Although the economy has improved and unemployment is low, more student debtors are falling behind on their federal student loans. After three years of declines in late payments and with no clear explanation, experts are not sure why especially since millions of these borrowers are enrolled in generous income-based repayment plans.
As of June 30, 18.8% of Americans are at least 31 days late on their student loan payment according to the U.S. Department of Education ticked up to percent . Approximately 3.3 million Americans have gone more than a month without making a required payment on their Education Department loans. This rise in borrowers falling behind on their student loan payment have economists and government officials scratching their heads. It is difficult for them to explain this rise in late payments since normally when the U.S. economy has improved, it means richer borrowers that can afford their bills. Under income-based repayment plans, that were created to help borrowers who can’t afford the typical monthly payment, debtors can remain in good standing as long as they annually document their earnings even if that number is 0. Today, 4.8 million student borrowers take advantage of these plans which makes the rise in delinquency rates more surprising. There are two possible explanations, according to the Education Department officials. The first is that the delinquency rate could simply be leveling off after years of steady declines or it’s due to the number of borrowers that couldn’t afford their new monthly payments. Income-based repayment plans are only good for one year and then borrowers are required to annually submit updated earnings information by the deadline. Many of these borrowers effectively fell out of income-based plans over the past year. The borrowers that fall out of income plans often become delinquent on their debt because they are no longer making payments based on their earnings. Many find there is a simpler reason: many Americans just can’t afford their monthly payments. There are some warnings signs that a growing share of consumers are struggling to pay their bills. Despite a strengthening economy, there’s no question that millions of student loan borrowers continue to struggle. Another issue is the increase in parents taking out Parent PLUS loans to pay for their child’s education. For more than 30 years, the federal Parent PLUS Loan for undergraduate students has helped parents bridge the gap between the financial aid their children receive and the total cost to attend college. Once a relatively small program, Parent PLUS loans have grown steadily over the years as college costs have increased and home prices trended downwards. Many American parents turned to home equity loans, which was a prime competitor to Parent PLUS loans. However, as home prices sank during the last recession and many families found themselves upside down on their mortgages, many parents could not get a home equity loan and turned to Parent PLUS loans for their child’s education. The National Center for Education Statistics reports that 20 percent of parents took out Parent PLUS loans and around 3.3 million parents are repaying more than $75 billion in outstanding Parent PLUS loans. Due to the fact that many Generation Xers are sending their children to college while still paying back their own student loans, the need for Parent PLUS loans are on the rise. In fact, 35% of the education debt belong to Americans over 40 years old. In some of these situations, parents are still paying off their own student loans when taking out loans for their children. The federal Parent PLUS loan can be contributing to the rise in falling behind on student loan payments. For years, controversy has swirled over whether the Parent PLUS loan is actually unfair to the borrower. These loans are not need-based and parent qualify regardless of the amount as long as the parent doesn’t have adverse credit. The parent’s ability to pay or debt-to-income ratio are not taken into account when applying for the loans that can cover all of your child’s college expenses minus any other loans or grants their child receives. Parent PLUS loans can be a lifeline for low- and middle-income families who have no other way to afford college, while others argue that the loans have become a debt trap for too many that can be impacting borrowers falling behind on their student loan payments. Further, Parent PLUS loans have higher interest rates and less generous repayment terms than federal student loans. Some even think that the colleges’ access to an unlimited supply of federal Parent PLUS funds allows them to drive up tuition. Due to private loans having tougher credit criteria, Parent PLUS loans became many American parents only option to help provide the ability for their children to have a higher education. However, many believe that credit counseling and information for parent borrowers before they borrow, and borrowing caps on Parent PLUS loans will help parents borrow less and be more capable of making their student loan payment without falling behind. Although the economy is improving and unemployment rates are low, borrowers need to know what they are getting themselves into before choosing to take out student loans. Apply for an income-based repayment plan to minimize your payments. Parents should also know exactly what their payments will look like before turning to Parent PLUS loans and not borrow more than what they can afford. This may mean your child has to work while attending college or attending a more inexpensive college, but make sure you can repay the loan before you commit to it. With college prices on the rise, many students are turning towards community colleges for their first few years old college. Often, it is not their first choice, but it helps avoid borrowing more money than you can afford to repay.
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If you are ready to invest, take the time to seek a solid financial advisor that will assist you in your financial goals. Research your financial advisor options and if something feels off, keep looking. This is your financial future and you should find the right fit for you and your financial goals. |
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Larry Lerner
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Annuities are insurance products backed by the claims-paying ability of the issuing company; they are not FDIC insured; are not obligations or deposits of, and are not guaranteed or underwritten by any bank, savings and loan or credit union or its affiliates; are unrelated to and not a condition of the provision or term of any banking service or activity.
By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product.
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