Your Money: Ways of coping with student debt

The biggest investment you, your kids, or your parents may ever make is paying for a college education. And that investment isn't offering a great return for any of us right now.

One out of every nine students with college loans is now in default, according to new federal data. Could this mean student loans are going to be the next bubble, like the subprime mortgage and housing crisis?

The Department of Education in September issued updated default rates, which stand at a stunning 9.1 percent of federal student loans, or roughly $90 billion worth.

Of the 22 million students enrolled at universities now, two thirds attend using loans, either federal or private, with an average total debt balance of $26,000, according to figures from publicly traded lender Sallie Mae (ticker: SLM).

The total for federal plus private loans outstanding just hit $1 trillion, exceeding credit card debt.

If you're behind on your student loan payments, or on the verge of default, what can you do?

First, ask your lender for an "income-based" repayment plan. Congress is considering overhauling today's abhorrent debt collector program for student loans, to make income-based repayment the law of the land. Monthly payments would be capped at 15 percent of your income after basic living expenses.

Some lenders are not keen on income-based payments that will keep them from charging exorbitant interest and extra fees. Students and parents "don't even know they can ask for it," says Chanel Greene, who oversees financial aid at Peirce College in Philadelphia.

As a servicer on behalf of the Department of Education, Sallie Mae helps "federal loan customers understand their payment options - including income-based repayment - which is available today to anyone whose federal student loan payments exceed 15 percent of their discretionary income," said spokeswoman Patricia Christel. "Federal loan terms and payment plans are set by Congress, and we, of course, follow the rules in place at the current time and follow new rules whenever Congress makes modifications."

Second, there are two types of education loans. The most common and more forgiving type is federal student loans, which are available directly from the Department of Education at rates and terms set by Congress. Federal student loans are available regardless of income, assets or credit history. They are designed by government and underwritten by taxpayers as a public program to encourage access to education.

Private education loans, originated by financial institutions such as banks or Sallie Mae, are credit-based and will affect your credit score, especially if you default. About 90 percent of Sallie Mae's private education loans are cosigned, typically by a parent.

Of the $1 trillion in outstanding student loans, approximately $850 billion are federal student loans and $150 billion are private education loans.

Sallie Mae's private education loan rates to students at degree-granting institutions are as follows: fixed rate loans range from 5.75 percent to 12.875 percent, and variable rates are 2.25 percent to 10.125 percent. A typical customer who makes in-school interest payments can save thousands of dollars over the life of the loan. Sallie Mae offers a 0.50 percent interest rate reduction when students make monthly payments of $25 while in school and a 1 percent rate reduction when they make monthly interest payments while in school.

Third, don't consolidate your student debt unless you have no other choice, says Greene of Peirce College. "We steer students away from consolidation," as they end up simply borrowing at much higher interest rates similar to a private loan or credit card. "If it's a private loan, all bets are off."

Here are state deadlines for the Free Application for Federal Student Aid (www.fafsa.ed.gov): Pennsylvania, May 1; New Jersey, June 1; Delaware, April 15.

It's a good idea to complete the FAFSA earlier, if possible, as some state programs are first come, first served. Also, some colleges and universities have their own financial aid application rules, so be sure to check campus-specific deadlines.