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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.

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

change your mind

Do You Need Help Figuring Out What to Do for Your Student loans? 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.

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

Do You Need Help Figuring Out What to Do for Your Student loans? 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.

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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!

See also  Student Advocates Turned Me Over to Titan Home Loans

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.

Administrative Wage Garnishment and 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 a series payments based on a a reasonable and affordable payment plan the loans can be rehabilitated and any wage garnishment will stop.

If your wages were being garnished under an Administrative Wage Garnishment, after five qualifying payments in the new rehabilitation program, the garnishment would stop.

Once rehabilitated your credit report will no longer reflect the poor payment history and the loans will show a current status.

Once your loan is rehabilitated, you may regain eligibility for benefits that were available on your loan before you defaulted.

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

Many people in default find they just can’t afford the current rehabilitation loan payments. But as of July 1, 2014 the formula for calculating the rehabilitation payments is changing to make them more consistent and affordable for consumers.

Here is what the new regulation says:
“…once the rehabilitation discussion has begun, initially considers a borrower’s reasonable and affordable loan rehabilitation payment amount to equal 15 percent of the amount by which the borrower’s Adjusted Gross Income (AGI) exceeds 150 percent of the poverty guideline amount applicable to the borrower’s family size and State, divided by 12. If the amount determined using this calculation is less than $5, the borrower’s monthly rehabilitation payment is $5.”

And the use of the AGI is important as well. Your AGI is calculated as your income minus allowances for exemptions or itemized deductions. It can be a number much lower than your income.

Sadly, only federal student loans are eligible for rehabilitation.

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.

Before you leap to join one of the income driven programs below, be sure to read Why Income Based Student Loan Payments Can Be a Terrible Trap.

Overview of Direct Loan and FFEL Program Repayment Plans

Repayment Plan

Eligible Loans

Monthly Payment and Time Frame

Eligibility and Other Information

Standard Repayment Plan

  • Direct Subsidized and Unsubsidized Loans
  • Subsidized and Unsubsidized Federal Stafford Loans
  • all PLUS loans
  • all Consolidation Loans (Direct or FFEL)

Payments are a fixed amount.

Up to 10 years (up to 30 years for Consolidation Loans).

All borrowers are eligible for this plan.

You’ll pay less over time than under other plans.

Graduated Repayment Plan

  • Direct Subsidized and Unsubsidized Loans
  • Subsidized and Unsubsidized Federal Stafford Loans
  • all PLUS loans
  • all Consolidation Loans (Direct or FFEL)

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

Up to 10 years (up to 30 years for Consolidation Loans).

All borrowers are eligible for this plan.

You’ll pay more 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
  • all Consolidation Loans (Direct or FFEL)

Payments may be fixed or graduated.

Up to 25 years.

  • If you’re a Direct Loan borrower, you must have more than $30,000 in outstanding Direct Loans.
  • If you’re a FFEL borrower, you must have more than $30,000 in outstanding FFEL Program loans.
  • Your monthly payments will be lower than under the 10-year Standard Plan or the Graduated Repayment Plan.
  • You’ll pay more over time than under the 10-year Standard Plan.

Revised Pay As You Earn Repayment Plan (REPAYE)

  • Direct Subsidized and Unsubsidized Loans
  • Direct PLUS loans made to students
  • Direct Consolidation Loans that do not include PLUS loans (Direct or FFEL) made to parents
  • Your monthly payments will be 10 percent of discretionary income.
  • Payments are recalculated each year and are based on your updated income and family size.
  • If you’re married, both your and your spouse’s income or loan debt will be considered, whether taxes are filed jointly or separately (with limited exceptions).
  • Any outstanding balance on your loan will be forgiven if you haven’t repaid your loan in full after 20 or 25 years.
  • Any Direct Loan borrower with an eligible loan type may choose this plan.
  • Your monthly payment can be more than the 10-year Standard Plan amount.
  • You may have to pay income tax on any amount that is forgiven.
  • Good option for those seeking Public Service Loan Forgiveness (PSLF).

Pay As You Earn Repayment Plan (PAYE)

  • 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.
  • Payments are recalculated each year and are based on your updated income and family size.
  • If you’re married, your spouse’s income or loan debt will be considered only if you file a joint tax return.
  • Any outstanding balance on your loan will be forgiven if you haven’t repaid your loan in full after 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 high debt relative to your income.
  • Your monthly payment will never be more than the 10-year Standard Plan amount.
  • You’ll pay more over time than under the 10-year Standard Plan.
  • You may have to pay income tax on any amount that is forgiven.
  • Good option for those seeking Public Service Loan Forgiveness (PSLF).

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 monthly payments will be 10 or 15 percent of discretionary income.
  • Payments are recalculated each year and are based on your updated income and family size.
  • If you’re married, your spouse’s income or loan debt will be considered only if you file a joint tax return.
  • Any outstanding balance on your loan will be forgiven if you haven’t repaid your loan in full after 20 or 25 years.
  • You may have to pay income tax on any amount that is forgiven.
  • You must have a high debt relative to your income.
  • Your monthly payment will never be more than the 10-year Standard Plan amount.
  • You’ll pay more over time than under the 10-year Standard Plan.
  • Good option for those seeking Public Service Loan Forgiveness (PSLF).

Income-Contingent Repayment Plan (ICR)

  • Direct Subsidized and Unsubsidized Loans
  • Direct PLUS Loans made to students
  • Direct Consolidation Loans
  • Your monthly payment will be the lesser of
    • 20 percent of discretionary income, or
    • the amount you would pay on a repayment plan with a fixed payment over 12 years, adjusted according to your income.
  • Payments are recalculated each year and are based on your updated income, family size, and the total amount of your Direct Loans.
  • If you’re married, your spouse’s income or loan debt will be considered only if you file a joint tax return or you choose to repay your Direct Loans jointly with your spouse.
  • Any outstanding balance will be forgiven if you haven’t repaid your loan in full after 25 years.
  • Any Direct Loan borrower with an eligible loan type may choose this plan.
  • Your monthly payment can be more than the 10-year Standard Plan amount.
  • You may have to pay income tax on the amount that is forgiven.
  • Good option for those seeking Public Service Loan Forgiveness (PSLF).
  • Parent borrowers can access this plan by consolidating their Parent PLUS Loans into a Direct Consolidation Loan.

Income-Sensitive Repayment Plan

  • Subsidized and Unsubsidized Federal Stafford Loans
  • FFEL PLUS Loans
  • FFEL Consolidation Loans

Your monthly payment is based on annual income.

Up to 15 years.

  • You’ll pay more over time than under the 10-year Standard Plan.
  • The formula for determining the monthly payment amount can vary from lender to lender.
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Do You Need Help Figuring Out What to Do for Your Student loans? Click Here

Here is a recap of the current income driven plans offered for federal student loans.

Income-Driven Repayment Plan

Payment Amount

REPAYE Plan

Generally 10 percent of your discretionary income.

PAYE Plan

Generally 10 percent of your discretionary income, but never more than the 10-year Standard Repayment Plan amount

IBR Plan

Generally 10 percent of your discretionary income if you’re a new borrower on or after July 1, 2014*, but never more than the 10-year Standard Repayment Plan amount

Generally 15 percent of your discretionary income if you’re not a new borrower on or after July 1, 2014, but never more than the 10-year Standard Repayment Plan amount

ICR Plan

The lesser of the following:

  • 20 percent of your discretionary income or
  • what you would pay on a repayment plan with a fixed payment over the course of 12 years, adjusted according to your income

Income-Driven Repayment Plan

Repayment Period

REPAYE Plan

20 years if all loans you’re repaying under the plan were received for undergraduate study

25 years if any loans you’re repaying under the plan were received for graduate or professional study

PAYE Plan

20 years

IBR Plan

20 years if you’re a new borrower on or after July 1, 2014

25 years if you’re not a new borrower on or after July 1, 2014

ICR Plan

25 years

Loan Type

REPAYE Plan

PAYE Plan

IBR Plan

ICR Plan

Direct Subsidized Loans

Eligible

Eligible

Eligible

Eligible

Direct Unsubsidized Loans

Eligible

Eligible

Eligible

Eligible

Direct PLUS Loans made to graduate or professional students

Eligible

Eligible

Eligible

Eligible

Direct PLUS Loans made to parents

Not eligible

Not eligible

Not eligible

Eligible if consolidated*

Direct Consolidation Loans that did not repay any PLUS loans made to parents

Eligible

Eligible

Eligible

Eligible

Direct Consolidation Loans that repaid PLUS loans made to parents

Not eligible

Not eligible

Not eligible

Eligible

Subsidized Federal Stafford Loans (from the FFEL Program)

Eligible if consolidated*

Eligible if consolidated*

Eligible

Eligible if consolidated*

Unsubsidized Federal Stafford Loans (from the FFEL Program)

Eligible if consolidated*

Eligible if consolidated*

Eligible

Eligible if consolidated*

FFEL PLUS Loans made to graduate or professional students

Eligible if consolidated*

Eligible if consolidated*

Eligible

Eligible if consolidated*

FFEL PLUS Loans made to parents

Not eligible

Not eligible

Not eligible

Eligible if consolidated*

FFEL Consolidation Loans that did not repay any PLUS loans made to parents

Eligible if consolidated*

Eligible if consolidated*

Eligible

Eligible if consolidated*

FFEL Consolidation Loans that repaid PLUS loans made to parents

Not eligible

Not eligible

Not eligible

Eligible if consolidated*

Federal Perkins Loans

Eligible if consolidated*

Eligible if consolidated*

Eligible if consolidated*

Eligible if consolidated*

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

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.

Feel Like You Are Not Getting Anywhere With the Department of Education?

If you feel like you can’t get anywhere with your federal student loan servicer or the Department of Education there is always one more place to stop for help, the Federal Student Aid Ombudsman Group can help.

The Federal Student Aid Ombudsman Group of the U.S. Department of Education is dedicated to helping resolve disputes related to Direct Loans, Federal Family Education Loan (FFEL) Program loans, Guaranteed Student Loans, and Perkins Loans. The Ombudsman Group is a neutral, informal, and confidential resource to help resolve disputes about your federal student loans.

Before contacting the Ombudsman Group, be sure to follow our recommendations to resolve problems with your student loan yourself.

If you have tried to resolve the problems with your loan but haven’t been able to, get prepared before seeking the Ombudsman Group’s help.

If you have done all of that and want to ask them to help, just click here or call 877-557-2575.

Want More Help And Advice?

Checkout the additional links below.

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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.
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23 thoughts on “The Ultimate Guide to Dealing With Student Loans You Can’t Afford”

  1. So, in all these explanations, you didn’t answer one important concern. If you are enrolled in REPAYE or IBRP, and are still enrolled in an income based repayment plan after 20 years, are your loans still forgiven?

    Reply
  2. Steve, plz check yr Facebook messages – I emailed you a cc of what i emailed an attorney fighting these unjust and unconstitutional laws – I know him in passing, having litigated against him.

    I write about college debt too – from a legal and moral point of view:

    * http://www.GordonWatts.com/Higher-Ed-Tuition-Costs.html

    * http://www.GordonWayneWatts.com/Higher-Ed-Tuition-Costs.html

    Since I nearly won one “big” case in the Fla Supreme Court, and was permitted to proceed pro se as an Amicus Curiae in another case in the US 11th Circuit Court of Appeals, I suppose I might know a little bit about law~ 😉 🙂 😀 (y)

    The current Federal Law in regards to college loans is VERY unconstitutional: 🙁 :p LOL >>

    http://www.GordonWatts.com/Student-Loan-Abuse_Brief.pdf

    http://www.GordonWayneWatts.com/Student-Loan-Abuse_Brief.pdf

    PS: Thx 4 the tips above. (Me, personally, I am on an income-based plan, where i pay 10% of my discretionary income – and 10% of ZERO is ZERO!)

    Reply
  3. Hi Steve,

    I recently found out that my wages are being garnished. I did not receive a letter from the Department of Education or anybody saying there was a notice to garnish my wages or anything. The only thing I received was a letter from my employer telling me a wage garnishment is now in place and a letter from the Department of Education saying my wages are now being garnished. I contacted the collection agency who is holding my loan and they basically said the garnishment will stay in place and would not offer me a rehabilitation plan. I applied for a Direct Consolidation Loan and I found out that application was cancelled because the Department of Education will not do a rehabilitation program while a wage garnishment is in place. So if the loan holder won’t give me a reasonable monthly payment and won’t stop the garnishment and I cannot get a Direct Consolidation Loan because the garnishment is in place, what can I do? How do I stop the wage garnishment?

    Reply
  4. You might look into Gradible as well. It’s a site that offers an opportunity to pay off student loans a little faster in exchange for doing work for their clients.

    Reply
  5. 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

    Reply
  6. 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

    Reply
    • 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 https://getoutofdebt.org/student-loan-help-discharge-eliminate-settle-or-adjustment-assistance

      Reply
  7. 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.

    Reply
  8. 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

    Reply
      • Sallie Mae is a private company.. only federal loans are subsidized and eligible for programs from the Department of Education… right? So your answer does not help the person- Omid-, asking you if there are any programs that can help… No need to look up Sallie Mae, everyone knows, it’s a private company since 2014.

        Reply
  9. 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.

    Reply
    • 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.

      Reply
      • 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.

        Reply

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