Question:
Dear Steve,
I am physically and emotionally spent. I earn $9.85 and hour and have $75k in Federal loan debt. Depression sinks in when I think about the private loan amount. I have had deferments however, I thought I would be able to find some better paying work to be able to make the $300 plus dollar payments. I live below the poverty level and I am so fear stricken, I just cant take hearing another “sorry I cant help you”. I was terminated from my old job in 2014 and it took three years before I could find another one. I had a pension and had to withdraw that money or continue to live in my car to survive. Now on top of it all, I have that tax penalty/bill that is two thousand dollars that I don’t know how I will pay. It seems like bankruptcy is the only answer. Your thoughts?
Trying to avoid garnishment is bankruptcy the answer?
Kelly
Answer:
Dear Kelly,
I hear you and I’ve lived through that same fear and depression when I faced my money troubles. Everything you are feeling is common and normal for many debtors. But having lived through the debt and now helping people with money troubles since 1994 I can assure you the emotional waves you are dealing with are the result of emotions rather than financial reality. It sounds to me as if you are dealing with financial PTSD which is a real thing.
Now I can give you the best debt advice in the world but you need to keep in mind that will not alleviate the feelings you are having from the financial PTSD. What you actually have is a math situation and an emotional trauma situation which are overlapping.
Looking at your situation as a math problem the answers are pretty clear. On your federal student loans you should have them consolidated into a Direct Loan and then opt to repay them using the Income Based Repayment (IBR) or Pay As You Earn (PAYE) repayment options. PAYE is only a good option if you are or get married and file a married but separate income tax return. Your payment should then be as low as $0 and keep you out of default.
On the private student loan if the lender is unwilling to do anything constructive then your options are limited. The forbearance or deferment options are great for the lender but totally suck for the consumer. While it feels like a blessing you don’t have to make the payment, all that is happening is your unaffordable private student loans are growing bigger and more unaffordable.
Strategically defaulting on your private student loans isn’t the craziest option in the world when there are no other good options. If you are prepared to face collection calls, collection notices, and pressure from the lender then defaulting on your private student loans can provide some relief and opportunity to dispose of the loans with modified payment plans or actually settling the debt. You should read Top 10 Reasons You Should Stop Paying Your Unaffordable Private Student Loan.
On the tax debt you can make a payment plan with the IRS online. If you can’t afford a payment plan and your tax debt is more than a few years old you can discharge that debt in bankruptcy. But let’s deal with the most pressing issues first.
- Make sure your federal loans are consolidated into a Direct Loan and on an income based repayment plan.
- Research what defaulting on your private student loans means and understand that in the range of few options, it is one if done with a plan in mind.
- Enter into a repayment plan, if you can afford to, with the IRS or tax authority you owe.
- If you have access to mental health care or counselors, talk to them about helping to deal with your emotional trauma. Both talk therapy and medications to help with depression can be very helpful to bridge the gap between desperation and hope.
I know you are feeling hopeless but the way you are feeling and the reality about your situation are two different things which are living within you at the same time. While I can see hope and give you a hopeful plan I can’t make you feel hopeful. Only you can take steps to achieve that goal.
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