due is a scary thing.  You may also lose eligibility for repayment programs, and you may also have your tax refunds and wages garnished.

Steve Pomeranz: They’re going to get their money, especially when it comes to student loans.  Now, can you file bankruptcy and be relieved of that responsibility?

Darla Mercado: Most likely, no.  The issue here with federal loans is that it’s extremely difficult to purge the debt if you file for bankruptcy.  And in that case, you would need to prove in court that repayment would impose an undue hardship on you.

Steve Pomeranz: Mm-hm.

Darla Mercado: Very hard to make that argument.

Steve Pomeranz: Right, right.  My guess, Darla Mercado is a personal finance writer for CNBC.com, where she’s covering financial planning, life assurance annuities, and retirement plans.  Remember, talk to your loan service provider, reach out to them first.  They’re being paid to help you repay your loans.  To find out more about Darla and to hear this interview again, don’t forget to join the conversation at StevePomeranz.com.  Thank you so much for joining us, Darla.

Darla Mercado: Thank you, Steve.

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Steve Pomeranz
I've been an investment strategist and adviser for over 35 years, leading with a mission of unbiased advice to educate and protect listeners on my weekly radio show on NPR affiliates nationwide. I have been named a “Top 100 Wealth Advisor” by Worth Magazine and “Top Advisor” by Reuters.