Paying off Student Loans with Bad Credit

Michael Lux Blog, Student Loans 3 Comments

Of all the questions that come into my inbox, the most frequent one is typically someone who wants help dealing with the following circumstances:

  • They have large amounts of student loan debt and cannot afford the payments
  • They are currently behind on their payments and worried about delinquency, default, garnishment and late fees
  • They want to get help with their loans but their low credit score makes it difficult, and they can’t find someone to cosign for their loan consolidation.

Trying to pay off your student loans and dealing with the consequences of a bad credit score can be very difficult.  Typical options such as consolidation, are made significantly more difficult.  Additionally, perks such as 0% interest credit cards or personal loans are not an option.  This advice is for the people who feel like they are at the end of the road and have looked at every option.

Fixing Your Student Loans

Step Number One: Make sure you are able to track down all of your student loans. Once you have located all of your student loans, you want to make sure you are in the best available repayment plan for you. Often, especially for recent graduates, a deferment of a forbearance can help you through an economic rough patch.  Just remember that these temporary fixes may lower your monthly obligation, but your loan balance will continue to grow.

Even when you have made sure that you have the best possible repayment plan for all of your loans, keeping up with your student loan debt can still be very difficult, so it is very important that you stay on top of these issues.

Step Number Two: Never ignore problems that you are having. Time is not your friend when it comes to student loan issues. Each month that passes without you taking action makes your problems worse.  Being a little late can easily turn into a delinquency, and a delinquency can easily turn into a default or a garnishment.  If you can’t make a payment, call your lender and address the problem head on. You never know what options are available unless you call. The only certainty, is the if you ignore your loans, it will haunt you.

Step Number Three: Budget, budget, budget… before the month starts know exactly how much money you will be earning and how much you will be spending. In theory budgeting doesn’t actually save you any money, but in practice you will find that by watching every penny, you find ways to save here and there.

Step Number Four: Plan ahead.  Student loans typically have no prepayment penalty, so it may seem tempting to pay whatever you can whenever you can, but you will want to be prepared for a difficult month in case you face any unexpected costs.  An emergency fund is critical to keep on hand.

Final Thoughts

I’ll be the first one to admit that this solution sucks.  For many of you it might just mean treading water and it may seem like you are not getting anywhere, but treading water is better than drowning.  The longer you can scrap by just barely keeping your head above water, the more opportunities you give yourself to get a better job or lower your expenses.  If you find a way to get by month to month, you credit score will improve and you can work your way out of this hole.

Whatever you do, please don’t fall into any student debt elimination scam.  It seems new ones are popping up each week, and they are targeting people who more than anything just need hope.  Don’t give any of your hard earned money to anyone until you have verified that they are deserving of it.  If there is any doubt in your mind, feel free to drop me an email, and I’d be glad to check it out for you.

Finally, its important to remember, bad credit or not, paying off student loans is a journey not a sprint. There is no magic way of doing it and you can’t get it done overnight. However, if you work at it, your loans will be paid off before you know it.

  • Mike GetRichWithMe

    Great advice Michael – your website must be helping a lot of people who are struggling with their repayments

  • Evan

    Hey Michael, thanks for all the good info! I was browsing your site and came across this post and wanted to share some relevant info that could be very helpful to anyone who had a federal loan serviced by the Dept. of Ed. become delinquent.

    I’m sure most of us remember the days when our federal loans were actually serviced by the federal government. Then at some point, they decided to torture student loan borrowers even more by passing these responsibilities off to servicers like Sallie Mae, and the federal student loan office essentially went out of business (very important later).

    When my loans were being serviced by the government, I allowed them to become delinquent to the point that they were reported to the credit bureaus. When I called their office they told me they were unable to help, and said I could try contacting the three major credit companies, but that it probably wouldn’t help. Fast forward to a few months ago when I was denied a car loan, and I decided I needed to pay alot more attention to my credit.

    I called the Dept. of Ed. and asked about how they could help me. The representative told me that that division had ‘gone out of business’. So I began searching how to dispute credit issues once the company who did the negative reporting has gone out of business. This is what I found:

    When you file a credit dispute, the credit bureau you filed with will investigate the dispute with the company. If the company no longer exists, or has gone out of business, there is no one available to argue their side of the dispute and you win by default! So I gave it a shot, and sure enough, was able to get all negative reports originating from the Dept. of Ed. DELETED! I hope this info can help some others.