Question:
Dear Steve,
I have obtained private loan debts from for-profit schools such as the Art Institutes and Fullsail. These debts have doubled from the interest alone. I find myself in a cycle: when I do work, all of my income goes to paying the minimum payment, or I go back school, but a legitimate state school to postpone payments.
I accrued these debts before getting married in the past year, and I am fearfully concerned. I'm currently unemployed, and my husband is bringing in the income, which pays all of the bills (even $186) towards interest only payment on ONE 46k private loan).
I fear not being any sort of income help once I do obtain a job, not being able to get a car under my name, not being able to help cosign a mortgage, and hell not being able to afford my retirement or life insurance when I do get on the ball for that.
What can I do? According to Navient, I owe $130,000 in private loans, I have two cosigners... I don't know how to begin. My loans are currently in deferment until I graduate, except for the one I'm paying (through my husband).
I am sorting through my options before I graduate in a year. It's not like I haven't tried paying in the past, but if I have no job, my credit is doomed.
Michelle
Answer:
Dear Michelle,
It is of little comfort for me to confirm you are a good example of a larger problem faced my scores and scores of students in America.
Currently the benefit for schools, both for-profit and non-profit, is to sell butts into seats and not provide an education that is both affordable and beneficial.
Just today the Department of Education released a statement which said, "Today, only students, families and taxpayers lose when students don't succeed-that makes no sense. Institutions must be held accountable when they get paid by students and taxpayers but fail to deliver a quality education. So should states and accreditors who are responsible to oversee them under the law."
What complicates your situation is the loans are held by a private lender and there are cosigners involved.
When someone agrees to cosign for a private student loan they are agreeing to accept 100 percent of the responsibility for the debt if you don't pay. My rule on cosigning is if anyone ever asks you to cosign for them, don't do it.
I understand the strategy you've elected. The deferments and delays in paying take away the pressure of making unaffordable payments right now but it also inflates the balance due. A continuation of this path will only make things worse. But the consequences of dealing with your situation at this moment are not pretty.
If there were no cosigners then here are Top 10 Reasons You Should Stop Paying Your Unaffordable Private Student Loan.
But with cosigners involved the lenders will go after the cosigners and maybe even sue them if you stop paying. That's not a great emotional outcome to face. But the truth is the cosigners were financial enablers who helped to leverage you into this situation. They bear some of the responsibility here even if they don't want it.
You should have a conversation with the cosigners and explain the current situation. They deserve to know the pit is getting deeper. They also deserve the right to help you pay your way out of the student loan debt if they want to avoid any negative financial consequence.
If they don't want to participate, then you may need to embark on a solution or strategy that is best for you and that probably includes defaulting on the debt.
Keep in mind, you also have a big risk for having cosigners as well. If the cosigner goes bankrupt or dies it is not uncommon for the private lender to demand the full payment for the total loans.
Again, if a cosigner was not an immediate concern it is also possible to think about discharging all or part of your student loans in a consumer bankruptcy. Your situation sounds a lot like the Opp case I talk about in this article. In that case the Court found the Art Institute loans were excessive and substantially reduced the balance due.
There have also been some recent cases that show how the bankruptcy courts are contemplatively considering the situations of student loan debtors in trouble. See this case and this one where the bankruptcy judge sided with the student loan debtor and discharged all of the debt.
Currently we are in a purgatory between students loading up on debt and realistic ways to deal with it. I see substantial progress being made for students but more hope will require federal legislative action and it is too early to predict what an upcoming presidential party change may do to the efforts put forward by the Obama administration. I just don't have that crystal ball.
The good news is while the options for dealing with the debt are not awesome or easy, you do have some options and a way forward.
If you have a credit or debt question you'd like to ask, just click here and ask away.
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This article by Steve Rhode first appeared on Get Out of Debt Guy and was distributed by the Personal Finance Syndication Network.