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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Accelerate the payments on the smallest loan first and get it paid off asap. Then take the money you were setting aside in your budget for that payment and apply it to the next largest loan. It’s like a debt snowball for your student loans and really worked for us.
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I am assuming you already know or are in the Dept of Defense Student Loan Repayment Program.
ALL student loan interest is tax deductible on your federal taxes!
I imagine interest rates for consolidating would be much lower than when you originally got the loans. Can the private ones be paid off in that manner?
The company I consolidated with – gave an immediate check ($500) for consolidating loans totalling over a certian amount, THEN after the first 18 months on time payments the interest rate went down by 1%, AND by signing up for AutoDebit through their system the interest rate was lowered .25%, AND when the balance reaches $600. it will be forgiven.
Student Loan debt is GOOD debt.
But cut yourself a break – consolidate after shopping around, at a lower rate with a company that gives incentives, get a longer payment plan, but pay more than the minimum AND take all the interest off on your taxes! Your education was an investment.
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“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.”
That bit about extra payments not going to principle is confusing to me.
Is the bank putting extra payments towards next months payment or something? Or are they not allowing early repayment? What exactly does the fine print say. If you send them extra money it should not go to waste. Theres no extra interest for them to apply extra payments towards.
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Meg, first of all, thank you for your service to the country. much appreciated.
I know things have changed since I graduated from grad school in 2002, but I was able to consolidate my loans (~50 federal) at 3.25% and make the term 30 years because I had over 60k in loans total (also had ~13 private). I threw everything at the private when I started working and got that paid off quickly, and now I’m not even concerned about the ~200/mo I pay for federal, at 3.25% interest it doesn’t make sense to pay it off early, and if I really start to hate the debt, I still have that option.
I recommend consolidating (if at a lower interest rate) and/or getting a longer term, and check again if there’s a way you can throw extra at the private loans… if not at least save up that extra so that you can pay them off sooner with a lump sum. I know you don’t like the idea of debt, but you can actually get rid of it faster that way as you can put money on the high interest rate loans. Just have to stay disciplined about paying them off when you have a longer term, but if the debt really bugs you, you will.
I also agree with taking a look at your taxes and make sure you don’t miss claiming the interest deduction!
best of luck to you and take care!
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There is a Federal program that will pay for the balance of your student loans if you work for ten years in the Public Sector. It’s through the Department of Education.
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While it might be beneficial to look at somehow lowering your interest rate or shaving a few months off the life of the loans (paying them as soon as you can so you don’t pay as much interest) I do think you need to also look at increasing your income at the same time. Don’t wait for “in the future” to get here. Start now.
Think outside the box, review some of the suggestions made previously and brainstorm some others. Are people willing to pay your to clean their cars of snow in the winter time for $5 or $10? What other needs do you see around you that you could fill? It may take a few different things before you find something that works for you. But even the $5 and $10 jobs add up. Look for something that might give you residual income, no matter how small or large. Once you start actually looking for something, you will start to see so many opportunities.
You mentioned that for the private loans any extra payment goes towards the interest. Does this mean you have a set amount of interest over the life of the loan? If that is the case, once you pay that off then shouldn’t the extra money go towards the principal? I would still look at trying to pay it off ahead of time, just pay off some of the other loans first, whose interest amounts you can effect. Keep rolling the payments once you pay off a loan; just put that amount towards the next loan.
I don’t think there is any wave-the-magic-wand-and-make-them-disappear solutions. No matter what it is going to take discipline and time on your part. The fact that you are thinking about them is a good first step. Good luck.
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Your student loan should be deferred for 3 yrs without interest while in the military.
Put in for an officer program and dramatically increase your pay. With a college degree you should have never been enlisted making so little money. It is criminal that your recruiter tried to meet a quota and did not send you off as an officer.
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I agree with jim (#102). That bit about extra payments applying towards interest, not principal, makes no sense. It is my understanding that all student loans, both federal and private, carry NO prepayment penalties.
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Sorry if this has already been posted – I got a little tired reading the duplicated posts myself.
The bit of advice I have (and I know through personal experience) is to ask if consolidating would impact any loan forgiveness later on.
I actually only took out my loans (all federal) because I knew I was going into public service would pay so little, that I could never afford to repay the loans. I took my loan counsellors advice and consolidated my student loans to lower payments and make payment more convenient while looking for the work I really wanted to do – and hopefully the work that would afford me loan forgiveness.
I quickly got a great job teaching special education to some of the lowest income students in the country and I have been doing it happily for 10 years. All of my loans would have been forgiven – if I had NOT consolidated. Since I did, I was not eligible any more. And since there have been many times I have had to forebear and defer the loans (unexpected life problems, and the income problem I expected) I have repaid many thousands of dollars – and I am only half done paying them.
I wish I had known what I was doing before consolidating!
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I haven’t read all of the comments.
Most of your income is discretionary.
This is the time to pay off your loan- go for it! Five years you will be free of the loan and the military- with job experience and debt free. Once you pay the interest on the private loans- they have to let you pay principal- or maybe roll the private loans into one that CAN be paid early.
My son in law is just finishing with the Marines (tomorrow). They don’t have any debt left and are starting new! He found what you found -military wise- the services are not as anxious about OBC right now. Seems slimming down is the word of the day. Hopefully, the recession will be almost over when you get out.
Better yet, stay in for twenty and get a retirement income at the ripe old age of 43!
BTW- having a second job is pretty difficult in most military fields these days. They work hard to provide you with all you need and do not like that second job thing (at least in my daughter’s AF experience).
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After reading all the comments, my recommendation is to apply to graduate school and use the GI bill or Federal Tuition Assistance to cover the expense. Get it online or through one of the base education centers. A lot of reputable institutions are online now and not only will you have your loans deferred, but you will probably become an officer by the time you earn your graduate degree putting you at a higher income bracket As an added benefit you will be further ahead of your peers. Being a Military officer is a competitive career track.
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There is a simple way to reduce your student loans as provided by the government, if your student loans are all government based, such as gradplus or basic government subsidized loans. If you consolidate all your loans to one lender, you can then apply for income based repayment (IBR). This should lower your payments from about 600 down to 300 or less. Once you have received IBR repayment, you can re-apply to the government for income contingent repayment (ICR). ICR repayment basically takes what you make, and has you repay a small percentage of it. For example, I currently have nearly the same loan debt as you, but I make 40k a year at my current job. ICR requires me to pay 170 bucks a month based on my current income and the fact I am married. A lot of people are afraid to use the government programs because they elongate the debt, but the current ICR plan is nice because it deletes all existing debt after 25 years. So even if you only pay 150 bucks a month for 25 years, all the rest of the debt is forgiven.
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I never post to these things, but for those of you who are confused about the difficulty of pre-paying student loans: there are some loans where if you make early payments, the money goes towards your next payment, not towards principal. If this is the kind of loan she has, prepaying won’t save her any money–it will pay off the loan faster, but not in any way that saves her interest. So there’s no prepayment penalty, but there’s no huge prepayment advantage, either (except in getting rid of the loan that much sooner).
I should add that sometimes it IS possible to prepay principal on these loans; it just requires sending the payments to a different address (often they make this address very difficult to find).
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@100 Honey: After I finished my masters, I kept taking night classes at a community college in San Mateo. After the first semester, my loans went back to in-school status.
It probably varies from school to school.
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As others have noted, there are new Fed programs to help with loan burdens. The information at Equal Justice Works website is very helpful:
http://www.equaljusticeworks.org/resources/student-debt-relief/public-service-loan-forgiveness
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I too (along with Chett @ 5k5k) wonder about the GI Bill. I worked as a VA coordinator many years ago helping service people access their education benefits.
You don’t mention what branch of the service you are in; check with your Education Services Office and see if any portion of your loan can be paid through your service. Also, if you are on active duty, this may qualify you for a deferment, also. Check it out! AND THANK YOU FOR YOUR SERVICE!
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IBRINFO.ORG
YOU HAVE TO CHECK THIS WEBSITE OUT!
My wife and I will have about 80k in student loans (2 undergrad degrees from a private institution and 1 masters). We were able to get all our loans as federal loans so that they were eligible for IBR and we’re going to be working for non-profits our entire lives. We’ll probably only have to pay back half of the 80 over the course of 10 years and we’ll be free of it all
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The deferral is going to require to go full-time in graduate school and graduate school is not cheap, so really, that’s not an option.
You can get a hardship deferral, but since you have a job, probably not going to happen, either.
Depending on the loan type, SallieMae will consolidate the federal loans and the rates are ridiculously low right now.
Depending on how the interest accrues, you might be able to get around the extra payment thing. My student loan bill is $75 a month, with extra payments going to interest. I make four payments==2×19 and 2×50 and I make them every 2 weeks. The first payment is 19. The next day, an automatic payment of 50 goes to the principal. Two weeks later, another 19 and the next day, 50. I’m paying 138 with 38 going to interest and 100 to principal. When I was making the 138 in one payment, I was only paying something like 90 in principal and 48 in interest.
Either way, spreading the payments out may let you get around the going towards interest thing.
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First, #107 above says “deferral is going to require to go full-time in graduate school” and this is not right, in my experience. That has not been the case with my federal student loans. Also, someone earlier in the comments said they thought you had to be enrolled in a course as part of a degree program, not just any course, to qualify for deferral. That is also not correct.
Actually, you can defer federal student loans (Perkins and Stafford) if you are enrolled in a college class for credit, at an accredited college or university, at least half time. I have done it, and it is also clearly stated on the US Department of Education’s website, and all over the internet. The classes can be at the graduate or undergraduate level. In some cases, taking a single class is considered half time enrollment. This is determined by the system the college uses to determine half time status. With a Federal Perkins loan from the time period you are talking about (2004-2008) you would also get a 6 month grace period after each deferment period ends in which the loan does not collect interest. In my experience, there is not a limit on these grace periods for Perkins loans the way there is for Stafford loans.
Megan, you should also try checking with your private loan lender to see if there’s anything you can do to reduce your interest rate, even a little. Someone else mentioned this above. One common promotion is that they may reduce the rate by 0.5% if you make a certain number of consecutive on-time payments online and agree to online billing.
For the Federal loans (Perkins and any SUBSIDIZED Stafford that you have) the loans won’t collect interest if the loan is in deferral (which you could sign up in the future for based on active military duty or half-time enrollment in a college courses). I know that doesn’t help you now, but it’s something to keep in mind for the future. From my personal experience, I can tell you that getting the interest deferred on the federal loans (meaning no interest accrues during the deferral period) can really improve your situation — if you can use that time to pay down the principle. If you can do that for any of your loans, now or in the future, this could make things a lot better for you. Since you can’t pay down the principle on your private loan (according to your earlier comment), this might be one option for paying off the any Federal loans you have left after the military knocks off the $10,000, if you are ever in school at least half-time or on active military duty in the future.
Also, the truth is that student loans are very complex. There are many kinds, and the terms of each kinds can be very different depending on when the loan was originated. Because of that, many people — even some financial aid professionals and students with loans themselves — do not fully understand all the details that will apply to YOUR loans. There have also been a lot of changes to the federal loan system recently, especially with the College Cost Reduction and Access Act in 2007. Just keep in mind when you read people’s advice that some of it could be outdated or based on incorrect assumptions.
I personally have been given a ton of incorrect information about my own student loans, from loan companies, the financial aid office at my college, etc. I guess this is not really the most upbeat comment, but my best advice is don’t take other people’s word for things regarding student loan repayment. I have been told incorrect things more often than I have been told correct things. It is very confusing territory. Best of luck to you figuring this out!
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I feel for you Megan! When my wife and I first got married 5 years ago, combined we had ~$900 in student loan payments per month, eating a substantial source of our income.
I have to agree w/ JD–it takes discipline to avoid “lifestyle inflation” and keep snowballing your debt. We’re about halfway done paying student loans by following Dave Ramsey’s technique in the “Total Money Makeover”.
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Megan,
I graduated with $45K in student loans in 1998, and currently have $35K left, but I followed the suggestions most people made in the comments.
–I deferred my loans as long as humanly possible, attending school half-time for 6 years to get my master’s degree.
–I consolidated at 2.8% interest rate a few years ago for $28K of my loan (to the person asking about this — it depends on the current market whether you get a low interest rate).
While these choices allowed me to live my life with little or no worries about the cost of my education, 12 years later I’m only down $10K and I haven’t progressed in my career like I should have because I spent my time in school avoiding loan payments.
Two of my friends graduated with similar debt; both lived “poor” in their early 20s while everyone else did, and both are finished with their student loans. Now I am actively paying off my loans, but it takes nearly half my monthly salary to do it.
My advice is: suck it up, hunker down, pay extra on the loans you can pay extra on, and with a bit of luck you’ll be out of debt sooner than you think. Remember, even if you consolidate later on, if your balance is lower, you’ll have less to pay in interest.
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Megan is certainly on the right track. She has her priorities in check, by making sure that she has enough money left over for the cost of daily living after she pays her monthly student loan payment. My advice would be to pay it off as quickly as possible, even if it means having even less “fun spending” money. Being in the military does make it tough to do odd jobs on the side, so it really comes down to budgeting your money well and paying off as much of the debt as you can as soon as you can.
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Even though “standard” extra payments are sometimes applied to interest, many times you can literally send in a check and write “apply only to principal” on the memo. And put it with a cover letter saying something like that:
“I am sending an extra check for $500. This is in addition to my monthly payment. It is to be applied to principal only. Do not apply it to interest.”
Usually that works. I know a number of people who do that.
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First off – thank you for your service!
second – it really looks like you’re on the right track for getting the loans paid off. I have to agree with teh others who recommend the hunker down and just get through it. If you can get used to the payment – and increase the payments when you get pay increases – when the loan is paid off – you funnel that money toward your retirement (remember – military comes with certain perks – one of which being a pension so you’re retirement goals needent be as aggresive as someone in the private sector). As for the interest/principal repayment deal. Most likely extra payments go toward future payments instead of principal by default. You should however be able to specify that the extra goes towards principle. They of course don’t want you to know that and so they explain it like it’s impossible. It’s at lest worth a shot to try it.
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I know a little too much about student loan debt. I was in the same boat as Megan, minus the military, and then I went to grad school. Yikes.
I actually put a guest blog post on the PerkStreet blog recently that was personally helpful to me and to a few friends who’ve also been struggling with even starting to get a handle on it. It sounds like Megan might have some paths she can take through her military benefits already, but maybe these tips can be helpful to other readers?
In a nutshell, they are:
1. Know Your Student Loan Details
2. Minimize Interest & Monthly Payment
3. Avoid Mistakes (like not picking up the phone when your lender calls!)
More info on the blog: http://blog.perkstreet.com/step-out-of-student-loan-debt-step-one/
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My best advice, Megan, is to talk to your lender.
I worked in student loans for nearly ten years, at both a lender and a school, and many of these comments and suggestions are full of inaccuracies. Please do not rely on comments here to make decisions without consulting your lender.
The loan forgiveness programs are extremely confusing and have very specific requirements- and frankly, I don’t think they will benefit very many people. Merely working in public service for ten years does NOT guarantee forgiveness- too many students are borrowing loans on that expectation.
The bottom line is, student loan lenders aren’t always the bad guys. Colleges/universities charge outrageous tuition, and too many students borrow money to pay for their luxury items. Just because you can borrow the money, doesn’t mean you should.
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Wow, my sympathies to everyone struggling with student loans. The more I read, the more I feel grateful I went to Uni here in the UK (started the year before fees were introduced), worked through all holidays, and only ended up with about £1500 in loans which I paid off within a couple of years of graduating even though I didn’t need to (UK graduates don’t pay until their salary hits a certain £ value).
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I wrote a piece on DailyWorth that outlines how I tackled my student loans:
http://www.dailyworth.com/blog/427-smash-student-loan-debt
I hope many find it helpful!
In Megan’s case, if she consolidated her loans, and still rapidly paid them off in 10 years (no discipline required, just automate the payments!), she would save a lot of money by paying less in interest, while still having them paid off sooner than later.
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Consolidation has REALLY worked out for me.
The 30-year timeline can be quite scary, but be practical about it.
For me, it locked in an interest rate of 4.5% (this was 2006, for undergrad), a rate I’m praising Jesus for now. My dad recommended it and I’m really grateful I took his advice, even though at the time I didn’t really know what I was doing.
The lower monthly payments enabled me to afford them straight out of college and later grad school while also handling my car payments and another (grad) student loan. I did a sort of debt snowball without knowing the term…I paid off my car using any means necessary, increasing as my income increased, then paid off my small grad school loan in hefty chunks.
The lower payments also helped me survive a recent move and a low-paying temp job until I could get hired and make a decent income. No late payments.
Now I have an emergency fund built up and I’m concentrating on throwing all my extra money at this one remaining loan. I REALLY don’t make that much money and since I live in a city, my rent is quite high, but I’m still finding I can almost double my minimum payment now that I’m not so anxious to put away money for a disaster. Assuming my income increases even minimally over the next few years I think I can get the sucker done in about 6 more years. I HAVE had to postpone the idea of a house, but that’s okay, I’m young and I do like the freedom of renting.
So, honestly, if you’re the type of person who can’t rest until her debt is settled (as I turned out to be, to my surprise) then consolidation could be just what you need. It turned out to be perfect for me and even with the downsides (I had to repay immediately out of college, and when I went to grad school 4 months later and got a forbearance the interest capitalized) I am REALLY happy I did it.
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My husband has massive students, both government and private. It’s practically crippled our financial situation. So much of our money has to go to the minimum payments, that we racked up massive credit card debt, and now we live with a friend because we couldn’t afford our own place on our salaries (I have a good paying job, my husband’s job pays barely anything) minus all the minimum payments.
I think if you can afford the monthly payments, then yes, do the shorter term loan to get it over and done with. However, for us, since we could never afford the payments on our salaries if his loans were 10-year, we keep the term of the loan stretched our for as long as we can to keep the monthly payments as low as we can, so we can afford stuff like groceries and to pay off our credit card debt, which has a MUCH higher interest than his student loans.
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You CANNOT benefit from loan forgiveness unless you are on a loan-contingent plan. If you consolidate to a 30-year plan and make your regular payments for 10-years, you will NOT be eligible for public service loan forgiveness. You MUST make a minimum payment of the standard payment UNLESS you are on an income-based or income-contingent plan. No payment below the 10-year Standard Repayment Plan payment will be a qualified payment. If you want to take advantage of the public service loan forgiveness you must stick with the 10-year plan and go with the income-based or income-contingent plan because that is the only possible way that you can still have debt after 10 years and be eligible to have it forgiven.
However, there are a few things to consider with Direct Loans. You can get a 1.5% interest rebate if you make all of your payments online. You can get an addition .25% rebate if you set up automatic payments. If a significant portion of your debt is from before 2006, you may be able to pay back your loans at a sub-3% rate after consolidation. In this case you might lose money by going with a 30-year term, but the interest rate might be low enough that having a large, liquid emergency fund or higher-yield savings might be worth it. Strongly consider consolidation and a 30-year repayment plan even if it might cost you a little bit of money in the long run, but if you manage your investments properly, it won’t. Just remember if you’re going to get that student loan payment reduced, take all of those savings and pay yourself first.
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The recent legislation that provides for student loan forgiveness is for those in PUBLIC SERVICE. As in serving the public. I can’t speak for all professions, but in mine, leaving my position to work for the government would result in a significant pay decrease. I saw a job posting just yesterday that I actually would love to do, but would result in a nearly $20,000 pay cut. The government set up this program to get people who couldn’t otherwise afford it doing necessary work such as teaching. They WANT “deadbeats” to “shirk” their responsibilities.
College costs a lot of money, as does graduate and professional school. Who’s going to teach your kids or provide legal assistance to low-income abuse victims if the people qualified to do so can’t afford it because their student debt is too high? Go after the high cost of education, not the people taking smart advantage of legal programs allowing them to work AND deal with educational debt.
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You may want to consider a private student loan consolidation with a company like http://www.cedaredlending.com. I was able to lower my monthly payments, lower my interest rate and only extended the life of my loan by a few years.
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