Real world of student loans

 Real world of student loans

Many unprepared grads may get rude awakening

By Diana McCabe
Orange County (Calif.) Register

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 Wollangk and 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 car.

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.

"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, the nation’s largest student-loan guarantor and administrator.

"They borrowed one by one and don’t see the totality of it. Psychologically, people don’t want to deal with it, so they put it off."

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.

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 but under different circumstances.

You have to apply for a deferment or forbearance and until it is approved, you must continue to make payments on your loan. And if your loans aren’t subsidized by the government, interest will accrue as well. Make sure your lender has your current address and phone number.

• Pick a repayment plan that works for you. Borrowers have several options here. After graduating, borrowers should use the grace period to figure out which repayment plan best fits their financial situation.

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 increased 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. Part of his salary goes toward insurance and utilities (he lives with his daughter’s grandparents) and toward a $225 car payment. There’s also the $75 he pays La Verne monthly for the $3,000 loan.

He’s yet to figure out exactly when he’ll be out of debt. The idea of how much he might owe is too overwhelming to think about right now, Wollangk says.

"Education is a great thing and I don’t regret mine. But I regret how I approached paying my loans back," he says.