So let me start by thanking you for providing an avenue for people like me to ask you questions! I am really grateful for hopefully getting help with my debt problems.
I am 24 years old and graduated from college over a year ago and now have over 100k in loans. The details of the loans are as follows:
- AES loans:
1) Balance = $38,467.33
Interest = 2.728 percent (This loan was originally 25,000 and had an interest of 10 percent but they lowered the interest two years ago, so it has almost doubled in amount)
2) Balance = $30,425.41
Interest = 7.18 percent
3) Balance = $2,981.31
Interest = 10.43 percent
- Sallie Mae loan:
Balance = $27, 804.97
Interest = 9.63 percent
I have three small loans from my school totaling $9,000 and federal loans totaling over 50k. As you can see, I am deep in student loan debt. I am less concerned about the federal loans because I feel like I can manage those, being that I may go into education and can eventually get a good portion of them forgiven. But going into this profession will not provide me with enough money to pay the private loans.
So after reading your article on why you should stop paying private student loans, my question is: is this the kind of situation where I should stop paying those private loans? On credit karma my credit score is around 600 now so I'm not sure what kind of impact stopping payment would have, but I really don't make a lot -- half of my income goes towards these loans. I'm just concerned about not paying these loans and the impact it will have on my credit and trying to buy a house in the future or anything where my credit would be necessary. But I have no savings and not paying these student loans would loosen up a lot of income for me to start saving money and investing.
Thank you for any help you can give me!
First off, let me give you a big hug for thinking about becoming a wonderful overworked and underpaid teacher. The world needs more incredible teachers who are willing to slave and sacrifice to help kids learn.
The teacher student loan forgiveness program can be a bit confusing. While it is true, federal student loans can be forgiven in full for some teachers, you have to read the fine print. Not all loans are eligible for forgiveness under the Public Service Loan Forgiveness program and the program requires 120 on-time payments before forgiveness is possible. But here is the big rule to watch. If you are employed by a for-profit school, you may not be eligible for total loan forgiveness.
So even if you were brave enough to become a teacher, you'd need to work for a nonprofit 501(c)3 or public school.
There is a Teacher Loan Forgiveness program but it forgives up to $17,500 of your federal loans. To be eligible for that program you'd have to teach full-time for five complete and consecutive academic years in certain elementary and secondary schools and educational service agencies that serve low-income families, and meet other qualifications. Again, more fine print.
Your credit score, as we financial professionals say, already sucks. So if you were to strategically default on your private student loans, now would be a logical time. You can then later focus on rebuilding your credit and credit score.
Anything you do will have an impact on your credit in one way or another. If you continue to pay the private student loans on time you have the ongoing outstanding balance which sounds like to impacts your debt to income ratio and reduces your ability to qualify for a larger mortgage.
Then there is the inability to save and invest. That can have very serious long-term consequences. Use my online calculator and see how much you are throwing away by not saving, click here.
As with many things in life, there is no blanket answer I can give you. Every situation is different and people have different temperaments for making it through this process.
So here are the top ten reasons why not to pay an unaffordable private student loan. Additionally, some private student lenders are settling accounts for lump sums or a few payments when the accounts get about 180 days past due. The settlements are in the 50 percent range. Some higher, some lower.
This can be an effective strategy if you have the cash on hand to settle, or you can get your hands on it.
Of course the downside to trying the settlement route is the forgiven debt could create a tax liability you may have to pay, it will appear on your credit report for up to 7.5 years as your delinquency will, and when you default, your lender could always sue you if they wanted to. There are big risks but there are also big rewards when faced with no good options for your unaffordable private student loan debt.
If you stopped paying and the time of the default exceeded the statute of limitations in your state, you could even then go for a total discharge of your private student loan debt in a bankruptcy. You'd really need to get a good understanding what that timeline might be for you. Talk to a bankruptcy attorney, for free, to get an opinion from an attorney who is licensed in your state.
Ultimately, the lack of ability to save money for an emergency, the inability to prepare for the retirement future, and the debt burden creates a significant financial cost. Some action will be necessary unless you can significantly increase your household income.
If you have a credit or debt question you'd like to ask, just click here and ask away.
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