Good Reasons to Love Those Darn Student Loans

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Student loansWith student loan default rates rising due to persistently high unemployment rates, it's easy to vilify the seemingly endless monthly payments that follow graduation.

But take a closer look, and you'll find that the news about student loans is more good than bad.

Higher Learning = Higher Earning

In November 2011, unemployment for people ages 20 to 24 who didn't attend college reached 20.1%, compared to 6.3% for college grads. Given my wanderlust and penchant for interesting but low-paying jobs, I know without a doubt that I would be one of the unemployed had I not completed my undergraduate and graduate degrees, even if I had to take out loans to do it.

Patricia Christel of Sallie Mae (SLM) says my situation is not unusual. "People with college degrees continue to earn more and have higher employment rates than those without, especially in this economy," Christel says. "On average, young adults with a college degree are about two and a half times less likely to be unemployed than those who did not go to college."

Don't Be Fooled By Statistics

Federal loans are currently defaulting at an 8.8% rate. But that's the default rate only for federal student loans, and it's an average.

Look at certain subsets of the total group of borrowers, and you'll find factors that cause the rate to vary dramatically: In 2009 (the latest figures available), the default rate for borrowers at public and private schools who completed four years of education hovered around the 5% mark, and was less than half the risk of those who completed two to three years. At for-profit colleges, on the other hand, the numbers were profoundly different: A whopping 15.4% of borrowers who completed four years (or more) defaulted, not so different from the 14.8% of borrowers who only completed two to three years of their studies.

For loans negotiated through a private lender, the default rate tends to be much lower. For Sallie Mae's private education loans, the most recent default rate was 3.7%, down from 5.4% from a year ago. Kirk Bare, head of education financial services for Wells Fargo (WFC), says although Wells Fargo doesn't comment on specific default rates, the bank's default rate is significantly lower due to strict lending practices. "We approve applications where we believe the borrower has the ability to repay the loan according to its terms," Bare says.

Deferral vs. Default

The rising rate of default isn't hard to understand: Graduating into a hyper-competitive employment environment weighed down by student loan IOUs isn't what most incoming freshman had in mind for their future.

Still, there are better ways to deal with the debt -- before, during, and after graduation -- than default.

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I paid for my undergraduate education through a combination of work-study, staff benefits (my mother worked at the school I attended), and of course, loans. Like many new grads, I had difficulty finding a job right after I graduated, and my early resume did nothing to ease my parents' minds that I would eventually be a highly functioning, productive member of society.

After a year of questionable jobs, I went to graduate school. That enabled me to defer my undergraduate loans, which were just coming due, until after I completed my master's degree, and take advantage of the graduation grace period for the second time. Then, I spent time in a public service program, which deferred the loans again, and offered me a small grant at the end to help with their repayment.

Jane Glickman of the Department of Education says your goal should be to work with your lender. "The Education Department offers numerous repayment plans to fit a borrower's needs," Glickman says, "including ICR -- income contingent repayment -- that is based on income." If one plan isn't working for a borrower, Glickman says there's no limit to how many times a borrower can change plans.

Looking back, it was almost absurdly easy to defer the loans for worthwhile reasons. Yes, the loans continued to accrue interest, but the 3% I was being charged was worth it for the chance to go to graduate school, or do public service.

Establishing Positive Credit

There's one other reason to stay current on repaying your student loans: A good record will help you reap long-term financial rewards. Despite my less-than-stellar early history with credit cards, my loans helped me establish a record of consistent, on-time payment on a non-revolving balance. I became creditworthy, the rewards of which I still reap to this day.

Now in my 30s, I've paid off the last of my credit card debt and live the life of the urban renter. Since a mortgage, and the long-standing credit it helps establish, isn't in my near future, I'm grateful that my student loans helped me establish credit at a time in my life when that wasn't something I took seriously. With their final payments in sight, I'm almost sad to see them go.

Almost.

Molly McCluskey does not own shares in any of the companies mentioned. Follow her on Twitter @mollyemccluskey. The Motley Fool owns shares of and has created a covered strangle position on Wells Fargo.



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