It seems I can’t emphasize enough to American student borrowers about #DirectLoans and #IBR @owsstudentdebt

As you might know, the Occupy Movement is now in what is being referred to as “Second Stage”. As the police in various towns are shoving the Occupiers out of the town squares and city parks, they are probably doing them all a favor, because it’s cold outside. Plus, it makes it a lot easier to do social media when you aren’t out there shaking like a leaf, and making sure the water stays out of the tent.

On strong element of the Second Stage is the student loan reform movement. As someone who had borrowed, starting in 1983, I have keenly followed this. Many of these young people–and plenty of middle aged ones–are stuck in the student loan debt trap. The activists on this issue have been somewhat active for the past seven or eight years, but now things are ramping up.

It’s clear that a large portion of student loan debt outstanding will probably never be paid. It’s just like the mortgages, only there’s no hard asset involved.

The only difference with the student loan debt is you can’t walk away from it. (I will have a post about that, sometime later this month, involving the U.S. attorney’s office in New York going after a lawyer who defaulted didn’t pay for ten years (1998-2008) and then defaulted.)

The one positive is that, for most government-guaranteed debt, it can be rolled into the U.S. Department of Education’s Direct Loan program, which has been around since 1995. Most student loan borrowers still don’t know this. The younger generation only has the choice of Direct Loans if they take a federally-backed one. (If they go with private loans, they are on their own.)

With a Direct Loan, you almost always have the option of “Income Based Repayment” if you are on low-to-moderate income. This payment formula exempts a certain amount of your earnings from the equation. Then, it asks for 15% of the “adjusted gross income” above that amount, as a payment. (For students currently in school, without loans before 2008 or so, they can pay back the same way, except at only 10%.)

This is effectively a 15% surtax on your income, above that exemption amount.

As a quick example, if you make $30,000 as a single person, the first $16,500 or so is exempt. The amount above that, $13,500, is in the government’s sights. They will want $2025 as an annual payment ($168.75 a month). If you cannot manage this, you ask for a forbearance, and pay what you can.

Student lending companies that still hold federally-backed student loans (like Staffords, etc.) are very sloppy about this new income-based repayment. Word has it, that many people who do qualify are being given the run around, because Sallie would rather squeeze the borrower than help the borrower manage the loan. This is olde style creditor games at work.

My advice to people is always move your federally-backed loans to Direct Loans. Under no circumstances default.

Student debt relief is a two-step process. What has to happen first, is that all the loans people have must be transferred over to Direct Loans. I don’t understand why TICAS and some of the other established players aren’t encouraging this—and I would expect ANY credible Occupy group to be sending out that message 24/7.

Secondly, once all the loans are with Direct Loans, THEN comes the lobbying for loan modifications that reflect the value of the education, in terms of what it actually nets you on the job market.

The idea that you don’t like the student loans, and so therefore default, is really stupid. I met a couple of people in Japan who did this, and I think it’s only a matter of time before a U.S. attorney is sending them a summons and complaint.

Don’t default–use DIRECT.