No Reward for Prodigal Sons and Daughters

When I defaulted on my student loans back in the mid-90's, I was given the opportunity to make things right. William D. Ford agreed to purchase my student loan debt, and promised that if I didn't miss a payment for a year, they would remove all related derogatory items from my credit reports. I paid on time for a year, and they kept their promise. Having those negative items expunged from my reports was a huge deal for me, because my defaulted debt was holding me back financially.

Today, students who made similar mistakes with their student loan debt and who are now looking to rehabilitate their loans are hitting a brick wall. These students aren't able to get the negative marks on their credit reports removed because the current credit crisis has caused the market for student loan debt to dry up. Details of this issue can be found in this NextStudent.com press release. Here's a clip:

"...Before a defaulted borrower's student loan can be considered fully rehabilitated and the borrower's credit and loan status returned to good standing, the guarantor must resell the borrower's college loan to a new lender. But in the current credit freeze, no lenders are buying.

In November, the sole commercial bank still buying rehabilitated student loans announced it would no longer do so. Although a few non-bank entities may still purchase some of these college loans, 19 of the nation's 35 guarantors currently have no buyers for their student loans.

Each month, the Chronicle reports, $150 million in student loan debt is being added to the growing backlog of student loans awaiting rehabilitation.

Consumer advocates and guarantors are concerned that if something isn't done soon to help move these student loans out of default and restore borrower credit, borrowers may get tired of remaining in default and stop making payments on their student loans altogether -- which would lead to even more, snowballing defaults..."

But help is on the way. The Federal Reserve's Term Asset-Backed Securities Loan Facility (TALF) program is now greasing the wheels of the credit markets by providing the funds necessary to revive the market for all kinds of debt, including student loan debt.

My prayer for the TALF: Godspeed.

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Was Paying Off My Student Loan Debt A Bad Idea?

Back in January 2008, I decided to payoff my student loan balance and be done with it. At the time, I wasn't too worried about draining my savings account, since business was good, and I felt that my business was more or less recession proof. I was paying 8% interest, and there was no way for me to consolidate to get a lower interest rate, because I had already consolidated with William D. Ford. (FYI: you can only consolidate student loan debt once, unless you go back to school and get more student loans.)

Here's what prompted me to payoff my student loan debt:





The above is a clip from the 2007 tax statement sent to me by the folks at William D. Ford. As you can see, since I consolidated, the amount I paid toward the principal was about the same as the amount I paid in interest. That just boiled my blood, and made me a little bit sick to my stomach. I'd been paying interest my whole life, and I was tired of it. This student loan debt was the only debt on which I was paying interest. I had an opportunity to rid my life of interest payments, so I took it.

Now, I'm beginning to wonder if paying off my student loan debt was a good idea. Yes, I know, you're asking yourself, "how the heck can paying off a huge debt be a bad idea?" It can be, if, like me, you are now working with a depleted savings account. I have learned -- the hard way -- that my business is not recession proof. In fact, I have learned that it is in fact very sensitive to economic conditions. This is the first time the economy has taken a hard spill since I began expanding my business back in 2003.

I had paid off my car note a few months previous to paying off William D. Ford, which did not help at all. At the time, I was very confident in my ability to maintain a steady and strong income. I got cocky, and now I'm paying the price.

Here's are the other directions I considered:

• Keep paying ~$110 per month with 8% interest. Balance would be reduced to $0 in about 500 years.
  
  
• Increase my monthly payment to reduce the time it will take to bring the balance to $0, and reduce the total amount I would have to repay. Of course, with this option, I still would have been burdened with an 8% interest rate.
  
  
• Transfer the debt to a 0% credit card. A decent option, but with 2 significant negatives 1) Once the interest-free period ends, there is no way to guarantee that I'd be able to find another favorable 0% credit card deal to which I could transfer my balance. 2) Balance transfer fees. 18 months ago, finding a 0% credit card that doesn't charge a balance transfer fee was easy. With the onset of the economic slowdown and the global credit crunch, feeless deals have all but disappeared.
  

So, yeah, I'm hurtin' right now, but I'm still very glad that the debt is gone. I cannot put into words how satisfying it was to call William D. Ford to check my balance, and hear this.

So, how am I going to manage?

First, I'm going to petition the family court to have my child support payments reduced. My monthly payment is nearly $700 for one child, which is way too high considering my current income. The mother of my child and I recently canceled plans to send our daughter to an expensive, private school. The fees were just too high (~$8,500 per year.) That's too much for a child going into Kindergarten. Even if my current income was the same as it was one year ago, when I was making almost as much as a U.S. Senator, I'm 90% certain that I would have decided against sending her to that expensive school. Fact is, she's doing great in the subsidized private school she's attending now. She also goes to Kumon twice per week, which I can recommend to any parent who can afford the $200 per month (she is way ahead of her peers in math and reading, thanks in no small part to Kumon.)

Second, I'm going to cash out my whole life insurance policy and get a term life policy. Suze Orman has finally convinced me that whole life insurance is not the best way to go.

Third, I'm going to cutback on my food shopping. Thankfully, I stocked up on meat during the good times. I now have a deep freezer full of high quality meat that could last a year or so -- literally!

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If you can payoff your student loans, I say do it. Just don't payoff your car note within the same time frame! Comments welcome.

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