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The Ultimate Guide to Dealing With Student Loans You Can’t Afford


More and more student loans are becoming the most problematic debt anyone can own. At some point in the past couple of decade student loans when from a leg up to financial slavery.

There is a lot of information out there about how to deal with troublesome student loan debt and payments. But I thought I’d put together the ultimate no holds barred guide on how to deal with student loan debt that becomes unaffordable.

After working with a number of people and answering questions about student loan debt I have come to the conclusion that if you can repay your student loans according to your original ten year repayment plan that might be the best and most optimum way to repay them since it eliminates them quickly. But to do that you might need to eliminate your other debt to make room for the payments.

Need Student Loan Assistance? Click Here

The Ultimate Guide to Dealing With Student Loans You Cant Afford

Let’s start thinking about what is the best way for YOU to deal with YOUR student loans.

Just because extended repayment programs exist, that does not mean it is best for you to enroll in them.

What is the wrong situation? Well if you are struggling to make your regular student loan payments because you have other financial obligations in the way, reducing those obligations might just be the more reasonable and more logical thing to do, even though to do so might be emotionally hard to face.

By delaying or postponing the rapid elimination of your student loan debt quickly you can easily waste early years that are critical to saving for retirement. Years you can never get back.

In this day and age with there being significant doubt if public programs like Social Security will be able to adequately assist you when you are old and unable to work, your retirement needs to be a primary consideration in dealing with your debt.

Here is an example. Let’s say you graduate from college at 22 with student loan payments of $400 a month. It takes you ten years to payoff your student loans.

Based on a stock market indexed mutual fund return of 12% you would be 32 when you could apply your full $400 former student loan payment to your savings/retirement. Assuming you will retire at age 70, you would have $3,697,717 saved.

If you did not deal with your underlying debt and instead enrolled in an extended repayment program you would be pushing out your ability to save for up to 25 years. In that case your retirement savings would only be $583,389.

By not dealing with your overall situation and postponing the payoff of your student loans you will squander $3,114,328 in retirement savings you could have had.

If you graduate from college and go to work with an employer that will provide matching funds for any investment you make in a company sponsored 401(k) or 403(b) you would be an idiot if you did not participate and take the free money they are offering you.

The Ultimate Guide to Dealing With Student Loans You Cant Afford

Need Student Loan Assistance? Click Here

The Right Mindset to Dealing With Your Student Loans

When dealing with student loan debt that is just unaffordable you have to change your mindset about your debt and reorder it. You have to make your student loan payments one of the top priority debts you pay first each month. If that means you can’t make other payments like credit card debt or other unsecured debt, so be it. You can deal with that by clearing the decks of your other debt by filing bankruptcy if necessary. In some narrow situations it is possible to discharge student loan debt with bankruptcy, read this.

Bankruptcy and Your Student Loans

Despite of what some people believe, it is actually possible to discharges some student loans in bankruptcy.

Discharge Your Student Loans in Bankruptcy

You can click here to find a local bankruptcy attorney and talk to them for free about your specific situation. Get the facts and then you can make an informed and educated decision if bankruptcy is right for you.

Sticking Your Head in the Sand

Failing to pay student loan debt has SERIOUS consequences. Your tax return refunds can be intercepted, massive collection fees of up to 20% of your balance can be added, it will hurt your credit score, and your wages can be garnished without going to court.

Basically nothing good comes from defaulting on your student loans.

Here is where changing your mindset becomes so important. You need to stop thinking of your debt as an emotional responsibility and start thinking about it like a corporation. Read this for more information about what I’m talking about.

BEWARE: A number of student loan rescue companies are popping up and selling student loan assistance for massive fees.

What they do not seem to evaluate is if it is in your best interest to reduce your payment or extend the length of your loans. making the wrong choice here can cost you millions in lost retirement income.

For more information about what to avoid read Student Loan Assistance Rescue Scams On the Rise – Buyer Beware

Need Student Loan Assistance? Click Here

Next, you will need to know if your student loans are private or government backed. One place to figure that out is to access the National Student Loan Data System at nslds.ed.gov and look at those loans listed as government backed loans in the system.

The Ultimate Guide to Dealing With Student Loans You Cant Afford

The National Student Loan Data System (NSLDS) is the U.S. Department of Education’s (ED’s) central database for student aid. NSLDS receives data from schools, guaranty agencies, the Direct Loan program, and other Department of ED programs. NSLDS Student Access provides a centralized, integrated view of Title IV loans and grants so that recipients of Title IV Aid can access and inquire about their Title IV loans and/or grant data.

Private Student Loan Debt

As I write this there is little hope, help, or assistance for people that owe private student loans other than what the servicers and loan holders are willing to offer.

If you have problems with your Sallie Mae student loans you can get quick and professional assistance from the Sallie Mae Customer Advocate office 888-545-4199. Shhh, don’t tell anyone about this number and be sure to be nice to these folks. There are there to help you, not take crap from you.

The option most people leap at is deferment or forbearance. Basically this just means you get some period of time during which you don’t make a payment.

While that seems like a solution, it’s not and commonly just makes the situation worse. You see during that time you are not making your student loan payments the interest charged causes your balances to grow and grow.

If you thought you could not afford your student loan payments before, wait till your grace period ends and the balances are now higher. Yikes!

The Consumer Financial Protection Bureau is looking into passing new regulations to help people find some way to make payments they can afford, but none exist right now. If you would like to file a complaint with the Consumer Financial Protection Bureau about a student loan problem, click here.

Update August 26, 2013

More private student loan lenders appear to be coming around to those people who are permanently discharged and complete the lender Total and Permanent Discharge application. You may have to ask for the Ombudsman at the company holding your loan for the application. If you’ve already been determined to be permanently disabled by the Social Security Administration that determination will greatly help you in seeking the discharge.

Additionally, at least one private student loan lender has confirmed my statements about bankruptcy being as an answer for students who are drowning.

The student loan servicer said, “Many borrowers and attorney’s don’t even try for the discharge as they assume it’s impossible but that’s not actually true. Many courts will provide relief for student loans if this petition is filed and the borrower can show they made attempts to pay the debt, doing so will be an extreme hardship and that their economic situation is not likely to change in the future.” For more information on this see this article.

Federal or Government Student Loan Debt

Probably the bright spot or good news is if you owe on government backed student loan debt. With those loans there are options available to deal with them.

But when considering your options you need to look at all the factors, and not just lowering your payment.

Student Loan Rehabilitation

If you are delinquent on your federal student loan payments a student loan rehabilitation can stop all garnishments and collection activity against you. After making nine consecutive on time payments your credit report will no longer reflect the poor payment history and the loans will show a current status, and you will then become for alternative payment options below that may reduce the payment further. Only defaulted loans can be rehabilitated.

Rehabilitation is a one time event. Once your loans are rehabilitated you will not be able to do this again.

Sadly, only federal student loans are eligible for rehabilitation.

Getting Your Wages Garnished for a Student Loan?

So the answer to getting your federal student loans out of default is actually to just roll your loans(s) into a new Direct Consolidation Loan with the U.S. Department of Education. Once you do that you can instantly elect to enter one of the income based repayment plans where your monthly payment is based on your income or available budget.

Just because you are in default it does not prevent you from consolidating your loans into a new one. When you do that your new loan will be current and reported as current. The old delinquent loans will be paid off. Even a loan rehabilitation won’t erase your delinquent repayment history so what’s the point anyway.

The U.S. Department of Education says “If you want to consolidate a defaulted loan, you must either make satisfactory repayment arrangements on the loan with your current loan servicer before you consolidate, or you must agree to repay your new Direct Consolidation Loan under the Income-Based Repayment Plan, Pay As You Earn Repayment Plan, or Income-Contingent Repayment Plan.” – Source

There are no application fees for a Direct Consolidation Loan, and you may prepay your loan at any time without penalty.

For more information on getting a Direct Consolidation Loan, click here.

Alternative Payment Options

Entering some of the reduced payment programs can have some serious consequences. Most notably it will extend out your repayment up to 25 years and any student loan debt forgiven at the end of that time is currently treated as income and you may have to pay income tax on that forgiven debt just as if you earned it. It can result in a massive tax bill unless you are insolvent at that time.

Below you will find the current special programs available to help with problem student loan debt.

Repayment Plan

Eligible Loans

Monthly Payment and Time Frame

Quick Comparison

Standard Repayment Plan

  • Direct Subsidized and Unsubsidized Loans
  • Subsidized and Unsubsidized Federal Stafford Loans
  • all PLUS loans

Payments are a fixed amount of at least $50 per month.

Up to 10 years

You’ll pay less interest for your loan over time under this plan than you would under other plans.

Graduated Repayment Plan

  • Direct Subsidized and Unsubsidized Loans
  • Subsidized and Unsubsidized Federal Stafford Loans
  • all PLUS loans

Payments are lower at first and then increase, usually every two years.

Up to 10 years

You’ll pay more for your loan over time than under the 10-year standard plan.

Extended Repayment Plan

  • Direct Subsidized and Unsubsidized Loans
  • Subsidized and Unsubsidized Federal Stafford Loans
  • all PLUS loans

Payments may be fixed or graduated.

Up to 25 years

  • Your monthly payments would be lower than the 10-year standard plan.
  • If you are a
    • Direct Loan borrower, you must have more than $30,000 in outstanding Direct Loans.
    • FFEL borrower, you must have more than $30,000 in outstanding FFEL Program loans.

For example, if you have $35,000 in outstanding FFEL Program loans, and $10,000 in Direct Loans, you can use the extended repayment plan for your FFEL Program loans, but not for your Direct Loans.

  • For both programs, you must also be a new borrower as of Oct. 7, 1998.
  • You’ll pay more for your loan over time than under the 10-year standard plan.

Income-Based Repayment Plan (IBR)

  • Direct Subsidized and Unsubsidized Loans
  • Subsidized and Unsubsidized Federal Stafford Loans
  • all PLUS loans made to students
  • Consolidation Loans (Direct or FFEL) that do not include Direct or FFEL PLUS loans made to parents
    Your maximum monthly payments will be 15 percent of discretionary income, the difference between your adjusted gross income and 150 percent of the poverty guideline for your family size and state of residence (other conditions apply).

    Your payments change as your income changes.

    Up to 25 years

  • You must have a partial financial hardship.
  • Your monthly payments will be lower than payments under the 10-year standard plan.
  • You’ll pay more for your loan over time than you would under the 10-year standard plan.
  • If you have not repaid your loan in full after making the equivalent of 25 years of qualifying monthly payments, any outstanding balance on your loan will be forgiven.
  • You may have to pay income tax on any amount that is forgiven.

Pay As You Earn Repayment Plan

  • Direct Subsidized and Unsubsidized Loans
  • Direct PLUS loans made to students
  • Direct Consolidation Loans that do not include (Direct or FFEL) PLUS loans made to parents
Your maximum monthly payments will be 10 percent of discretionary income, the difference between your adjusted gross income and 150 percent of the poverty guideline for your family size and state of residence (other conditions apply).

Your payments change as your income changes.

Up to 20 years

  • You must be a new borrower on or after Oct. 1, 2007, and must have received a disbursement of a Direct Loan on or after Oct. 1, 2011.
  • You must have a partial financial hardship.
  • Your monthly payments will be lower than payments under the 10-year standard plan.
  • You’ll pay more for your loan over time than you would under the 10-year standard plan.
  • If you have not repaid your loan in full after you made the equivalent of 20 years of qualifying monthly payments, any outstanding balance on your loan will be forgiven.
  • You may have to pay income tax on any amount that is forgiven.

Income-Contingent Repayment Plan

  • Direct Subsidized and Unsubsidized Loans
  • Direct PLUS Loans made to students
  • Direct Consolidation Loans
Payments are calculated each year and are based on your adjusted gross income, family size, and the total amount of your Direct Loans.

Your payments change as your income changes.

Up to 25 years

  • You’ll pay more for your loan over time than under the 10-year standard plan.
  • If you do not repay your loan after making the equivalent of 25 years of qualifying monthly payments, the unpaid portion will be forgiven.
  • You may have to pay income tax on the amount that is forgiven.

Income-Sensitive Repayment Plan

  • Subsidized and Unsubsidized Federal Stafford Loans
  • FFEL PLUS Loans
  • FFEL Consolidation Loans
Your monthly payment is based on annual income.

Your payments change as your income changes.

Up to 10 years

  • You’ll pay more for your loan over time than you would under the 10-year standard plan.
  • Each lender‘s formula for determining the monthly payment amount under this plan can vary.

Need Student Loan Assistance? Click Here

Student Loan Forgiveness

There are a couple of special programs to forgive student loans for people that serve in public service or are permanently disabled.

  • Public Service Forgiveness

    Those that may qualify include emergency management, military service, public safety, or law enforcement services; public health services; public education or public library services; school library and other school-based services; public interest law services; early childhood education; public service for individuals with disabilities and the elderly.

    You must be eligible and make 120 monthly loan payments to be eligible for a discharge.

    For more information, click here.

  • Total and Permanent Disability Forgiveness

    You may be eligible for a Total and Permanent Disability (TPD) Discharge on your federal student loans if you are unable to engage in any substantial gainful activity because of a medically determinable physical or mental impairment that

    • can be expected to result in death,
    • has lasted for a continuous period of not less than 60 months, or
    • can be expected to last for a continuous period of not less than 60 months.

    If you are a veteran, you may be eligible for TPD Discharge if you’ve received a determination from the Department of Veteran Affairs (VA) that

    • you have a service-connected disability or service-connected disabilities that are 100% disabling or
    • you are totally disabled based on an Individual Unemployability determination.

    For more information or to apply, click here.

Federal Student Loan Consolidation Calculator

The calculator below is just a bit too big for this page but you can scroll side to side using the bars around the calculator.

If you have multiple federal student loans, you can consolidate them into a single Direct Consolidation Loan. This may simplify repayment if you are currently making separate loan payments to different loan holders or servicers, as you’ll only have one monthly payment to make. There may be tradeoffs, however, so you’ll want to learn about the advantages and possible disadvantages of consolidation before you consolidate.

This calculator, from the Department of Education, will help you to see what your monthly payments might be if you consolidated and enrolled them in these special programs.

The Ultimate Guide to Dealing With Student Loans You Can't Afford by

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About Steve Rhode

Steve Rhode
Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
  • Aileen

    Hi Steve,

    I am a student who is about to graduate with my bachelors in May. I will be a working full time teacher in either elementary or secondary in August.

    All of my loans are Direct Stafford Unsubsidized and Subsidized.

    Under the forgiveness program, it says that I can get up to $5000 after I pay 120 full payments. Is this the only forgiveness program I qualify for?

    I know I should consolidate them, but what else would you suggest I do for my loans since between May – August, I do not have an income?

    Thank you so much,
    Future Teacher in Texas

  • Chasity

    Steve,
    Can you suggest any help with student loans that are in default? Thank you for the useful information thus far.

    • http://GetOutOfDebt.org/ Steve Rhode

      The article above contains a lot of information about this.

  • tim

    HI steve,
    I recently filed for Bankruptcy, my lawyers told me that my Private student loans were not even considered, my dad consigned for 3 of them and my mom for the forth, currently im unemployed searching still for a job. The loan repayments are over 900 a month… When i filed for Bankruptcy i argued with my laywer saying they should be able to cancle or even settle on some of the loans, he replied that the loans wont be in my name however might go to the cosigners and theres nothing he can do… The burden on these loans now are so strong my parents might be losing their house. My bankruptcy finished 3 days ago and i come to find out that 1 student loan is stil in my name however the 3 big ones arent. I tried calling the AES(42kish) and wells fargo(37kish) however neither would talk to me about anything still even tho my bankruptcy is over with. My question is i have no idea what to do now… I have almost 95k in student loans that were unaffected by my Bankruptcy. I have called and pleaded with wells fargo for lowering the interest rate(currently at almost 13%) which didnt and also AES which did lower from 12% to 6% for hardship. However still the damage was done, interest alone on these loans over the last 5 years in college made them almost double… Is there anything i can do to besides find a job that pays me enough to actaully even pay these things. I worked in retail while in college and ive been dedicating all my time to finding a good job or any job at this point to help pay these for my parents sake.
    pls help
    ty

    • http://GetOutOfDebt.org/ Steve Rhode

      When it comes to private loans with cosigners the lenders will go after the cosigners. That’s why they asked for cosigners.

      Your bankruptcy attorney could have gone with an adversary proceeding as part of your bankruptcy to remove some or all of your liability but that would have no impact on the cosigners.

      You will either need to persuade your parents to default and how to negotiate some solution before or during the suit against them or even consider a subsequent chapter 13 bankruptcy which will grow the remaining balances but stop collection efforts against them. Finally, you might want to consider http://getoutofdebt.org/student-loan-help-discharge-eliminate-settle-or-adjustment-assistance

  • Guest

    What are your thoughts about entering into the extended repayment plan, but making high payments as if I was in the 10 year standard repayment plan (or even more some months)? I would do this to pay more money towards my principal and as a safety net so if I came into economic hardship or wanted to save for a large purchase I would not be pressured some months to make such high payments for 10 straight years. FYI I am 116,000 in student loan debt, make 75,000 a year, have roughly 800 dollars in expenses each month, and I am 26 years old.

    • Guest

      ^^my expenses was not including my student loan payments

    • http://GetOutOfDebt.org/ Steve Rhode

      Is this federal or private student loan debt? On face value that makes sense. I’ve not seen a student loan that has a prepayment penalty.

  • omid

    I have a private student loan which I couldent make payment in last 2 years. there is several thousand dollars interest on that right now. the company(sallie mae) said I need to pay this interest before start talking about any help. they already reported on my credit and made my score bad. I don’t want to do bankruptcy. The good news is recently I got a new job and I will be able to make a payment. but I don’t want to pay only for interest. so i’m looking for refinance and pay the principal to them. but the problem is thy already distroid my credit. do you know any where or any program that can help me

    • http://GetOutOfDebt.org Steve Rhode

      You should follow the guide you commented on to determine if your Sallie Mae loans are subsidized and eligible for programs from the Department of Education.

  • KC

    Hi Steve,

    I just came across your site and deeply appreciate it. I’ve been getting very conflicting information about income based repayment. You have some of the clearest information but I’m still a little confused about the tax penalty on the interest. Does “can result in a massive tax bill” mean it absolutely will? Several of the other articles on the “tax bomb” of IBR use phrases like “there is a possibility,” and “people might face…” How solid is our knowledge of this? Also, you wrote that you could face the massive tax bill unless you’re insolvent at that time. What shape would that take? Another article said the tax bill would have to be paid immediately, no exceptions or delays. Thanks for your help! And, again thanks so much for your compassion and the informative site.

    • http://GetOutOfDebt.org Steve Rhode

      According to the IRS, “Generally, if you are responsible for making loan payments, and the loan is canceled (forgiven), you must include the amount that was forgiven in your gross income for tax purposes.”

      Also see http://blog.credit.com/2012/04/cancelled-student-loan-debt-creates-tax-nightmare/

      Hopefully the law will change by the time the debt is forgiven. But because this problem exists it is why I suggest if other debt is in the way and preventing you from making your regular and full student loan payment then bankruptcy is a consideration because the other debt will be forgiven tax free and you can get back to paying off the student loan in ten years.

      • KC

        Thanks Steve! Yes, this is why I’m so glad I did a little research. IBR is a valuable tool but it’s good to know there is a serious downside so I can try to avoid using it too long.

      • http://GetOutOfDebt.org Steve Rhode

        It’s better to use because it is the best solution instead of just assuming it’s a magic fix.

        I’m glad the article helped.

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