Bubbles seem to be bursting all across the economic landscape. First we had the housing bubble, then the automobile industry bubble, then came the credit card bubble. Pretty soon we’re liable to have a “bubble” bubble, where our heads explode over all the financial fires popping up everywhere.
So it’s with extreme caution that I broach the subject of one more economic bubble: the student loan crisis.
I know what you’re thinking. “Cramer, we can’t take any more bad financial news, especially about student loans. It’s just too much!”
Well, you got the “too much” part right. Too much student loan debt coupled with too much financial stress is triggering a larger burden for student loan borrowers.
As usual, the numbers tell the story. According to the College Board, total student loan borrowing has more than doubled from 1998 to 2008: $85 billion, compared to $41 billion ten years ago. The amount of privately funded student loans, which usually include higher interest rates and higher repayment amounts, have also risen over the same time period, from 7% in 1998 to 23% of all student loans in 2008. Meanwhile, the Wall Street Journal reports that subsidized federal aid is treading water at about $42.8 billion per year.
Those ingredients make for a witches' brew for cash-strapped borrowers in 2009. Saddled with debt, and facing layoffs and loss of income, student loan borrowers are falling behind. Sallie Mae (Stock Quote: SLM) reported a delinquency rate of 9.4% in the third quarter of 2008, compared to 8.5% a year earlier. How much do you want to bet that gap continues to widen in 2009?
But if you’re late on your student loan debt, take heart. The last thing that shell-shocked lenders need is for you to default on your student loan debt. More and more of them are willing to talk about delaying payments and renegotiating terms. So you don’t want to be delinquent on your loan. That could hurt your ability to borrow money later, kill your credit score, leave you open to IRS garnishments and stop you from getting a professional license in your chosen field.
I’ve got some ideas for you, but before we go there, you need to understand the different levels of “late” student loan payments.
Seven to 10 days: Anything seven to 10 days late is generally okay. Lenders usually give you a grace period of about a week. No harm, no foul.
15 days: Any payment that arrives at the lender past 15 days will likely incur a late fee. I hate late fees with a passion—you’re essentially paying interest on your interest, and that’s no way to create wealth.
30 days: If you’re 30 days late or more, you’re starting to sink in financial quicksand. You’re still accumulating late fees, plus you’ve got two months worth of payments to handle.
60 to 90 days: If you’re two or three months late on your student loan bill, your lender can really start to turn the screws. By law, lenders are allowed to take your loan interest and actually add it to your loan principle. When you hit the 90-day mark, your loan starts to take the shape of a mob gambling debt, as your lender can begin charging you extra interest on top of the interest you already owe.
Anything after 90 days: You’re really in hot water. The delinquent loan will likely show up on your credit report, and you reduce the chances of having your lender grant you forbearance, where your loan is temporarily put on hold until you get on your financial feet again. If the clock keeps ticking, and your account is 270 days past due, the loan will likely go into default, and then all bets are off.
