Student Loan Resources Money Mondays

Mellody Hobson answers some of the “Text Tom” questions our listeners have sent in.

Today, let’s focus on the ones that came up around saving for college.

“How do companies work that help with student loans in default and back taxes owed? They’re very popular and I am wondering if they’re real or a scam and possible alternative solutions.”

Let’s start with the bad news: Recent college students are defaulting on federal loans at the highest rate in nearly two decades, reflecting “crisis” levels of student debt and a weakened economy with limited employment prospects.

One in 10 recent borrowers defaulted on their federal student loans within the first two years, the highest default rate since 1995, according to annual figures made public last month by the Department of Education.

Default can trigger serious debt-collection methods that include fees, wage garnishments, and withheld tax refunds from the IRS.

When it comes to companies that work with loans in default or back taxes owed, it really depends. There are many who are reputable, but the bottom line is that private companies who deal with debt consolidation are not non-profits: They’re charging fees and/or interest to help you, so if you have the wherewithal to attack the red tape on your own, buckle down and do it. You can consolidate your loans on your own if you contact the Department of Education. It’s just about getting organized and communicating, and it starts with a simple phone call.

As for alternatives, a lot of people aren’t aware that the government has programs that cap monthly payments based on borrowers’ incomes. The two-year default rate on student loans has doubled since 2005, and millions of potentially eligible borrowers appear unaware of programs that help borrowers manage debt burdens and avoid default.

The administration’s three debt-relief measures are called Income-Based Repayment, Income-Contingent Repayment and Pay As You Earn. These programs shouldn’t be expected to avert every default, but many of the 600,000 borrowers who defaulted last year should have been able to benefit. Contact the Department of Education for more information about how to enroll.

Well, one of the questions was about the billions of dollars in scholarship money that supposedly goes unclaimed. That’s an urban myth. The number of unused scholarships is actually quite small.

Yes, there are billions of dollars in scholarships out there for the taking. Start at fafsa.gov, which stands for Free Application for Federal Student Aid. It’s grant money the federal government will give you if you meet certain income qualifications.

Next try blackstudents.com, a free scholarship search geared for African American students. Fastweb.com is currently the largest scholarship search engine on the internet. Its database contains 1.3 million scholarships worth over $3 billion, so you can’t afford to NOT look here. Scholarships.com, collegeboard.com and collegeanswer.com are also great resources.

As you search, you should be sure to look in your own community at churches, synagogues, and even parents’ employers who might sponsor college scholarships. This is one of those times when all that community service can pay off—Sponsors like students who have demonstrated a long-term commitment to volunteering.

“Are there scholarships for grad school?”

There are! Scholarships for graduate students aren’t as common, and most of them are a lot more specific, concentrating on specific industries and/or students who meet certain criteria, but with some perseverance, aspiring graduate students can find opportunities. Start with your alma mater, then talk to the financial aid office at the school you’d like to attend. Next look into career-specific scholarships—from nursing to architecture, there’s someone out there who wants to help. Professional organizations you belong to could also help. And there are unique grant opportunities for women, the military and minorities.

Many grad students rely heavily on research fellowships or assistantships. Finally, if you’re employed, check with your employer to see what kind of financial assistance your company may offer employees who want to pursue an advanced degree. Some firms will cover up to 1oo% of tuition fees.

Mellody is President of Ariel Investments, a Chicago-based money management firm that serves individual investors and retirement plans through its no-load mutual funds and separate accounts.  Additionally, she is a regular financial contributor and analyst for CBS News.