Like millions of Americans, Nancy McMenamin of Winters, Calif., went back to college to launch a new career. After five years, she acquired a master's degree in mental health counseling. And $27,000 in student loan debt.
Now 74, McMenamin has been paying down that debt for nearly 20 years. Because of several deferments she took over the years, her overall debt has notched upward, to $36,000.
She's not delinquent but is anxious about her ability to repay in full, especially given the hefty interest rate on her Sallie Mae student loan: 9 percent.
"What I really want is to pay it off as soon as possible, but the interest rate is horrendous," says McMenamin, who was laid off in August from a part-time job with a Yolo County, Calif., mental health office. "What can I do?"
Especially in a stressed economy, student loan debt is a major issue. It's not uncommon to see students saddled with thousands in loans for undergraduate and graduate school costs.
Sallie Mae is one of a number of lenders that issue federal student loans. During fiscal 2007-2008, the U.S. Department of Education said 14.8 million federal student loans were issued, totaling $68.2 billion. Sallie Mae, a private student lender, is managing $178 billion in loans for 10 million customers, including McMenamin.
The bad news is that McMenamin's 9 percent interest rate is pretty well locked in. Congress sets the terms on federal student loans for Sallie Mae and other private lenders, such as banks or credit unions. Loans can be consolidated, but once that's done the interest rate is set.
"Often, Sallie Mae faces cases like this where we'd love to be able to help," said Conwey Casillas, a Sallie Mae spokesman. "But by law, we're not given that option."
What's especially frustrating for student borrowers is the wide disparity in interest rates. Because they're pegged to Treasury bill rates, interest rates on federal student loans dipped as low as 2.8 percent in 2004-05. Currently, rates on Stafford loans like McMenamin's are set at 6.8 percent (6 percent for those with documented financial need.)
Casillas and others acknowledge that the variable rates have created "inequality" among holders of student loans.
But Sallie Mae and other federal loan lenders do offer ways to lessen the monthly burden.
Borrowers like McMenamin can lower their monthly payment - sometimes by half. Or they can request an extension on the standard 10-year repayment terms.
And in July, new borrowers facing economic hardships can apply for an "income-contingent" repayment plan based on income, family size and other factors. After 25 years, the loan would be forgiven.
Another option, which McMenamin is using, allows borrowers to defer payments because of unemployment or other economic difficulties. After being laid off in August, she obtained a six-month deferment on her payments, which resume in February. McMenamin also was able to drop her monthly payment from $376 to $281, due to her reduced income.
The downside to all the repayment options: The interest continues to pile on. In McMenamin's case, her loan amount is now $36,000, due to accumulated interest.
What would a financial planner advise?
"I really admire that she is owning up and not trying to get out of the responsibility of paying the loan," said Betsey Archer, a longtime Sacramento, Calif., certified financial planner. "Unfortunately, in today's marketplace, her ability to refinance the loan is very limited, especially without a job."
And it may not actually help the situation. As an example, Archer calculated that if McMenamin were able to obtain a five-year bank loan at 6 percent, her payments on the loan would be $692.50 a month, more than double what she is paying now.
And because McMenamin and her husband do not own a home, they can't tap any home equity to pay off their entire loan. (A federal student loan can be repaid in full at any time without penalty.)
"Her best option from a cash-flow standpoint may be to keep paying the $281 month until her economic situation changes," said Archer.
Borrowers like McMenamin are advised to contact their lender or the U.S. Department of Education (www.ed.gov/finaid) to see which repayment options work best for them.
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