Carrie's e-mail jumped out at me because she's a fellow mom -- and she's really worried.
Her son borrowed $75,000 in private student loans for college, she wrote. Although he's employed, he can't make the payments the lender is demanding.
"He is a teacher and makes $24,000 a year," Carrie wrote. "(The lender wants) a payment of $1,400 a month. He brings home barely that (much)."
If these were federal student loans, Carrie's son would have a number of good options. The best, starting July 1, would be the new income-based repayment plans that allow borrowers to cap their monthly payments at 15% of their discretionary income.
Because he's a teacher, any unpaid balance would have been forgiven after 10 years. Those who don't work in public-service jobs can have their balances forgiven after 25 years of repayment.
But his are not federal loans. Unfortunately, Carrie's son -- and thousands of young people like him -- have tumbled into a trap set by private lenders.
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Here's the problem
Barely old enough to vote, these borrowers have signed up for high-rate debt they often can't afford, can't refinance and can't escape.I've covered this situation before -- including in "How did student loans get so sleazy?" -- but here's a recap for those who don't know the stark differences between federal and private student loans:
- Federal student loan rates are fixed at a maximum 6.8%. Private loans, by contrast, usually come with variable rates that have no caps. Private loans currently average 11% to 12%, said student loan expert Mark Kantrowitz of FinAid. Those rates could increase sharply as the economy recovers and general interest rates rise.
- What's more, applicants often aren't told the interest rates they'll get until they sign the promissory notes agreeing to pay back their loans. The rates are often based on the borrowers' credit scores, but shopping for the best deal is tough because most lenders don't disclose their rates in advance.
- Federal student loans come with numerous consumer protections and flexible options for repayment, including graduated payments, income-sensitive plans and consolidation, which stretch out the repayment period to lower the payments. Private loans often lack these options. Refinancing or consolidating has become impossible for many borrowers as fewer lenders offer these options and those that do demand high credit scores.
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Students buried by debts The skyrocketing cost of college is pushing students further and further into the hole.
Students often turn to private loans after exhausting their federal student loan options. That's happening more often these days because the maximum undergraduates can borrow through federal loan programs hasn't changed since 1992.
But some students never apply for federal loans. Some are steered by their colleges straight to private lenders, while others don't realize they qualify for federal programs. These students don't know that anyone who fills out a Free Application for Federal Student Aid can qualify for federal student loans, regardless of need.
Continued: Let's fix the problem