More and more student loans are becoming the most problematic debt anyone can own. At some point in the past couple of decades, student loans went from a leg up to financial slavery.
There is a lot of information out there about how to deal with troublesome student loan debt and payments. But I thought I’d put together the ultimate, no holds barred guide on how to deal with student loan debt that becomes unaffordable.
After working with a number of people, and answering questions about student loan debt, I have come to the conclusion that if you can repay your student loans according to your original 10 year repayment plan that might be the best way to repay them since it eliminates them quickly. But to do that you might need to eliminate your other debt to make room for the payments. Just because extended repayment programs exist, that does not mean it is best for you to enroll in them.
Student Loan Debt: Is College Tuition Worth the Cost?
What is the wrong situation?
If you’re struggling to make your regular student loan payments because you have other financial obligations in the way, reducing those obligations might just be the more reasonable and more logical thing to do, even though doing so might be hard. By delaying or postponing the rapid elimination of your student loan debt quickly, you can easily waste early years that are critical to saving for retirement — years you can never get back.
In this day and age, your retirement needs to be a primary consideration in dealing with your debt. Especially considering there is significant doubt whether or not public programs like Social Security will be able to adequately assist you when you’re older and unable to work,
Here is an example: Let’s say you graduate from college with student loan payments of $400 a month. It takes you 10 years to payoff your student loans. If you don’t deal with other underlying debt, and instead enroll in an extended repayment program, you would be pushing out your ability to save.
The Right Mindset When Dealing With Student Loans
When dealing with student loan debt that isn’t unaffordable you have to change your mindset about your debt and reorder it. You have to make your student loan payments one of the top priority debts you pay first each month. If that means you can’t make other payments like credit card debt or other unsecured debt, so be it. You can deal with that by clearing the decks of your other debt by filing bankruptcy if necessary. In some narrow situations, however, it is possible to discharge student loan debt with bankruptcy.
Bankruptcy and Student Loans
Despite what some people believe, it’s possible to discharge some student loans in bankruptcy. You can find a local bankruptcy attorney and talk to them for free about your specific situation. But get the facts first — and then you can make an informed and educated decision on bankruptcy.
Sticking Your Head in the Sand
Failing to pay student loan debt has serious consequences. Your tax return refunds can be intercepted, massive collection fees of up to 20 percent of your balance can be added, it will hurt your credit score and your wages can be garnished without going to court. Basically, nothing good comes from defaulting on your student loans.
Here is where changing your mindset becomes so important: You need to stop thinking of your debt as an emotional responsibility and start thinking about it like a corporation.
A number of student loan rescue companies are popping up and selling student loan assistance for massive fees. What they do not seem to evaluate is if it is in your best interest to reduce your payment or extend the length of your loans. making the wrong choice here can cost you millions in lost retirement income.
Next, you will need to know if your student loans are private or government backed. One place to figure that out is to access the National Student Loan Data System at nslds.ed.gov and look at the loans listed as government-backed loans in the system.
Private Student Loan Debt
As I write this there is little hope, help or assistance for people that owe private student loans other than what the servicers and loan holders are willing to offer. The option most people leap at is deferment or forbearance. This just means you get some period of time during which you don’t make a payment.
Although that seems like a solution, it’s not — and it commonly just makes the situation worse. During the time you’re not making your student loan payments, the interest charged causes your balances to grow and grow. If you thought you could not afford your student loan payments before, wait till your grace period ends and the balances are now higher. Yikes!
The Consumer Financial Protection Bureau is looking into passing new regulations to help people find some way to make payments they can afford, but none exist right now.
As of August 2013, more private student loan lenders appear to be coming around to those people who are permanently discharged and complete the lender Total and Permanent Discharge application. You might have to ask for the Ombudsman from the company holding your loan for the application. If you’ve already been determined to be permanently disabled by the Social Security Administration that determination will greatly help you in seeking the discharge.
Federal or Government Student Loan Debt
The good news in all of this is if you owe government-backed student loan debt, those loans have options available so that you can deal with them. But when considering these options, you need to look at all the factors — and not just lowering your payment.
Administrative Wage Garnishment and Student Loan Rehabilitation
If you are delinquent on your federal student loan payments a student loan rehabilitation can stop all garnishments and collection activity against you. Sadly, only federal student loans are eligible for rehabilitation. But after a series of payments based on a reasonable and affordable payment plan, the loans can be rehabilitated and any wage garnishment will stop. This it how it works:
- If your wages were being garnished under an Administrative Wage Garnishment, after five qualifying payments in the new rehabilitation program, the garnishment would stop.
- Once rehabilitated, your credit report will no longer reflect the poor payment history and the loans will show a current status.
- Once your loan is rehabilitated, you might regain eligibility for benefits that were available on your loan before you defaulted.
- Rehabilitation is a one-time event. Once your loans are rehabilitated you will not be able to do this again.
Alternative Payment Options
Entering some of the reduced payment programs can have some serious consequences. Most notably it will extend out your repayment up to 25 years and any student loan debt forgiven at the end of that time is currently treated as income and you might have to pay income tax on that forgiven debt just as if you earned it. It can result in a massive tax bill unless you are insolvent at that time.
Student Loan Forgiveness
There are a couple of special programs to forgive student loans for people that serve in public service or are permanently disabled.
1. Public Service Forgiveness
Those that might qualify for this include emergency management, military service, public safety, law enforcement services, public health services, public education or public library services, school library and other school-based services, public interest law services, early childhood education or public service for individuals with disabilities and the elderly.
For more information, click here.
2. Total and Permanent Disability Forgiveness
You could be eligible for a Total and Permanent Disability (TPD) Discharge on your federal student loans if you are unable to engage in any substantial gainful activity because of a medically determinable physical or mental impairment that:
- can be expected to result in death.
- has lasted for a continuous period of not less than 60 months.
- can be expected to last for a continuous period of no less than 60 months.
If you’re a veteran, you might be eligible for TPD Discharge if you’ve received a determination from the Department of Veteran Affairs (VA) that:
- you have a service-related disability or service-related disabilities that are 100 percent disabling.
- you are totally disabled based on an Individual Unemployability determination.
For more information, click here.
If You’re Not Getting Anywhere With the Department of Education
If you feel like you can’t get anywhere with your federal student loan servicer or the Department of Education, there is always one more place to stop for help: the Federal Student Aid Ombudsman Group.
The Federal Student Aid Ombudsman Group of the U.S. Department of Education is dedicated to helping resolve disputes related to Direct Loans, Federal Family Education Loan (FFEL) Program loans, Guaranteed Student Loans and Perkins Loans. The Ombudsman Group is a neutral, informal and confidential resource to help resolve disputes about your federal student loans.
This article originally appeared on GetOutofDebt.org.