It's safe to say that when 40 million Americans are saddled with about $1.4 trillion in student debt, it constitutes a crisis. Astronomically high tuition costs and ridiculous interest rates coupled with a lack of financial literacy among borrowers mean that graduates are often left owing the cost of a house after earning a four-year degree and have no idea how to tackle their bills.
On Wednesday, I wrote an article about what to do when you're being crushed by federal student loans. The tl;dr was, "Pay them, because you have no choice." As an expert told me, the federal government is the best debt collector in the universe, and it will get its money one way or another—even if that means garnishing delinquent borrowers' wages or withholding their tax refunds or government benefits.
I guess I struck a nerve, because after the article was published, I was inundated with Tweets, emails, and texts from both strangers and acquaintances asking for advice on private student loans. So in a quest to understand how those work, I rang up Peter Rhode, who calls himself "The Get Out of Debt Guy."
Even though defaulting on federal loans sounds like a special kind of hell, Rhodes told me that giving up on private ones is actually a good idea in a lot of cases. "People make all sorts of bad decisions about how to deal with their debt based on fears and not reality," he told me. "Today, the reality is that when it comes to private student-loan debt, so many people say there are no options, and that's just not true." Here's what else he had to say.
VICE: What happens if you don't pay your private student loans? How many months of nonpayment does it take for your credit to be completely fucked?Peter Rhode: The minute that it shows up on your credit report as being in collection, which is typically going to be by the 90-day mark, you're going to have a notification on your credit report that you're in collection. That can be overcome once you deal with it in one way or another, and then you make payments on your other lines of credit on time, and it will rebuild your credit quickly. So that's not really a concern.
Say you get a new job and you can start paying. How long does it take of making regular payments for the law to stop considering you a deadbeat?
It's interesting that people have so much fear about their credit report. For example, if you file bankruptcy, you can get a new car loan in a year, you can buy a house in a couple of years, you can get a credit card the next day… If the number-one issue is to fix your credit, then what you should do is abandon all your other life priorities and make sure you make the minimum monthly payment on your student loans for the rest of your life.
As soon as you've made 12 months of on-time payments, then the fault that you had will count less and less and the more time that passes the less it will count. But in order to stop bad credit being reported, you have to pay your account as agreed—and that's where most people who run into trouble would contact me. They've got $175,000 of student loan debt for a graphic arts degree—that's never going to pay them enough money in their field [for them to pay back] their loan. So instead what they do is they react to the loan payment.
If you look at home ownership among millennials, it's way down—there are more millennials living with mom and dad who can't afford to be out on their own. But the biggest tragedy, I think, is the inability to begin to save for retirement after you leave college, because you are so saddled with student-loan debt. Just yesterday I was talking to someone—they were 23 years old—and I explained to him that if he could just afford to [invest] $300 dollars a month for ten years and then never save for retirement again, by the time he retired he'd have a couple million dollars.
Right, and that's fucked up because I'm going to be paying that $300 a month until I'm 50 just to keep living.
When you get in that situation, what I always say to people is write your 80-year-old self a letter now and let yourself know what kind of dog food you like to eat—because you're going to be broke.
So what do you do? What's the solution?
It depends on what kind of private student loans you have. There is so much misinformation out there about the dischargeability of private student loans and bankruptcy. Some of them are instantly dischargeable now, especially if you went to a trade school, a vocational school, or a school that was not titled or accredited. Those are not protected in bankruptcy. When you have a lot of student loans that were taken out where a percentage went to paying for things that were not qualified educational expenses—things that weren't tuition, or books, or school expenses—all of that debt is dischargeable on bankruptcy.
The next strategy, if you can't afford anything—we're talking about private student loans—is to default. Defaulting certainly has some serious consequences—like it can show up on your credit report, you could be sued—but if you can't afford it, you can't afford it. I've had so many people who have wanted to kill themselves, leave the country, or become escorts to make their student loan payments. Defaulting is by far better than any of that stuff. If you default, which means you are 90 days or more delinquent on your debt, you will find that the student loan lenders will proactively offer you either settlements, or—oftentimes—more favorable payment terms.
What I'm seeing now is Sallie Mae is offering people a 50 percent reduction on their student loan debt if they can afford to pay it in one to three payments after they default. Not everybody has access to those kinds of resources, but if you could repay $70,000 in student loans for $35,000, and not incur any more interest, it might be worth borrowing the money.
So you mean taking out more loans to pay the loans at a more favorable interest rate? That seems weird.
Well, if you look at the compound interest on $70,000 in 20 years, versus a $35,000 loan that you pay over five years, the math just works out.
What are your thoughts on deciding between paying your private student loans or saving for retirement if you can afford one but not both? Is it smarter to default and use that money to save for retirement, or smarter to just use that money to pay off the loan?
Money problems are really made of two components: math and emotion. The emotional component is it's smarter to continue to pay on the student loans and avoid collections and negative items on our credit report—and emotionally that immediately feels better.
The other problem is that according to behavioral economics, people are more likely to put more weight on decisions that are right in front of them than in the future. The reality is, it's going to be better in the long run for yourself and society to be able to save money for retirement now so you won't have to rely on public benefits or retire broke in the future.
Half of Americans over the age of 50 have no money saved for retirement. The argument that it is more moral, or better, for someone to repay their debt now than to think about the future is an interesting one, because if you don't think about the future now and you retire broke, who is going to pay to support you?
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