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?
GRS is committed to helping our readers save and achieve your financial goals.Savings interest rates may be low, but that’s all the more reason to shop for the best rate.Find the highest savings interest rate from Ally Bank, Capital One 360, Everbank, and more.
This article is about Debt, Education
Disclaimer: This content is not provided or commissioned by American Express. Opinions expressed here are author's alone, not those of American Express, and have not been reviewed, approved or otherwise endorsed by American Express. This site may be compensated through American Express Affiliate Program.
Discover is a paid advertiser of this site. Reasonable efforts are made to maintain accurate information. See the Discover online credit card application for full terms and conditions on offers and rewards.
SEARCH FOR RECENT ARTICLES
The answer depends in large part upon what type of student loans you are dealing with.
If these are federal student loans, they are eligible for Income Based Repayment. Better yet, since you are in the military (a public service job), after 10 years of qualifying payments on the income based plan while working full-time in public service, the remaining balance due may be eligible for forgiveness. The catch: this forgiveness is only available on Federal Direct student loans, so if the loans are with a different lender, you should absolutely consolidate them into the Federal Direct Loan program to make them eligible.
Given the amount of debt you have, I think it’s likely there are also some private loans in your mix. My best advice: work out your lowest payment possible (probably income based) on the federal loans and pay as much as you can stand on the private loans until they are paid in full.
loading....
The best thing to do is to extend your loan period to get the minumum payments down to a more resonable level. As long as you have the intention of paying them off before 20 or 30 years, you should have no problem. You definitely need a higher paying job, especially since you have a degree.
Another option is to get married and pull in that second income.
loading....
Depending on how disciplined Megan is about money, one option would be to see if her loan company offers a military service deferment, which would allow her to temporarily stop making payments, however, she wouldn’t accrue interest on the loan during the deferment period. Double-check that that is true with the lender, but in my experience this is true of deferments. Forebearances do, however, accrue interest, so make sure you know which one you are getting.
Megan doesn’t mention if she has any other debt. Since student loan debt is looked upon as good debt by creditors, I’d then use the money to pay off any other debts. If she doesn’t have other debts, she could put most of what she’s currently paying on her student loan into a savings account or CDs, something that would earn her some interest. This would allow her to build an emergency fund (which I’m assuming she doesn’t have since she says she has no money for savings) and also leave a little fun money every month. It would also give her some breathing room when her deferment ends if she’s not making more money than she is now, or if she’s left the service and is looking for a job.
As much as Megan understandably wants to pay this debt off now, I’d say if she can do the military deferment to get herself in a better financial position then she should do it. Unless she plans to be career military, she doesn’t know what her job situation might be like in a few years time, and she doesn’t want to have no savings and be forced to put her loans on forebearance (where they will accrue interest) because she can’t make the payments.
loading....
A lot of folks have great advice about programs Megan can look into, but don’t give up on the other side of the equasion. J A and Meg make great points – get more money. Many employers will understand you are in the military – and many may respect that and want to hire you more. A retired military officer running a local shop may prefer Megan over just another applicant. And part time work is often flexible enough to find replacements if you get deployed. So don’t give up on a part-time gig. You may also check with your contacts within the military – they may have part-time job assistance programs.
But a j-o-b is not the only choice. Like Meg said – lawn care, dog walking or anything you can do in your spare time could earn a few extra bucks per week – and pour those into your loans (whether you consolidate or not). Don’t be afraid to get creative.
And you can sell stuff. Sell whatever you don’t use or need and attack the debt. That could help a lot. When you’re out of debt you can buy new “stuff.”
I have over $87,000 in loans myself and just revealed my plan to pay them off by the end of 2011. I’m fortunate to have a “bigger shovel” (as Dave Ramsey would say) to use to dig. And I’m going to sell everything I can.
loading....
I second all the suggestions to look into loan forgiveness, loan payment deferment or even interest only payments that might be tied to your being in the military – or if you have any other public service work (not sure if your salary comes just from military work or other work). These were available before the financial stimulus was passed, but they have been enhanced recently.
If you have any opportunities to acquire specialized skills – and bump up your salary as a result – look into them. this is a longer term effort but can provide long-term and growing benefits. Ideas: learning a foreign language (e.g., Farsi if you are deployed), picking up computer skills, etc.
While you had mentioned the difficulty in getting another job due to your military commitment, maybe, If you have the ability/opportunity, you can take on freelance work or temp assignments. If you can make high quality crafts, you can sell them on Etsy. If you know how to play an instrument, perhaps you can teach. You could write, design websites or consult from most any location. Alternatively, you could look through your stuff to see if any is worth selling. If you have the time, you can look for diamonds in the rough to re-sell on eBay. Even books, CDs and DVDs can be packaged up and re-sold. These additional activities may not bring in a lot – but even an additional $100 payment every month can help the balance on student loans go down.
loading....
What everyone else said about checking out Income-Based Repayment. That said, J.D., I think you’re wrong to steer her away from consolidation. If she can consolidate the loans and get the same or a lower fixed rate, it doesn’t matter how long the term is – if they’re federal loans, there is never a penalty for prepayment. So get the lower payment now while you work to increase your income over the next couple of years, then start throwing extra payments at the principal, when you’re able. I consolidated my loans to a Graduated payment plan (which means payments start out low, interest-only, and increase over time), but I plan to pay them off well before the loan term expires. The equivalent would be getting a 30-year mortgage but paying it off like it’s a 15-year. You give yourself the flexibility to increase payments as you’re able, but if you need cash, you can just pay the minimum for a few months.
loading....
I have never commented on a post at GetRichSlowly before, but this seemed an appropriate time. I am in a situation very similar — my student loan debt is eating up almost half my income each month.
I have just applied for a loan consolidation, available through recent legislation, that will reduce my monthly payments by 2/3. Income based repayment allows the borrower to pay based on their income — something it seems like on the surface you’d qualify for. The legislation is new, and hard to understand at times. There’s a great website that helps to explain all the steps: http://www.equaljusticeworks.org/resources/student-debt-relief/income-based-repayment. I used their information to go through the process. Note that it will take months before your payments are reduced, if you’re approved.
Good luck!
loading....
I just went through a direct student loan consolidation through the US Department of Education. I had both subsidized and unsubsidized loans, one was a variable rate of 2.48 percent and the other was fixed at 6.8 percent. I was able to lock in a fixed apr of 3.625 percent for the life of the loan. Rather than having a $507 student loan payment every month, it got knocked down to $250.
Sure if I use their repayment schedule I’ll pay over $27,000 in interest over the 20 years of the loan, but I plan to use my debt snowball (once my car is paid off) on this loan and have it knocked out in less than 5 years.
Consolidation can be a life saver if you have the diligence to make sure to throw as much extra money at it when you can. However, if you don’t have the discipline to make getting out of debt a priority, then I would stick with the 10 year loan repayment plan.
Also, depending on your state, city- in the near future- there will be the opportunity to volunteer for student loan repayment credit. There is an active program like this in Chicago now http://www.sponsorchange.org/.
Best of luck~
loading....
As someone with $200k (went to expensive law school)in Student Loans, I think I am qualified as a master on this topic:
You really need more information. Are these loans federal (and fixed) or private (and variable)? If they are variable, extend those things out on a 30 year plan if you can. Interest rates are at an all time low. As interest rates rise, she is going to be paying more and more each month to student loans. She needs to be building up some savings and making smaller payments now on the loans. Once she has a cushion, then she can contribute extra and pay down the principal.
loading....
Recently I started looking into this issue more in-depth. I understood back in 2008 that if you make 120 on-time payments under a qualifying student loan plan, and work for the government during that time, after ten years your balance will be forgiven. I consolidated and got myself on the Standard repayment plan (which is the required plan)… but apparently I missed the part where you have to be on a ten year repayment schedule to qualify, which would almost triple my current payments (and is totally out of the question with my current budget). I don’t understand what good a ten year forgiveness is when your loans are scheduled to be payed off in ten years, maybe it’s different for military but I’d be wary of that.
That said, taking the 30 year repayment plan lowers minimum payment (you can always double or triple up if it fits your budget) but it means if something unexpected comes up, you may not have to choose between student loans and fixing whatever needs fixed, especially on an already tight budget. Plus, for me, consolidating locked my interest rate in lower than the interest rates for each of my loans individually, so that’s definitely worth looking into. And as others have said, income-based repayment is certainly an option… they have plans which allow you to pay lesser amounts now and greater amounts later as your income presumably progresses. There are plenty of options, you just have to be able to accept sacrifices of one area (say, more in interest paid over the long term) over benefits during that time (for example, establishing an emergency fund being possible with lower monthly payments).
loading....
She must be a private in the military they earn around 16,000/yr.
The whole question would depend upon who issued the loans, ie what type of loans you have.
I have roughly 40,000 in student loans through the Fed Gov. I have a fixed intrest rate of 3.65, and they give you a discount of 1% for paying on time, so it has been 2.65% for the last 5 years of so. I pay around $150 a month, the lowest possible amount. I could pay more but I have no desire to… Student loan interest is deductable on taxes every year… If I die before it gets paid off it is erased. So I will be paying this 150 for 20 years but I don’t see the point in paying it back so quickly with a 2.65% rate and when I can deduct it from my taxes every year. I call it my “good” debt. Some may not agree but oh well.
The terms and option will depend on the lender.
loading....
I’m just curious…where are people getting low interest rates on consolidation loans? mine is 7.5%!
The new formula for federal consolidation loans (private consolidation loans cannot cover federal education loans now) is the average interest rate of your federal loans. The interest rate is set, obviously by the feds. They were changed in 2006 to the following:
Grad PLUS loan 8.5%
Stafford loans 6.5%…
meaning that all students graduating with federal loans will consolidate with an interest rate of around 7.5%.
It is a total racket and needs real reform.
Personally, i believe student loans are going to be the next mortgage crisis. with the unemployment rate skyrocketing, people will not be able to make their payments…
and that’s my little rant.
loading....
“I got my degree … but that in the end cost me $55,000. After taxes, I only make $1280 a month.”
We really need to stop telling our children that any college degree at any price is a good investment. I know so many people whose parents kept telling them “you have to get your degree” or “just get your degree, it’ll open so many doors” who ended up with a very expensive but not particularly useful piece of paper.
I know this advice won’t help Megan, but it might help a lot of people avoid Megan’s situation in the future.
loading....
I want to give a word of caution about the graduated payment programs. My husband chose one of these when he graduated college because he “would be making more money when it adjusted”. What ended up happening was for many years he was BARELY covering the interest accruing on the loan and when it adjusted it went to 3x the payment. I am not sure about others but in 3-4 years of working he did not triple his income.
If you have to do any sort of graduated plan do one based on your income, not on some hope that you will magically make a ton more in a couple years.
loading....
This is becoming a tutorial on how to get out of one’s moral obligations. When you get a loan, you give your word you will pay it off. To talk about loan forgiveness is just plain offensive. And, I’m wondering what the current students are thinking about this – it would seem it would encourage them to get more loans, knowing that they, too, could shirk their responsibilities.
I’d like to see a follow up article about finding a way to get through college without being in debt up to your eyeballs.
loading....
There is a company, UPromise which used to be solely for saving for college fund for kids but now they have added an option where you can use the money you eran to pay off student loans. It’s like a rewards program on things you alreay buy. You don’t need to use the credit card they offer, you can just tie your debit and credit cards to your purchases and your student loans. http://www.upromise.com/welcome/how-it-works
loading....
1. Forgiveness is likely out of the question. Student loans are notoriously difficult to get out from under and any lack of payment comes with very steep penalties.
2. If time permits, look at taking graduate courses at a state school. This will allow for deferral of payments, and can buy time to hopefully get a new job/additional income.
3. If you own a home with equity, consider a refi and using some of the cash to pay down the loan. The interest on a home loan is tax deductible, so you can replace non-deductible interest (i.e., student loan) with deductible interest.
4. If the loan is a through the federal government, simply ask for a deferral during these hard times. Interest will be capitalized but that may be okay.
loading....
@Karen – Loan forgiveness is not about “shirking responsibility”. It is about someone taking a job that so few people want, often putting their lives on hold (even in danger) to do so. Usually these jobs are lower paying then others and so this is extra compensation.
loading....
I would consolidate and pay just enough to get the maximum allowed in tax benefits.
loading....
I’m not sure what service she’s in, but since she says her (base) pay after taxes is $1280 I must assume she’s no higher than an E-3 and has less than 2 years in the service. Her housing costs are probably completely covered by her BAH or she’s in the dorms or on base where there are no housing (or utility) costs to her. She can also probably eat at the dining hall on base which means that (even though it probably gets old) she eats for may be ~$10/day. This should leave ~$343 for everything else. Her taxable income is either $1447.20 (E-1), $1622.10 (E-2), or 1705.80 (E-3) (from http://www.dfas.mil/militarypay/militarypaytables/2010WebPayTable34.pdf). Meaning her annual taxable income is at most $20469.60. After you take out her student loan payments her total taxable income is at most $12825.60. Basically she’s probably going to get all her tax contributions back at the beginning of next year. That’ll be a windfall of $2006.40 – $5109.60. If it’s the latter case, there’s her yearly Roth contribution right there. It’s probably not the best to assume that she’ll get all her taxes back, but with that huge student loan and the standard deduction her taxable income is reaching way below minimum income. Getting a second job in this case probably wouldn’t be worse, but it might bump her up to the point where she’s getting taxed.
I’m not sure what to say at this point, she’s only got ~$343 to deal with everything beyond the basic necessities. If there are things she wants to buy I’d suggest may be doing some odd-jobs or finding people that need the skills you need on a short-term basis. A second job doesn’t have to be part-time work at McDonalds. She has a college degree and I’m willing to bet it’s going unused as an E-1 to E-3. I bet the skills and knowledge she obtained from that degree would be well used outside the military. The internet is a place to connect with people that need her skills, but there’s probably someone in her neighborhood that needs help or knows someone that does. Whenever you do a project for someone, let them know that your primary job takes precedence. If you tell them you’re in the military people will usually understand.
As a parting point remember if you do seek to make money outside of the military you need to let your supervisor know and (like everything in the military) you need to fill out some paperwork. Don’t let that be roadblock, the paperwork is worth the extra cash, especially in you situation.
loading....
“After taxes, I only make $1280 a month”
This isn’t really accurate in the same way most people mean. In the military, her room & board & food are paid for separately from her base salary. What this really means is that she has $1280 a month discretionary income. I think that 50% of your discretionary income is a reasonable payment for someone just starting out in life. My advice would be to keep up the payments as long as you’re able, and look for ways to make money on the side. With a degree she’ll likely be an officer soon, and her pay will go up.
loading....
@ Shawn, I agree. There are an awful lot of difficult, unpleasant, and sometimes dangerous jobs being handled by government employees who don’t get paid well. Loan forgiveness is like public pension funds and subsidized health care, a benefit offered to make up a decent compensation to these people so that they aren’t tempted to unionize.
I think the US should forgive 100% of education expenses (no matter who holds the loans) for any public employee with more than ten years’ service. We need these people to be well trained, thoughtful, and smart.
loading....
Hi Megan,
I’ve been reading GRS since the start of 2010, first time commenting though. This article strikes a chord with me because student loans are my current debt target.
Your military job probably puts you in a unique situation. But without knowing anything about it, I’m going to suggest you seriously consider consolidating if you have federal loans. You can keep paying them off as aggressively as you are now (if it’s sustainable) but with a lower minimum obligation you have the option to redirect your money elsewhere, should your priorities or obligations change. And as for the psychology side, it sure feels good to pay more than the minimum!
Some lenders offer a rate reduction if you sign up for autopay, or are consistently on-time for a long period of repayment.
I went with a graduated plan when I consolidated. I was only paying interest on the first 2 years; I paid towards the principal as well, but was grateful for that lower minimum if I had a month where money was tied up in something else (e.g. security deposit on my first apartment). I’m five years into repayment now; I may end up paying more interest in the long run, but I will never regret the breathing room that has allowed me to contribute to retirement, an emergency fund, and as of last year a mortgage.
But right now, I’m itching to pay off the rest of my own student loan ASAP.
Good luck!
-Erica
loading....
First off, you don’t have to consolidate to extend your loan payment period, you can extend the period without consolidating. I recently graduated from Law School with $100,000 in debt. They encourage you to consolidate, but as another commenter noted, this averages your interest rates across multiple loans. If you’re like me, you have several loans that are at different rates and consolidating negates the added benefit of paying off high-interest loans first.
For instance, I have 2 loans at 7% interest, 1 at 6.5% and 1 at 2.5. If I consolidate, I will be paying the full amount at like 6.8% interest. To me, I rather keep them separate and pay extra, directing the extra payment to the specific loans that have higher interest rates. This will cost you less in the long run. The benefit of consolidating is that you have one payment, but who cares if you automate your payments. What difference does it make if there are 1 automated payment or 4? None.
Instead choose a longer repayment period and when you can pay the original amount, if you have an extra expense, then pay the amount you owe. I have mine on 30 year repayment but pay the amount that I would pay for 10 year every month anyway. That way, I’m not forced to pay that amount if something comes up, but I’m still on track to pay it back in 10 years. It just gives you more flexibility.
loading....
@63 Tyler – my sentiments exactly. The advice to all others considering an expensive degree is to look local first – many community/city colleges offer transfers after two years to larger public universities. The first two years are relatively cheap and the in-state public costs of the final two years are cheaper than out-of-state or private alternatives. Unless, of course, you can afford the expensive stuff to begin with. I, for one, can vouch for the fact that the right degree from a public university can provide a wonderful yield over the course of one’s first 10 years out of school.
For Megan’s benefit, as a military member she has access to military financial counselors, who can be wonderfully helpful and can provide custom-tailored advice for her situation at no cost, and who can likely pinpoint what benefits she can receive under the GI Bill or other military-only alternatives.
At that salary level, I have to assume Megan is junior enlisted – so I wonder if she is considering applying for Officer’s candidacy, since she has a degree already. She could also consider volunteering for not only deployment, but for an overseas tour for a few years. There are numerous tax-free allowances tacked on to overseas travel, whether in a war zone or not.
As a side benefit, it’ll also provide her an excellent opportunity to see the world at a fraction of the cost of a tourist.
loading....
The choices she made don’t exactly make sense (going to an expensive private school then enlisting) But as JD points out our decisions with money are more emotional, especially when young huh? I am wondering if she is in the reserves not enlisted ? Either way I would use my GI Bill money (there is one especially for reserves) or use the military tuition assistance program (which for enlisted) to get a practical, goal oriented Masters degree and defer the student loan for a bit. Then use that degree to get a public service job, a job that pays more, or an officer position promotion if you want to stay enlisted. Then you should be able to pay those loans off. The “good” thing about student loan payments is you get a pretty good break on your income taxes for paying on them. It is sad but my friends and I have started to say that a BA is the “New High School Diploma” you are almost better of with skills and no degree/ no debt. But I am sure the expirience of college when your younger is pretty priceless– I look back on mine fondly.
loading....
I’m in the same boat as people like Adam and Tiff (over $150K in FFEL loans; 6.8% to 8.5% interest)
Pretty much feels like you’re drowning everyday. I’ve looked at all kinds of ways to attack them. Here are some suggestions:
(1) Finaid is great
(2) Ibrinfo is great
(3) If you have any 8.5% loans, consolidate them to get an automatic .25% rate reduction through a loophole
(4) Defer all your subsidized stafford loans for as long as possible with your current lender (you get three years max), then consolidate with Direct Loans, (you get a new three years); use the extra money to pay off your higher interest or non-subsidized loans
(5) work in public service and get forgiveness after 10 years
For those commenters who are appalled at the thought of forgiveness after 10 years – - don’t forget, there are people who want to provide their expertise in the non-profit/public service sector, which enhances all of our lives. The cost of higher education at $150K should not be a bar to those people.
loading....
If you choose to do income based repayment you also have to consider if you plan on working in that field for ten years. In my line of work, data analysis, most people start at the government/state level and work their way into private industries where the pay doubles.
loading....
Geez people – student loan forgiveness is not about shirking obligations or getting out of one’s responsibilities! It’s basically a job benefit that “vests” after X years of service to encourage talented people to fill low-paying but highly needed positions. The military, some teachers unions, AmeriCorps, the NIH, etc offer this BENEFIT to qualified individuals as part of their employment package. It’s about as ‘shameful’ as accepting a 401K match and it doesn’t cost the federal student loan program a dime.
loading....
@72 chacha1 who said “I think the US should forgive 100% of education expenses (no matter who holds the loans) for any public employee with more than ten years’ service. We need these people to be well trained, thoughtful, and smart.”
As a public employee with more than 10 years experience myself, I couldn’t disagree more with this statement. We already have numerous benefits and incentives not found in the private sector, including for obtaining higher education at low costs in many cases. But creating an extra burden on the backs of taxpayers for the benefit of public servants with this type of plan is ludicrous.
Economic growth in the US is generally provided by the private sector anyway. So while I’m very proud of the service I provide as a public employee and recognize its impact on the stakeholders I represent, I also readily acknowledge that public service is not the end-all-be-all that some of my counterparts tend to think it is.
All that said, I fully support this idea for the military, as their service to our nation is one of true sacrifice – where lives can often be at stake.
Thank you, Megan, by the way for your service!
loading....
3.If you own a home with equity, consider a refi and using some of the cash to pay down the loan. The interest on a home loan is tax deductible, so you can replace non-deductible interest (i.e., student loan) with deductible interest.
4. If the loan is a through the federal government, simply ask for a deferral during these hard times. Interest will be capitalized but that may be okay.
WHAT?? #3 above is just patently false, student loans are above the line deduction whereas mortgage interest is only useful if it is over the standard deduction.
#4 I disagree, if you can pay it, pay it. Do look into surveys and other little things like selling on half.com for your textbooks to put money away for retirement but if you stay in the military you’ll have a pension, health insurance and your income will go up. Just hang in there.
loading....
@ Joann,
Perhaps I am misunderstanding you, but I don’t think your information about the loan forgiveness portion is correct. Please look at this again. if you have to make 120 payments on time, but also must be on a 10-year loan payback plan, then in 10 years, you would have fully paid back your loans, and the loan forgiveness plan is moot. The loan forgiveness plan is only for certain jobs with low pay that service the public, but the point for them is that if do this type work for ten years and make timely payments for 10 years, the remaining debt is forgiven (not the entire debt).
loading....
Here is one thing that I didn’t see mentioned in the article…
You can claim an exemption on your tax return for student loan interest. My accountant has always advised me to keep paying on my student loans because I’ll always be able to deduct the interest. That said, I do try to pay extra to the principal on a monthly basis. You would be surprised what a difference just $10-$20 would make over the course of a year!
I’m going to assume Megan does not own a home, either.
I did consolidate my loans. I’m in the unfortunate position of having been downsized for at least 1 year, 3 times in the 10 years since I graduated. But, when I consolidated, I was able to get my Stafford loans down to 4.5%. My private loans average 8.9%, so I’m concentrating on paying those down first.
Another way to save a little bit is to sign up for automatic deductions from your checking account, which saves 1/4%, which is just pennies on a payment of over $600, but it’s still a savings!
If you shop online, sign up with Upromise, where you can make your purchases and earn cash back that goes to pay down your student loans. I use this for my gas purchases and dining out… the same things you already do now, but I’m carving back out some funds to pay my loans down.
Hope this is helpful!
loading....
@ lil
That’s exactly my point. I looked just last week at this issue, because I’ve been operating for the last 2 years under the assumption that making my base payments while working in public service will end in forgiveness of my remaining balance at the end of 10 years (I’m in slightly more debt than Megan but I have three degrees to show for it). As a result I only had incentive to make the minimum payment (I pay slightly more only because I like even numbers, just a touch OCD).
It turns out my standard monthly payment is a little bit more than 1/3 of what I must pay to qualify for forgiveness… I would have to pay $600 MORE PER MONTH to qualify (they show the chart on my account, what I have paid per month and what I would have to pay to qualify), and guess what balance that leaves me at the end of ten years? Yep, zero. Nothing to forgive.
loading....
Megan, I understand 100% where you’re coming from. I was in the same boat for a little over 2 years before having to change what I was doing. I graduated in 2007 with about $40k in student loans, if I remember correctly (may have been $45k, I can’t remember without digging back through my files). There were 5 or 6 loans total, some federal and some private. My monthly payments were about $550. I was only making $25k annually at the time (gross!) so this was killing me. I did it for two years and started to evaluate my options.
The key was accepting that I would have to extend the loan term beyond 10 years. I understand I may still be able to payoff the loans in 10 years or less, but to get the monthly payment into a manageable range for me, I had to change the time horizon for payoff, if that makes sense.
I consolidated all of the loans into a Wells Fargo Private Consolidation Loan, whihc now has a balance of about $32k. (Wells Fargo wasn’t a good choice, I would recommend another lender, but that’s a different story for a different day). My payments are now $271 per month. The one downside is that interest is variable, but I can handle that on one loan (two of my loans before were variable interest). Having one payment is much easier to deal with now, and it’s a lower amount, by nearly $300/month.
I did have to extend the term to 25 years, but I expect that my income will increase over the next few years (I’m making a little under $40k annually now). As it increases, I’ll contribute more and more to paying off the student loans.
But in summary, I just wanted to say I totally get where you’re coming from. But I encourage you to look at this realistically. Obviously, the $600+ monthly payment bothers you. The only way to fix that is by extending the term of the loan. Ten years is a long time to be putting 1/2 of your income towards debt payments. And that is assuming this is your only debt.
loading....
I just got a private consolidation loan with Wells Fargo. Why were they not a good choice? What happened???
loading....
I struggled with my student loans for years. Oh, the cruelty of thinking you’re going to school to increase your earning potential only to graduate and find yourself making $20,000/year or less.
I set myself up on income-based payments. At first, the estimated payoff date was in the distant future – I think I would have been in my 70s before they were paid off, but the payments were manageable for me and allowed me to stay on track.
As my income increased, so did my payments and my pay off date started looking a little better. Eventually, I got a new job with a high enough income that I was able to quadruple my monthly payments and pay off the balance in less than a year – I was 25 when I graduated college and 35 when I paid off my loans. Just hitting the 10-year goal Megan set for herself.
It’s hard to imagine that you’ll be making more money eventually when you’re in your early twenties and struggling to make ends meet, but as you gather experience, build confidence and settle into a career, it really does happen.
loading....
Here’s a link to a site that talks about the public service forgiveness option. It looks like it you would have to get through 10 years of payments. If that’s your current plan you might look into whether you could consol to a 30-year and then get forgiveness after 10 years. This would essentially reduce your liability by the amount saved each month for the 10 years. Also, I’m not sure if the consol will reset the 10-year as I’m not in the military and haven’t looked into this. I would spend a little time on this if I were you – call your servicer and ask them. They may be helpful.
http://www.finaid.org/loans/publicservice.phtml
loading....
I would recommend thinking about the purpose of taking out the loan it the first place. Consider that the interest you pay is in exchange for the benefit of spreading the cost out over time. The more you spread it out, the more convenient it is, and the more you pay for that convenience.
So consolidate/refinance and bring those monthly payments down. Yes you’ll pay more in interest, but perhaps its a fair trade. Don’t forget you’re getting something for that interest: more time and a more forgiving monthly budget.
loading....
I keep my federal loans and my private loans at the absolute minimum payment (which includes interest and principal), and have them automatically debited from my checking account so I get the best rate. I keep a separate emergency fund just for a year or so of loan payments, so I wouldn’t have to defer even if I lost my job. This is mostly for sanity and to keep my credit in good shape (i.e., everything is on auto-pilot)
When I graduated, I consolidated my federal loans because I was able to lock in a very favorable fixed rate (mid 2%) — there was no benefit to me consolidating my private loans. I restructured the terms of my consolidated federal loan so that I was on the 30 year payment plan instead of the 10 year payment plan (that was not a new consolidation, just picking a different payment plan). I use the money I would have spent toward the federal loans and apply them toward the private loans, which have higher interest rates.
On top of my minimum monthly payments, I try to pay off about 6-10K in principal of my student loans every year (e.g., with lump sum payments toward the private loans). When you are talking about a lot of debt (over 100K), it’s not always possible to knock it out quickly.
The most important thing to me about paying off my loans is having a defined plan, and not getting stressed out. If I continue to follow my plan, I will knock out the private loans in the next 5-6 years. Not as worried about the federal loans, because around 2% fixed is not a bad rate at all. And I still have that student loan emergency fund that I could use for a year or more.
Debt is never good, but I think sometimes people do not appreciate that liquidity and other financial priorities are also important — not just debt elimination.
The way my loans are set-up, the loans recalculate every time I make a payment toward the principal beyond the minimum payment. When I first started, my minimum loan payments were about $1350 per month, but now they are down to $520 per month. When I knock out the private loans, they will be down to $240 per month. That is really a huge improvement in cash flow.
Separately, I think that massive student loans are going to be a huge issue for our country in the next 5-25 years. With one generation strapped with underfunded retirements and exploding medical costs, and another generation strapped with massive non-dischargeable student loans, it’s going to be ugly. With the government strapped for cash as well, where is all the money going to come from?
loading....
Since she’s in the military and her basic needs (food, housing, clothing) are covered, her “after tax income” is what the rest of us call “fun money” in our budgets. I’d LOVE to have over $600 fun money in the monthly budget, even after paying debt.
Also, her income will most likely increase at a fairly steady rate over the next few years. You have to be a real loser to NOT pick up rank up to at least E4. After that, it gets a little more competitive at each level, but it still do-able. If she is going to be commissioned as an officer her income will jump as well.
loading....
A.J., without getting too in-depth, I was told that the loan was still eligible for in-school forbearance. When I went back to school recently to get my second B.S. degree, I called Wells Fargo and had the loan put in forebearance – I knew additional interest would accrue, but I didn’t want the burden of making payments while in college again.
It turns out that is not correct. Wells Fargo Private Consolidation Loans are not eligible for any kind of forebearance or deferment. After a couple of months of not making payments because I had written notice from Wells Fargo that my loan was in forebearance for the next six months, I started getting calls and collection notices stating I was two months behind on payments. I called WF to discuss, and found that the information I had been given in the past was wrong.
When I faxed the letter I had from WF to the WF rep as proof that my loan was put in forebearance, she insisted it was a mistake and that WF was not responsible for the mistake – basically, that mistakes happen. I spoke to several people at Wells Fargo over teh course of 6 hours and got no resolution. I caught up the payments and vowed to never do business with this company again. The arrogance coming from an institution that my tax dollars helped to bail out was just astounding.
As soon as my loan balance is under $25k, my plan is to get a LendingClub.com 60-month loan and finish paying off this debt. But I will never, *EVER* do business with Wells Fargo or Wachovia ever again.
I’m gettnig pretty mad recalling the situation so before I lose it and start lambasting WF with horrible language, I’ll sign off.
loading....
P.S. And I briefly considered suing Wells Fargo for court fees and the balance of my loan. After all, I had written notice from Wells Fargo on which they were reneging. Several friends discouraged me from this, though, so I let it go. In hindsight, I somewhat regret that I did not take them to court.
loading....
Oh — thanks for the heads up. Luckily, I do not plan to go back to school full-time any time soon. If I go back part-time, I intend to keep making payments on my loan.
I agree with you though — I want these off my plate ASAP.
loading....
it is obvious that there are a TON of student loan questions out there and I wanted to offer my knowledge as a resource. I am CEO of a company called iGrad (iGrad.com) and we are a resource for recent college graduates trying to tackle debt and make wise financial decisions. I am considered an expert in student loans and have appeared on CNN, in the Wall St. Journal, USA Today etc. just to name a few, all about student loans and finances. If youhave a particular question, please don’t hesitate to email me or go to iGrad.com and press the “Ask iGrad” button on the top right hand part of the site. We will answer your question within 24 hours, often sooner and the site is free.
loading....
Student loans are the one thing I see most often ruin your credit when you are young. It is important to pay, and pay on time. I agree that if it is difficult based on your income, try to work with your lender. But, DON’T just stick your head in the sand and hope it will go away. Poor credit will affect you for a long time to come and in a lot of different ways, so protect your credit rating…..
loading....
I just want to add my voices to those saying, “Pay it off as quickly as you can!” I was in your situation 11 years ago, and I do not regret a single one of the sacrifices I made in order to pay my student loans off as quickly as possible. Since your income will increase over time, it probably won’t take you the full 10 years to pay off the loans; that means you won’t miss out on much retirement savings at all.
One thing that might help a little is UPromise. It’s a free program that operates like a rewards credit card: every time you make a purchase, you earn money toward your student loan payoff. Even better, your friends and family can sign up and allocate their rewards to you.
loading....
I tried to get through most of the comments, and at some point got overwhelmed. But here are the answers to the most common questions…
- I’m currently an E3 in the USAF, I’ve only been in for 14 months which is part of why my pay is low.
- I live on base (in the dorms), eat at the cafeteria, walk to work, don’t have cable or internet etc to keep my expenses down
- I have both private and federal loans. The private ones are the problems because any extra payment goes towards interest and not the principle. Which makes me feel like it’s somewhat pointless, and it’s my fault for not reading the fine print when I signed up.
- I plan on commissioning (i.e. becoming an officer) but at the moment the AF is too big and so they aren’t taking anyone so it will be a few years.
- Also, the govt is repaying $10000 (almost half) of my federal loan per my enlistment agreement
I was well aware that going into the military enlisted was going to cause financial issues for me, but since I can make payments it was not enough of a reason for me not to do it. I like my job and serving my country. I’m not complaining, I’m just asking for some advice that I can’t find anywhere else
loading....
See comment 51, some of them will likely be eligible for forgiveness in 10 years so check out which ones and those, extend to a longer payment plan while you keep the others on a 10 year schedule… get more info from the lenders! Good luck!
loading....
I am a graduate advisor at a major university, and it is my understanding that in order to defer her loans she would have to be enrolled in a graduate degree program. Just taking classes won’t affect her payments.
Deferral = interest suspended, only certain things qualify you for this.
Forbearance = suspend payments, interest accrues, you can ask for this anytime.
I’d consolidate and get the lower monthly payment, save an emergency fund, and then start paying extra once you’ve got a bit of a cushion.
loading....