What do more than 70% of recent college grads have in common?
A whole lot of debt. About $28,000, on average, to be exact.
Needless to say, that’s a big issue for many of us. So yesterday, President Obama announced a new initiative to make it easier for people with student loans to pay back their debt. He signed the “Student Aid Bill of Rights” that called for loan providers to provide clear information about what you owe, how to pay it back, and how to avoid crazy fees. Obama also asked government agencies to consider allowing consumers to file for bankruptcy on student loans.
Since this is a big topic that affects many of you lovely readers, I thought I’d break down the nitty gritty of what this actually means.
How does this affect the loans I have today?
Not by much. Contrary to the nifty name, this was more of a wish list than a legal bill. President Obama set in place a task force to create improvements and greater consumer protection under the student loans system (public and private), which should take place over the next year.
Are there any details or dollar amounts around the new laws or fees?
I can’t repay my loans. Can I file for bankruptcy?
Not at the moment, but it sounds like this initiative may allow student loan holders to file for bankruptcy on loans they can’t repay starting next year.
That said, filing for bankruptcy should be your last resort. Bankruptcy will kill your credit rating, making it extremely difficult to get a credit card, finance a car, or get a mortgage for a house purchase.
Overall, this is a great step for student loan holders. The amount of student loan out there – $1 trillion! – I’ll support any policies to better protect and educate loan holders. That said, you’ll have to stay tuned over the next year to see a tangible impact (if any) from this initiative.
In the meantime, you can make a few steps to help combat your student loans. For one, consider any income you get outside of your normal paycheck as your debt fund. That means your proceeds from eBay purchases, your year end bonus, your tax refund, etc. After all, you weren’t likely counting on this surprise income to pay your normal expenses anyways. By adding extra to your debt payments instead, you can significantly minimize the interest you pay.
Another consideration is to focus on both your highest interest and your smallest debts. It makes sense to pay off high interest debts first, since interest means you’re repaying money you never actually saw. After those are paid off, Dave Ramsey has a snowball theory that paying down your smallest debts first helps you build confidence and momentum to pay everything off more quickly.