Ask the Readers: What Can I Do About My Student Loans?
Published on - July 30th, 2010 (by J.D. Roth) I do my best to cover a variety of topics here at Get Rich Slowly. Personal finance is a v-a-s-t topic, and there’s a lot of specialized knowledge. But there’s no question I have blind spots. Because Kris and I have no kids, I don’t write much about children and money. Student loans are another blind spot for me.
Still, I know a lot of GRS readers have questions about student loans. You folks e-mail me all the time with questions I can’t answer. But I finally realized that instead of ignoring your queries, I should put a few of them out for reader comment.
For example, Megan recently wrote looking for advice on coping with student-loan debt. Here’s her story:
I got my degree from a small private university in Wisconsin, a school that I loved, but that in the end cost me $55,000 in student loans. That total (as I just calculated) is up to $63,630(!) because of interest since I graduated in 2008.
After taxes, I only make $1280 a month, and my loan payments total about $637 each month — almost 50% of my income! I can make the payments no problem, but it leaves very little money left over for savings, retirement, and even just fun money. A second job isn’t very feasible since I’m in the military and I can get (and have been) called into work at a moment’s notice.
Do you have any tips or advice on what I can do about my loan payments? Right now, the majority of my loans are on ten-year repayment plans, which I like since I don’t want to be in debt forever. Consolidation would lower my payment, but nearly triple the interest I’ll have to pay over the years, and would also increase my payment plan to 30 years. (I’d be 54 by the time I’d pay them off!)
Is there any other way to get through this that I just don’t know about?
Again, I know very little about the ins-and-outs of student loans. Based on the information Megan provided, though, I agree that consolidating the loans probably isn’t a good idea. I’d rather keep the ten-year term. (If she’s disciplined, though, Megan could consolidate and then opt to make accelerated payments on her loans, much as Kris and I chose to do with our mortgage.)
In either case, part of the problem will fade with time. Some of this is a function of time. Megan will eventually take higher-paying jobs, and as her income increases, she’ll be better able to handle her student loans. The $637 monthly payment that seems like a stretch on a $1280 monthly income will seem very manageable on $3000 a month or $5000 a month.
Until then, however, it’s vital that she keep her other expenses in check. She should do what she can to avoid the “lifestyle inflation” that often comes with an increased salary. Instead of spending her raises, she should be especially diligent about using them to pay off the student loans, and to save for retirement.
Because I have no experience with student loands, I don’t have any specific advice for Megan — just these general thoughts. Do you have advice for Megan? Is there anything she can do to decrease the drag her student loans place on her budget until she’s able to earn more money? Are there any other student-loan tips or tricks you can share?
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If you are in the military, volunteer for a deployment. That’s what I did a few years back with my tax-free deployment income. don’t forget to set a little aside in the TSP!
Also, you may qualify for student loan forgiveness after ten years of payments. Look up College Cost Reduction & Access Act and see if it applies.
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Definitely check out the College Cost Reduction & Access Act; if you find work in a non-profit, state, local or federal government, or most health fields yo can qualify for forgiveness after 10 years of repayment. You may also qualify for the Income based repayment plan which will lower your monthly payments to a manageable amount until your 10 years pass. I currently have $40,000 in loans that I had my monthly payment reduced to $175 given my family size and income. This will still count towards my 10 years since I work for a state government. All you have to do is consolidate all your loans into the Direct Loan program and request the IBR plan. It is a wonderful program that is designed to reward those with degrees that serve humanity so to speak.
And get this…. it was passed during W.’s administration!!!!
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Is there a way she can earn extra money through freelance work, or an online business? I’m thinking that something where she gets to set her own hours might be a good way to earn some extra cash.
That being said, I know how difficult it is to fit in extra work when you’re already working full time! People always make it sound so easy…
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1) income based repayment
2) get a job eligible for public service loan forgiveness.
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Worry about the interest rate, not the amount of total interest you will pay over the life of the student loans. 50% of your income is a serious cash flow issue – if your interest rate will decrease or stay the same while consolidating and extending the term, it is almost certainly the right idea. If you have more money to pay off principal later, you will have the flexibility to do so.
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Megan needs to talk to her lender. For at least a little while, they should be able to adjust her payment plan so that it’s income sensitive. This might mean paying interest only for a while, or interest and a small part of the balance.
If she does this, she still has the option of sending in additional payments to pay down the principle. It just gives her the option of paying less for a few months so she can build up her savings.
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Make payments online as soon as you get paid. This shaves off a couple months of payments because the sooner you throw money at the loan, the less time interest has to accrue.
Also, if you are planning to stay in the military for 10+ years to come, some student loans like perkins offer have generous forgiveness programs. Google search military student loan forgiveness and see what you find.
Good luck!
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Unless your loans are private loans you can get on an income-based repayment plan and it will seriously reduce your monthly payment. You can find out more about the income-based repayment plan at ibrinfo.org.
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If Megan is currently taking in $1280 a month I would assume she is still in tech school and has been in the military for less than a year. I would also assume as she has graduated college that she is or will be an officer soon which comes with higher pay. Based on these assumptions I would tell her to sit tight and utilize what the military has to offer like the free gym or taking a class at the community college for free. I was enlisted in the Air Force for one term and lived in a dorm at first and then moved to an apartment in town. I ate in the chow hall, worked out religiously, and proactively tried not to spend any money for the first two years. Those were very formative years for me but once I got past the car debt and more importantly developled frugal living out of necessity those savings habits have propelled me to a new level of confidence. I think it is important to be reasonable enough for people to understand their situations and figure out a way to live beneath their means and use sites like GRS for motivation. Once you get ahead of the debt curve it is all upside. Good Luck Megan -
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http://usmilitary.about.com/cs/joiningup/a/clrp.htm
Military College Loan Repayment Program. See if you qualify.
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I’m in a similar situation, though I earn a little more than double what Megan makes. I can make all my loan payments, pay all my other expenses, and live pretty well, but I just want to get rid of these loans. I’m working on a debt snowball but it can be a little disheartening, especially because I’m hoping to quit my job in a year or so from now and have my own business up and running. The student loans just keep hanging above my head, though.
Luckily, if your loans are serviced through the Department of Ed you can defer at any time for unemployment or hardship. So as long as you stay in contact with them, it’s never a problem. That interest keeps building, though!
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Yes, talk to the lender. If it’s a federal student loan, you can ask to have your payment based on your current income. They’d rather lower the payment than have you default.
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She probably has two types of student loans: private loans and federal loans.
Consolidating her federal loans will not do any good, because when consolidating, the government takes the weighted average of each individual loan, and uses it to calculate the new interest rate. However, a law was recently passed (http://www.finaid.org/loans/publicservice.phtml) that states that if you work in public service, your Federal loans can be forgiven after ten years of on time payments.
We don’t know if she plans on making a career in the military, but if she does plan on that, she can put her Federal loans on a interest only payment plan (for the time being), and put as much of the $637 as she can on the private loans, to knock them down as much as possible. It doesn’t matter that she’s only paying interest on the Federal loans — they’ll be forgiven eventually.
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What field are you in to get that salary amount? The way I calculated it was that if you are getting $1280 for a month and working 40 hours a week that roughly works out to be a little above minimum wage. Unless you have a liberal arts degree, there has to be someway of advancing your salary by moving up in the military.
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So where does the GI bill fit in repaying these student loans? Just curious. When I served the GI bill took care of a good portion of my student loan.
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We need more info. Why does she make so little? What does the future hold for her?
If she thinks her income will drastically increase soon, sure, sit tight. Otherwise do federal direct consolidation (assuming they’re eligible loans), get on an income based repayment plan, and apply to have the loans forgiven under the public service forgiveness act (after 10 years of income based repayments).
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The federal government started a direct lending program last year. Now all student loans are through the dept of education. There is a one time option to consolidate all of your student loans with the government. From what I read there are both standard and income based repayment options. Visit the department of education website and search for direct lending. Any college financial aid website or professional should have the information as well.
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I know she said she can’t do a second job, but what if it’s something like lawn care, or taking care of the elderly, or dog-walking? Even if she only made an extra $20/week doing something – that can go a long way to helping her repay her loans.
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I would not even consider consolidating. I would spend time accessing any program that may be available to me, starting with the military. If there is not any program that can work with your loan situation, I would suggest finding another income stream, even if it is selling things on ebay or whatever. Without more income, this payment is going to be a problem.
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I agree with the commenters suggesting (re)consolidation and getting on income-based repayment plan.
I DISAGREE with everyone suggesting loan forgiveness… if lenders can’t recover the principal it’ll just make borrowing more expensive for everyone later.
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Student loans are terrible! I’m up to 108,000. yikes. look into the public service forgiveness loan. i chose to consolidate because it made my monthly payments more manageable, and the remainder of my loans are forgiven after 10 years. the one drawback is that the government has changed the formula for calculating interest on consolidated loans, and they’re really horrible.
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1. On my Federal Student Loan, the government reduced my interest rate by 1/4 percent because I have the payment automaticaly debited each month. 1/4 percent savings on the interest helps out; espcially when you owe so much.
2. I respect you for wanting to pay your loans back in 10 years, but putting 50% of your income toward student loans is not realistic long term. That will not give you enough money to support yourself in a reasonable manner. The Federal Government lets you extend the term of your payments(20 years, 30 years, etc.). I suggest that you do this, but then pay as much extra every month as possible.
3. You should be looking for a new job that pays more money. Even with frugal living, you need to make more money to wipe out your debt wihtin a reasonable time.
Good luck.
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1. The federal government lowered the interest rate on my student loans by 1/4 percent when I signed up for direct deposit. 1/4 percent on $63,000 add up.
2. I suggest extending the payment schedule past 10 years. I respect you for wanting to get rid of your debt, but paying 1/2 your income to student loans is not sustainable. If you extend the payment schedule, you can (and should) pay extra every month what you can.
3. You need to find a new job. It is much too difficult getting out of this type of debt with your salary.
Good luck.
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I DISAGREE with everyone suggesting loan forgiveness… if lenders can’t recover the principal it’ll just make borrowing more expensive for everyone later.
Uh, forgiveness is part of the terms when you do something like serving in the military. It’s not like defaulting on a mortgage. It’s already factored in. Really, now.
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I think it’s incorrect to assume that anyone’s salary will necessarily increase as time goes on. Maybe that’s the way things used to be (in, say, the 1950s), but I’m just not sure it’s true anymore.
She should consolidate and take a 30-year repayment term. The longer repayment term will significantly lower the per-month payments, which is what’s killing her right now. If, in the future, she can make extra payments, great. But if you’re getting clobbered by the monthly payments and there’s an obvious fix, you have to take it.
Which is more at issue right now, the extra amount in interest a 30-year repayment will rack up, or the inability to make your monthly payments (or, put another way, the reduced standard of living that comes with making those payments)?
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Interest paid on federal loans is tax deductible so you should get some money back at tax time and she can use that to pay on the principal.
If she has private loans she should try to knock those out first since there is no tax incentive, the rates are usually variable, and the interest is higher than fed loans.
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@Tim B: If she’s enlisted, her room and board may be partially or fully covered already. If she’s commissioned, she receives an allowance for those things. (I think. It’s been a while since I reviewed the military pay structure.) The point being that her take home pay may seem small but that’s because some things are already taken care of by the military. (Which, incidently, is part of the reason why the DoD has such a large budget (part, not all). If you think about the number of people in the military and how much they have access to in terms of programs and other benefits, the DoD budget, which is huge, starts to make a little more sense. Sorry about the tangent.)
@saad: While it may be true that borrowing will become “more expensive to everyone later”, that is the lender’s risk not yours. Why they would put themselves in that position is somewhat beyond me. However, if you’re making interest only payments or even paying some of the principal, by the time your loans are forgiven, you’ll have paid almost, if not all, of the principal amount. So in terms of actual dollars, the lender probably hasn’t lost much except a portion of the profit.
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Thanks for jumping into the student loan topic!! A tip for J.D. – when people ask about school loans, finding out the type of borrower (private or federal) is key
One way to reduce federal loan payments easily, without even having to qualify, is a GRADUATED PAYMENT PLAN. I’m not sure if all lenders are required to offer this option. For a federal loan, you can SWITCH between FIXED payments and GRADUATED payment plans easily, without penalty, as much as you need to. In a GRADUATED plan, you simply pay less at the beginning and a higher amount by the time you get to year 10, and you still need to pay it off in 10 years.
While Megan will pay more in interest this way, she will not have to extend the life of her loan, and it should be much more manageable in the near term. She can also switch to a FIXED payment plan once her income increases.
Also key – if it’s a federal loan, as her income increases, she will not be penalized by paying more on the PRINCIPLE of the loan. When paying above the monthly payment, submit the payment and indicate it is for PRINCIPLE. That way, the interest you pay on the life of the loan will decrease because the principle, upon which the interest is determined, will decrease.
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Agree that we need more information about what she’s doing in the military. Is she an officer or enlisted or officer candidate, as this will make quite a difference in anticipated pay in the next couple of years.
While I agree with the poster who noted that 50% of one’s [take-home] income is a significant cash flow issue, it’s also important to remember that in this young lady’s case, her housing is being provided, either on base or with a tax-free allowance for off-base housing. So it’s not apples-to-apples with what you might be thinking.
Additionally, while I applaud her efforts to save for retirement so early and with such limited means, I would like to offer some advice to ensure that she first only save in a Roth plan. Either a ROTH IRA, or a ROTH TSP, which I understand is either available now or in the works. Never make perfect the enemy of the good, for sure, but this was a small mistake that I made while I was in the Service. Her effective marginal tax rate will never again be this low.
“if lenders can’t recover the principal it’ll just make borrowing more expensive for everyone later.”
Which of course, will just make colleges cheaper, so it’s all a wash. They charge what the market will bear, when borrowing became cheaper and more accessible, tuitions skyrocketed. There’s no other way to explain it; it’s not as if professors are being paid more.
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Yes, yes, talk to the lender. There are almost always different repayment plans. Will it stretch out the amount of time you’re paying and possibly mean you pay more? Yeah, probably, but right now, it’s your best option for keeping your head above water.
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Income-based repayment if they are federal loans.
But we really need to know if it private or federal…
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I just skimmed the comments and saw a lot of referrals to income based payments and loan forgiveness but I did not see the links for these programs.
From what I understand, only loans in the Federal Direct Student loan program (http://www.direct.ed.gov/student.html)qualify for forgiveness and only after 10 years of qualified public service (http://www.direct.ed.gov/cancellation.html).
If this duplicates another comment, I apologize. If not, I hope it is helpful.
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A couple things – it also depends on what field Megan is working in. And it also depends on what kind of loans that she has – the best ones are typically Staffords and Perkins because they apply for loan forgiveness if she is in particular fields such as education, non-profit, etc.
I recommend talking to the lender to see if they offer any other options.
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OK, this won’t be popular. It’s a LOAN. A loan she took out on purpose & she is reaping the benefits of. The way to deal with it is to be aware that she made a choice to buy her education with her future. Now is the future and she has positive memories and skills. Now she PAYS for it.
Either extend the term (through consolidation or income sensitive payments as listed above) and ultimately pay more OR deal w/ $643 in expendable income and knock the loan out in ten years. Those are the options.
Megan, I can say from experience that the ten years after college go by very quickly. Your income will go up over time, especially in the military. Also you have many peers who are in similar situations, so find some that also value frugality and hang tight.
Every time you see the loan payment go out, take a moment to appreciate the education and experience you bought.
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I too went to a small private school and racked up just over $60,000 in student loans (no parent help). This most likely means that the larger, higher interest loans are NOT federal, but private loans. With the private loans you cannot do Income Based Repayment. Being in the same situation, I have dropped my federal (low interest rate) loans to a interest only payment for up to 2 years. This dropped my payments by about $100. I then started saving that $100, and any extra I can, into a Student Loan Emergency fund that I will grow to 6 months worth of student loan payments. After that I will go back to paying more then interest on the federal loans and begin paying extra on all loans (when feasible). But knowing I have the emergency fund takes a lot of the worry out of your mind and can give you freedom to even do things like start a new career or travel. Good Luck!
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One thing to consider is what that interest rate really is: (http://www.studentloanconsolidator.com/consolidation/projected-rates.php) — when I consolidated nearly a decade ago, I thought I got a deal with around 4%. That’s expensive these days!
Another thing to consider is that lenders will frequently reduce your interest rate for paying on time for a certain amount of time. I think mine was 6 months?
Megan, you might try looking into online passive income — JD’s new blog for instance, but something that requires less regular input would be better for you I imagine. Check out my favorite blog: smartpassiveincome for inspiration/advice.
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While it goes against the common advice on this website, I don’t think consolidation should be ignored as an option… if she qualifies for direct consolidation through the Department of Ed anyway. Check out loanconsolidation.ed.gov. It will make your payments much more manageable, and you can make accelerated payments as you start earning more income.
That site also has links about income based repyament, so it’s a good resource regardless of how you choose to tackle this problem.
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1. If they are federal loans, you can ask for a deferrment of payment for 2 years. You tell them you are planning on going to graduate school. (Whether you do or not is beside the point), BUT if I remember correctly, it freezes the principal no more interest. And you can still make payments to lower whats there.
2. Actually go back to school. Enroll online somewhere, same thing. No interest is charged on the principal while you are in school and you can still make payments.
3. A long time ago…payments in total could not exceed 25% of your income. You have to file paperwork with you lender…talk to them about it.
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Others have said this, but Income Based Repayment.
A GREAT website is:
http://www.ibrinfo.org/what.vp.html
Depending on your career (non-profit, government), remaining debt is forgiven after 10 years – the military appears to be one of the careers where your loans are forgiven after 10 years. The website above has a calculator to help you see if this is worth it. You will probably have to switch your loan from your original lenders to a Direct Federal Loan, first – most loans are eligible, but not all.
I did this (I work for a nonprofit), and, while it was a pain to get it all set up, it was the best decision I ever made. Now I can focus on paying off other debt and saving for retirement.
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Take heart. It is hard now, but you have the tools to make it easier as time goes on.
I heard a statistic that someone in the military is promoted on average 4 times in their first few years of service. Assuming that comes with additional compensation, bank the extra and use it to pay down.
It might be wise to set up a consultation with a reputable fee-only financial planner who might be able to give you specific info about the student loans.
Think about what you can do within your schedule that might help you earn a little extra money that can be put on the loans. No one mentioned babysitting as an option.
Create a system to syphon off extra money to pay down debt. My sister saves all her job expense reimbursement money in a new car fund. Some people save all the $5 bills they receive in change, or all the coins. Do whatever works for you, and be disciplined in using that money to snowball debt.
Good luck!
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on a different note, this just shows how ridiculous college costs are today. $55,000 is a ton of money, and college graduates are making minimum wage. my niece is racking up $80,000 at her college and she will graduate and become a social worker. she won’t be making that much more than a person who didn’t go to college and is a clerk or office manager. what’s the point? $80,000 is a nice down payment on a house.
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I used to work helping people with their FAFSA applications. There’s only a few ways to get out of a student loan or get it reduced. You can a) become a teacher (conditions apply to time spent and type of teaching), b) become permanently disabled with no chance of rejoining the workforce or c) die. Bankruptcy won’t get rid of student loans. Since you’re in the military you might be able to reduce your loan as well, but memory is hazy there.
You can defer payments for up to two years, but interest will accumulate in the meantime, and if you’ve already deferred once, you don’t get that time back (ie. if you deferred for six months, then started paying, you can only defer up to 18 months if you need to defer again later).
However, in your case you would be best to restructure the loan out to 30 years to lower the existing payment. Yes, that means having to pay more in the long run, but it’ll also let you live now. And so long as you keep paying on time, it shouldn’t be a problem to restructure again and shorten the loan when you have more money to put towards it. Also make sure to check if there are any benefits in relation to your military service on forgiving some of the debt. Like I said, my memory is hazy on who is eligible for debt forgiveness, but it’s worth looking into.
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I think it really depends on where your future lies. I kept up high student loan payments for the first 8 years, until I needed to readjust because of kids and all of that expense. The gvt recently passed the 10-year loan forgiveness plan for fed. loans if you work in certain lower-paying gvt. jobs. My job qualifies, but b/c it’s not retroactive, by the time I finish paying 10 more years, I won’t have much loans left. (In other words, I would have been much better off by reducing my loan payments and consolidating from the get-go) If you plan on being in a career which qualifies for loan forgiveness and you’ll be doing that for 10 years, reduce your monthly payments by consolidating (if you can) and squirrel away the extra money. If not, I’d pay the higher amount as long as you can, unless you are planning on having kids and/or a house.
I would strongly advice against the interest only type modification or a very low payment based on your current salary. Those loan structures balloon and the payments then go even higher. I have a friends who chose this option and had to take a job she hates simply to try to pay for the even larger loan payments now. We all think our future salary will be higher, but in my state, we’ve not had raises in 4 years and will likely be without raises until the economy gets fully back on its feet.
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This has nothing to do with the loans themselves, but have you tried adjusting your withholding to get more cash in your paycheck? At that level of income, your income tax should be minimal since you’re in the 10% bracket.
I’d also look at getting a new job and selling anything you can to make some extra money and get that debt paid.
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I think the problem is the income is too low ($1,280 is $8 an hour, $.75 above minimum wage), not that the payment is too high.
You may want to consider a part time job — I know that the military can call you up and you’ll have to respond at a moments notice — but if you inform your boss of that fact during the hiring process and (s)he’s alright with it, then there is no problem.
Consider if there is something you can freelance or do from home? This would allow you to set your own schedule for your second job, and if you have to report to the military, you can. What field is the degree in? What talents do you have? What do you do in the military? Are any of them a service you can market when your “off hours” from the military?
You always have the option, being in the military, to follow AC’s (#1) advice and volunteer for deployment. One of my friends in the Army reserves was able to make serious savings while deployed in Afghanistan the first time doing construction; and he’s currently there with a sapper team (much more dangerous), and because he has no real expenses almost all of his pay is going into savings.
Talking to the lender and revising your current repayment plan might be a good idea in the short term; but when you have the opportunity (wage), return to being as intense about the student loan as you would consumer debt.
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I’m going to plug http://www.graduateleverage.com – they help recent grads navigate the student loan mess.
Note that they are NOT a debt consolidation, or other debt servicing company – they merely help graduates choose the best option for repaying student loans in return for a modest (like ~$250) fee.
Not affiliated, just appreciated their services.
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“After taxes, I only make $1280 a month…”
Because she can write off the interest on her loan, she should definitely start with lowering the amount of tax she is paying on her income.
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Consolidation dropped my interest rates as well as my monthly payment – technically I’ve got 20 more years to pay my remaining loans, but if I pay them off in 4 years (which I will at my current rate of payment), then I’ll have paid less interest than I would have if I hadn’t consolidated.
Also, whenever I receive a windfall (money for Christmas, tax refund, etc.) I spend a little on myself and then throw the rest of the money at the student loans.
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If your loan is from Sallie Mae you can do a three tiered 10yr payoff. Where you pay less to start, which covers the interest and then it steps up a few years later. I did this and was able to pay a bit more at the start which shaved off years plus allowed me to survive when I needed help most after college
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Someone making $1280 a month is probably doing something that she loves, like working for the Sierra Club. But in my opinion, she cannot afford it. Life is about compromises, and at this stage in her life, she is going to have to “sell out” and return to this dream later when she can actually afford it. The choice of such an expensive, private education has consequences and the responsible thing to do would be to live up to them.
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I would say that if you can handle the payments now, to continue with the 10 year repayment. While in the military, I’m sure that you aren’t paying much in living expenses. The sooner you can get the student loan albatross off your back, the sooner you can get on with your life.
Also, I would delay any retirement savings and put every penny I had toward your loans. I’m 42 and still paying off student loans and it’s not fun.
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