Question:
Dear Steve,
I owe like 50k or more in student loans that I will never be able to pay. I graduated in 1997 and have been able for various reasons to defer with different programs until recently. I guess laws changed. My loans are with Granite State.
I am setup on income based payments. I am married, with one child, but due to circumstances we have been living apart for the better part of the last 3 years and file taxes separately. But I still share bank accounts, help her pay bills. We are still married, just work has made me have to live apart.
When I first ran out of the ability to just do yearly forbearances, my payment was set at an affordable 45 bucks a month. I lost a job at the end of 2014 and got another 6 month forbearance. Went back to work in July of 2015. Updated my income which didn't go up that much but payment jumped to over 200 dollars which I can not come close to affording. I was laid off yet again as of yesterday and immediately applied and was granted another 6 month forbearance, however, I will be going back to work but if I make a decent wage the payment is going to go through the roof.
My question is this, what should I do? I want to work and make money but this student loan will completely cripple me. Wife owes even more than I do.
My credit is already shot so that's not a concern. I thought there were laws that made payments based on payments that included expenses etc. Based on income available after bills were paid. Please help. Seeing what just a little more income did to my payment has me freaked out once I go back to work.
Brian
Answer:
Dear Brian,
Your question is a great example of how difficult and unforeseen life can be.
So because you are already on an income based payment program I'm assuming you have federal student loans.
Both a forbearance and an income based repayment (IBR) program have the same impact on your balance, it causes it to grow as all the unpaid interest gets added to your balance.
The advantage of an income based program is limited but if you pay for 20-25 years the balance owed would be forgiven. However, as things stand right now you'd owe income tax on the balance forgiven. And income based programs have other traps as well. See Why Income Based Student Loan Payments Can Be a Terrible Trap.
Income based repayment programs are a bit of false advertising. The payment is not based on your income after your expenses. They are based on your discretionary income which the Department of Education defines as:
For Income-Based Repayment and Pay As You Earn, discretionary income is the difference between your income and 150 percent of the poverty guideline for your family size and state of residence.For Income-Contingent Repayment, discretionary income is the difference between your income and 100 percent of the poverty guideline for your family size and state of residence.
The poverty guidelines are maintained by the U.S. Department of Health and Human Services and are available at www.aspe.hhs.gov/poverty.
There will soon be a new federal program that can reduce your payment down to 10% of your discretionary income. This would help to reduce your payment further. The program is called REPAYE.
At the very least you should be in an income based repayment plan to get credit for the time you've been paying and potentially that will lead to loan forgiveness in the future for you.
You might want to read The Ultimate Guide to Dealing With Student Loans You Can't Afford to review your options.
Bottom line, when it comes to government backed student loans there are no good reasons I can think of to ride along on a forbearance only without using forbearance as part of a larger plan.
For example, take the person who is going to be retiring in a couple of years and can't afford their payments. Their income will drop substantially in retirement. In that case a forbearance may make perfect sense to use the last couple of years to save up additional money and then get on an income based repayment program after income drops in retirement.
These issues can be complicated and tricky but if you would like to talk to someone for a personalized plan based on your situations I would suggest you talk to my friend Damon Day at DamonDay.com. He is an exceptionally good debt coach.
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