Student loan borrowers: help is on the way

What a good week for borrowers: First, President Obama announced new rules to help homeowners with underwater mortgages. And now, new changes that can help roughly 5.8 million people who have federal student loans. Here's how:

• IBR (Income-Based Repayment). This program lets folks repay loans according to how much they make, rather than how much they owe—which can help lower monthly payments. I've been raving about it since it launched in 2009, but under the new "Pay As You Earn" proposal, IBR gets even better. Borrowers can cap their monthly payments at 10 percent of their discretionary income (down from 15 percent). And after 20 years of participating in IBR, your loans will be forgiven (down from 25 years). Plus, it goes into effect in 2012 (rather than waiting until July 1, 2014).

• Loan consolidation. Many people have a combination of Direct Loans or FFEL (Family Federal Education Loans). Consolidating FFEL loans into the Direct Loan program can help folks receive up to a 0.5 percent interest rate reduction, qualify for loan forgiveness programs like IBR, and cut the clutter and confusion of managing multiple payments. This offer also takes effect in 2012.

But a big drawback—pointed out by Mark Kantrowitz, the financial aid guru behind FinAid.org, and Ron Lieber, "Your Money" columnist at The New York Times, is that both plans exclude many borrowers.

While the new IBR is a great boon for current and future college students, it's not available to people who graduated in 2011 or earlier. To qualify, you must be a new borrower since 2008, and have at least one loan originating in 2012 or later (for example, someone who began college in 2009 and takes out loans each year until they graduate in 2013). So, the new IBR helps as many as 1.6 million people, but excludes the 36 million borrowers who are ineligible.

The new consolidation rules aren't much better. The program is only available to those who have both FFEL and Direct Loans, and it excludes anyone in default or who has previously consolidated into the Direct Loan program.

On a positive note, the administration is at least trying to save future generations from drowning in debt. The same day Obama made this announcement, the Consumer Financial Protection Bureau unveiled a new initiative called "Know Before You Owe," which proposes one-page financial aid shopping sheets that would make costs and loans clear to students before they enroll in college and allow them to compare offers side by side. (Yes, shopping around is a *must*—even for school!)

Plus, you can't help but think this is a direct response to the Occupy Wall Street protest, which is full of picket signs to "Cancel All Student Debt," or to the popular online petition "Forgive Student Loan Debt," which now bears more than 600,000 signatures.

Will you be able to take advantage of the new student loan programs? Any questions I can help answer? Post them in the comments below, or ask me on Facebook or Twitter.

Education Comes With a Price Tag

My latest piece for the Huffington Post just went live. Titled "Education Comes with A Price Tag," it begs the question: How can we teach students about the debt they're taking on before they choose a college?

Take a look and share your thoughts.

The Money Fix: "The Bill for My PhD Is Due"

Hey! Beth here. This fall I'm participating in an awesome project called "The Money Fix." Basically, DailyWorth played matchmaker and set up nine readers with money experts. Each reader is blogging on DailyWorth.com about her progress. My advisee, Charlotte, posted her first blog last week, and I wanted to share it with you. I hope her story will inspire you! Take it away, Charlotte:

Hi, my name is Charlotte, and I have staggering student loan debt from getting my PhD.

2010 was a big year in our house. I turned 40, had our son, and now I've decided to tackle my finances.

I want to do everything at once, but I'm overwhelmed. At 40, I still rent an apartment, we don't have a car (thankfully we live in DC), we don't have life insurance or a college savings account—and we need to save for retirement.

But the elephant in the room is my student loan debt. It took me 13 years to get my doctorate, and the bill has come due. I love my work, but I'm not sure I can afford to stay in the not-for-profit field.

But I'm getting ahead of myself.

My first step, says Beth Kobliner, author of Get a Financial Life, is to open up those stacks of student loan statements that are now stashed in boxes on my desk and probably under my bed—so I can figure out how much I owe exactly, and to whom.

She's right: First I have to face financial reality to see how big and bad this elephant really is. Then I can make other choices. (If you're interested, you can read my full story here.)

Can you relate to Charlotte's story? What financial facts are you avoiding?



Beware: Debt Settlement Companies

If you're deep in debt and need some expert advice, be wary of any company that promises to get rid of your debt. They're debt settlement companies, and they can actually make your situation worse.  

Perhaps you've seen their commercials on TV, with misleading marketing ploys like "New Government Programs!" or "Get out of debt in 24 hours!" You know the saying: If it sounds too good to be true, it probably is.

Here's the gist: Debt settlement companies claim to help you pay off your bills for a fraction of what you owe. On top of charging exorbitant fees, they generally advise you to make monthly payments into a special account instead of paying creditors. They promise to use the cash to settle debts for pennies on the dollar, but in the end they usually just pocket your money. Their tactics could result in you losing your cash—or worse, facing a damaged credit score, deeper debt, lawsuits, and more.

Fortunately, consumers are exposing their shady practices: According to the Better Business Bureau (BBB), the number of complaints against debt settlement companies shot up 27%, from 1,378 in 2007 to 1,748 in 2009.

The government's stepping in, too. The Federal Trade Commission announced new rules that go into effect starting today, which take aim at these companies' false promises and up-front fees. The new rules are a good step in the direction of transparency, but they have major shortcomings (for example, they only apply to debt settlement solicitations made over the phone). 

If you need help, here are 5 steps to avoid a scam:

1. Contact trustworthy organizations. Two that I recommend are the Association of Independent Consumer Credit Counseling Agencies and the National Foundation for Credit Counseling (NFCC). Either one can connect you to a reliable debt counselor.


2. Choose a good debt counselor. The NFCC has a handy set of guidelines for selecting the right counselor. Remember that a good one will help you create a budget for free (before signing you up for additional paid services, such as a debt management program—see tip #3) and admit when bankruptcy is a good option (rather than keeping you dangling while they collect fees).


3. Don't confuse debt settlement with debt management. Your counselor may suggest a debt management program, whereby he/she strikes deals with your creditors to lower your monthly payments (and sometimes eliminate fees you've racked up), so that you can ultimately pay back 100% of your debt. This service won't hurt your credit score or put you at risk in other ways. However, you'll pay a monthly fee for the service (they vary by state, but generally won't be more than $50). And even though it's less risky than debt settlement, there are some scams associated with debt management, too, so proceed with caution.


4. Avoid a counselor who tries to put you into a debt settlement or debt management program right away, since debt settlement is usually a scam and debt management can be expensive. You first want to be sure you’ve exhausted your other options, like making changes to your budget.


5. Don't sign anything until you get a second opinion! Call up another credit counselor in your state and ask their advice before moving forward with anyone. You can also check with the BBB to see if there are any complaints filed against the company you're considering.

What's your breaking point: How much debt would you have to incur before reaching out for help?



Should you declare bankruptcy?

Especially in these tough economic times, if you owe a significant amount of money in credit card debt or medical bills, it may seem appealing to file for bankruptcy. It offers a chance to hit the "redo" button on your financial life, since all your debt would essentially disappear. But here's why bankruptcy should only be used as a last resort.

First, some background: If your petition for bankruptcy is accepted, your debts will be "discharged," meaning you'll be off the hook for the money you owe to creditors such as your landlord, doctors, and credit card companies. Some of your assets can be seized to pay off these creditors, but depending on which state you live in, you may be able to work out a deal where you get to keep your car, home, and household possessions. And it may not be long before you can start borrowing money again (though, unsurprisingly, I'd strongly advise you to proceed with caution).

That said, filing for bankruptcy is generally not an option that most of us should consider. For starters, there's a long list of debts that can't be forgiven, such as student loans. What's more, bankruptcy is noted on your credit report for 10 years. True, you may be able to get some form of credit within a few years, but you probably won't be eligible for low-rate credit cards or decent loan deals for many years. And you won't be able to apply for certain kinds of student loans (like Grad PLUS loans) if you're thinking about going back to school. Finally, you may have trouble getting a job, since many employers run credit checks on prospective hires and will learn from your credit report that you declared bankruptcy (even though that practice is under scrutiny at the moment).

To give you some background, there are a few different kinds of bankruptcy, but the one most commonly filed by consumers like you is Chapter 7 (the court discharges your debts), and others may opt for Chapter 13 (the court sets up a repayment plan). First, you should evaluate whether or not bankruptcy makes sense for you. If you decide to move forward, you'll then have to complete credit counseling with a U.S. Trustee's office-approved agency to determine whether it's really necessary. Then, you'll fill out some paperwork and submit it with a fee ($299) to a federal bankruptcy court. You'll also probably need to pay a bankruptcy lawyer to help with the case. Before your case is over, you'll have to attend another counseling session to learn how to manage your personal finances.

If you have any questions about bankruptcy or debt, don't hesitate to drop me an email.