More and more student loans are becoming the most problematic debt anyone can own. At some point in the past couple of decades, student loans went 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.
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 percent, 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 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.
You can ind 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.
Failing to pay student loan debt has serious consequences. Your tax return refunds can be intercepted, massive collection fees of up to 20 percent 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."
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.
According to the National Student Loan Data System for Students:
"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 basically no hope, help, or assistance for people that owe private student loans other than what the servicers and loan holders are willing to offer.
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.
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.
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.
For a complete list of government programs that can allow you to reduce your student loan payment, see "The Ultimate Guide to Dealing With Student Loans You Can't Afford."
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