Life and debt: Pay off student loans and get your life back
Marilyn Stanley sees them all the time. People worried about collectors, credit cards, medical and other bills and want credit counseling. So they come to Housing and Credit Counseling in Topeka, Kansas, where Stanley works as the COO.
"And then, when we are going through their entire financial situation, we discover, 'Oh! You have this much student loan debt and this much of a payment and you're delinquent,’ ” says Stanley. "They think the student loan can just go and wait a little while."
Even though student loan collections are not as quick or in-your-face as credit cards, student loan debt is inexorable, unrelenting and will not just go away. The Federal Reserve Bank of New York pegs total student loan debt in America at $1.1 trillion (credit card debt is at $650 billion). The average student loan balance upon graduation is $29,400, according to the Institute for College Access and Success. And except for those who can prove the difficult status of "undue hardship" the lender will be paid.
The burden of student loans is on politicians' minds, too. Last week, President Barack Obama extended a repayment plan option for student loans while Congress argues over how to pay for other loan relief. But rather than risk waiting for a partial solution from Washington, experts say simple ways to attack student loans are available and worth applying.
"You will eventually get the debt paid off," says Mark Kantrowitz, senior vice president and publisher of the education loan advice website, Edvisors.com. "And there is such a feeling of relief when you make your last loan payment. And maybe that will teach you to avoid debt wherever you can."
Get started, get mad
The first step to get out of student loans has to do with emotion, according to Rachel Cruze, co-author with her father Dave Ramsey of the book "Smart Money Smart Kids."
"You kind of get mad. You want this debt out of your life," she says. "Once you have that emotion, that is when you are going to see progress because you really want to see change at that point. The number one is your attitude. Number two is the tactical, the how to pay off the student loans."
Upon graduation, student loans have a six-month grace period before the first payment is due. Cruze advises not to wait six months to start setting aside money to pay off the loans. And making payments requires employment of some sort.
"It is probably not going to be your dream job," Cruze says. "This is where the mistake happens. People graduate and they say, 'This is my degree. This is my passion. I can't find a job in this area, so I'm not going to take one, I'm going to wait for my dream job.' That is not reality.
"You need to find any job. Go wait tables. Go work four jobs. Do whatever you can to make an income to start paying off those bills."
This way, when the dream job comes along, the debt will be smaller.
Mark Kantrowitz, who is the senior vice president and publisher of education loan advice website, Edvisors.com, says people need to grasp the basic facts about their situation and be careful.
First, according to Kantrowitz, mark on a calendar the days that are two weeks before each payment is due on each student loan. "When people are late with a payment on a student loan, about a quarter to a third of them are late with the very first payment."
Borrowers also might think the payment isn't due until they get a payment coupon book or statement from the lenders. At the same time, they might not have been very diligent in letting the lender know their new address.
"Get organized," Kantrowitz says. "Make a list of all your loans."
Write down the lenders. Write down their websites. Write down the due dates, the interest rates, the contact information.
Stanley recommends the same to clients who come in for credit counseling.
"Sometimes people really are not quite certain how many student loans they have and where they are and who they are with," Stanley says.
To find out what private student loans people have, they can pull a credit report. This can be done at no cost, once a year for each of the three major credit reporting agencies, at AnnualCreditReport.com. Federal student loans can be found at NSLDS.ed.gov, the National Student Loan Data System website.
"They may have ten student loans they haven't consolidated yet," she says.
Consolidation and snowballing
Sometimes consolidating multiple loans is a good idea, according to Stanley. "Imagine having 10 different loans and each one requires $100 a month," she says. "That is a lot of money in a monthly payment."
Consolidating the loans could reduce the monthly payments, making it easier in some circumstances — although reducing the payment will increase the total amount paid over the life of the loan. Information on how to consolidate student loans can be found at the StudentLoans.gov website.
Kantrowitz says consolidation is not always a good idea, however.
"Students often think consolidation saves them money," Kantrowitz says.
If loans are not consolidated, a person can target the loan with the highest interest rate for quicker repayment — saving the most interest over the long term. "If you consolidate the loans, you can no longer target the highest rate loan, so you are not going to be as efficient in paying down the debt," Kantrowitz says. "You always want to target the highest interest rate loan for quicker repayment."
Cruze teaches another approach: the debt snowball.
The process starts with listing every debt a person has, then arrange them from smallest to largest, regardless of the interest rates. Pay minimum payments on every debt and, after saving up to build up a $1,000 emergency fund, put everything extra into the smallest debt first. After the smallest debt is gone, put everything into the next smallest debt and work up to the biggest debt.
"For most people, student loan debt is their largest debt," Cruze says. "So student loan debt will probably be one of the last things you pay off."
Cruze says mortgage debt isn't included in the debt snowball.
"It is important to gain momentum," she says, "and get the perspective that you can do this. And when it gets to Sallie Mae, you want to kick her out of the house as soon as possible."
Cruze says paying off debt involves sacrifices in lifestyle. People do not go out to eat. They sell the expensive car. They have garage sales. They take extra jobs.
Most families who begin to really attack their debt pay it off in 18 to 24 months, Cruze says. "It is a very short period in life. In two years you can do it very quickly."
And the sooner the better.
Analysis by Pew Research Center finds that having debt has a significant impact on the wealth of younger Americans. Pew found that for college-educated young households with student loan debt, their median wealth was $8,700. But college-educated young households with zero student loan debt had a median wealth of $64,700 — seven times greater.
Cruze recognizes that a lot of people recommend paying off the highest interest loan first. "That is mathematically correct," she admits. "But personal finance is 80 percent behavior and only 20 percent head knowledge.
"If you were interested in math you wouldn't be in debt in the first place. It's not about math, it is about gaining traction and momentum and seeing the light at the end of the tunnel. This is about behavior change."
Help and forgiveness
Gerri Detweiler, director of consumer education for Credit.com, an online credit education and financial services company, says another avenue for repayment is income-based repayment plans (IBR). These plans, such as the Pay As You Earn plan recently extended to more borrowers by Obama, look at how much a person is making and adjust the payment plan accordingly.
"The good news is that if you aren't earning much and you have federal loans, your payments may be as little as $0 under IBR," Detwieler says. "And with IBR there is a light at the end of the tunnel."
Income-based repayment plans, because they are making the payments smaller, naturally also increase the length of the loan — and the total amount of money paid out.
"You'll still be paying back your own student loans when your children are going to college," Kantrowitz says. "That means you won't have saved for their college education. You'll be less willing to borrow for their college education because you'll still be up to your eyebrows in debt. And so there will be a cascading effect on the next generation."
Forgiveness for student loans can also come from other sources, Kantrowitz says.
In a profession that has a high demand, some employers provide the "forgiveness" as a way to recruit employees. For example, new nurses sometimes are offered a signing bonus or other assistance to help pay off their loans.
Schools also may have what are called Loan Repayment Assistance Programs or LRAPs for students going into particular professions.
Not every form of forgiveness is tax-free. Borrowers using an income basis repayment plan could have the remaining debt forgiven after 25 years. Under current law, Kantrowitz says, that forgiveness is taxable. "So you are substituting a smaller tax debt for a student loan debt."
Because there are so many different programs and repayment plans available, default shouldn't be an option, Kantrowitz says. For example, in a federal loan, wages will likely be garnished at a higher rate than if a person simply had applied for an income based repayment plan. "You are not going to save any money with default," he says. "There is no strategic reason to default."
Hoping for settlement after a default isn't helpful either. Settlements usually are the amount of the loan balance on the day a person defaulted, Kantrowitz says. Sometimes the lender might forgive some of the interest accrued after the default — in exchange for a lump sum payment. A borrower shouldn't expect default to lead to a better repayment plan.
Dismissing the loan under bankruptcy also isn't much of a plan.
The rules for getting a student loan discharged in bankruptcy are very harsh, Kantrowitz says. The borrowers have to demonstrate "undue hardship" for themselves and their dependents, which is difficult to prove.
People have to not only prove they couldn't sustain a minimal standard of living if they repay the loan, but they have to prove they are not likely to ever do better during the term of the loan.
"You can't simply turn around and say, 'Oh, I'm unemployed right now; I'm going to file for bankruptcy," Kantrowitz says. "It doesn't work that way."
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