Student loan debt 101: Avoid programs like SafeStart
Filed under: College, Debt, Student Loans
In a piece in The New York Times, Ron Lieber writes about SafeStart, a new program for student debtors that I recently discussed here. The way the SafeStart program works is this: A student (or more likely his parents) pay a fee of $40 to $70 for every $1,000 borrowed through the federal Stafford loan program. Then if the student runs into problems paying off the loan and can provide proof of hardship, SafeStart will make the payments on the loans for 36 months. The offer only applies for the first 5-years of post-graduation life and borrowers only have A chance at a 60-month interest free loan at any point during the first five years of graduation sounds like a very, very low return for an origination fee of 4% to 7%. And what if you can't pay the loan back within 60 months?
But the real reason that SafeStart is such a horrible idea is that Income Based Repayment already allows students with little or no income to make little or no federal student loan payments -- without a 4% to 7% origination fee or a requirement that they pay the money back within 36 months.
If SafeStart applied to private student loans, it might in fact be a very valuable service -- although the default rate on private loans would likely make it unprofitable. But in its current form, it's very expensive and provides something less valuable than what is already available for free.
It's just another example of services offered parents and students who haven't done their homework.
Reader Comments (Page 1 of 1)
8-17-2009 @ 12:58PM
Carlo Salerno said...
Hello Zac,
Your assertion about the length of the SafeStart repayment period is factually incorrect. Borrowers have 60 months, not 36, to repay their no-interest line of credit.
I would kindly ask that you please correct this information in your blog post.
Sincerely,
Carlo Salerno
Prinicipal
BridgeSpan Financial LLC
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8-18-2009 @ 12:48AM
Ray said...
Zac,
Band-Aids are good when you are bleeding. Programs like SafeStart have their place in the market place. This program certainly addresses the immediate needs for Young Adults faced with financial hardship.
I currently reside in Pittsburgh, and there is a program called SponsorChange.org for young adults with student loans that really resonates with me and has garnered a lot of support locally. The program is as focused towards benefiting young adults in a more comprehensive and strategic approach then any other effort I have heard, short of national policy advocating for making higher education affordable for everyone.
The program conducts leadership training and connects young professionals to non-profits where they carry out flexible consulting projects and lead service projects usually on weekday evenings and weekends. The young adults receive monthly direct student loan stipends for their service leadership, in addition to increasing their network, and gaining valuable leadership development. Some participants have cited their experience with the program has made them more attractive candidates for management positions at their workplace.
Non-Profits benefit from leveraging the hard skills and volunteer management of the young adults. Lastly businesses have benefited not only from great company PR, but also employees with formal leadership training, community relations, and employee recruitment and retention.
The program is financially supported through a fee accessed to the hosting non-profit and business. In addition support has come from foundations and individuals who prefer to directly sponsor a young adult.
Perhaps a followup story should be run about programs such as this that address the problem of indebted young adults using a more comprehensive approach.
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10-01-2009 @ 3:53AM
Robin Smith said...
This is a really nice blog regarding debt and its procedure. I was searching for this information from so long ago. Thanks a lot for posting this.
http://studentsblog2.blogspot.com/2009/10/tips-on-how-to-avoid-debt.html
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11-04-2009 @ 6:54AM
David hogard said...
Set goals on useful things you want to have and try to avoid spending on useless stuff. After a short period of time you will see that it's an easy way of getting more valuable things instead of having a lot of junk.
Don't have credit cards unless you are able to pay at least 80% of your monthly balance, otherwise the compound interests will keep growing and you would never pay your total debt.
Keep this line in mind: I own the money, it doesn't own me.
And the most important thing: avoiding debt and having a personal budget is not something you make from one day to the other, you have to change your mind and be disciplined with the rules you've set to yourself.
http://letterdash.com/saver/avoiding-dept-even-if-you-are-young-and-not-earning
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