Mailbag: Wrapping Your Head Around Massive Debt

Michael Lux Blog, Mailbag, Student Loans 0 Comments

In today’s mailbag we will dig deep into Sally’s student loan issues.  Sally borrowed a ton of money to attend a for-profit college and doesn’t really see a light at the end of the tunnel.  If you have a question for the Sherpa, feel free to ask us!

This particular email is quite lengthy, so rather than posting the long email and a response at the end, comments will be added throughout the email for ease of reading.

Sally writes:

Hello Michael,

Thank you for taking on the hard questions about student loans.

Background: I’m single, almost 50 years old. I make $35K a year. I have no savings, no retirement. I used to have those things, but I have made every bad financial decision that can possibly be made.

In 2010, I decided to take out student loans for a graduate degree in “media psychology” from the for-profit Walden University. I was fascinated by social media and what was happening to worldwide communications. I told myself that the degree would give me knowledge that would make me attractive in the job market, but this proved untrue.

I ended up taking out $90,000 at Walden University for my degree. I am astonished when I look back on it. I can’t believe what I did. I have a disability (bipolar disorder) that likely has something to do with my poor decision making. A recruiter flattered me and told me how easy it was to get the loans *and* to pay them back. She created a sense of urgency by saying she needed my application essay right away. I fell for it without doing my homework.

Sherpa: This is a very common tactic with many of the for-profit schools and has been the subject of a number of lawsuits.  If you feel you have been mislead in any way, filing a compliant with the Consumer Financial Protection Bureau could cause them to take action in order to protect future students.  With regards to your disability, you may want to discuss this issue with your doctor.  If you reach a point where you are unable to gainfully work, there is a disability discharge for federal student loans.

Each year when the FAFSA renewal reminder came in my email, I filled it out. That was that. Now, after two years of forbearance, my loans are up to $115,800 with capitalization. At some point I must have opted in to income-based repayment, because that’s what I’m on now. I am planning to switch to PAYE instead, because I think it has better terms. (Right?)

Sherpa: There are a few options when it comes to picking the best income-driven repayment plan.  A lot of it comes down to when you first received your student loans, your marital status, and your spouse’s student debt.  We have previously looked at deciding between IBR, PAYE, and REPAYE.

I realize I’m “lucky” to qualify for PAYE, because it caps my repayments based on income and 150% of the poverty level. But every time I think about the amount I owe going up over 20 years–since I do not anticipate earning enough to make regular payments–I could almost faint. I never thought about this once during the years that I was getting the degree or during the two years of forbearance.

How could I never have thought about this? I don’t understand myself. I must have thought that if someone was willing to loan me that money, the product must be worth it. I trusted. I thought it would be like when I got my earlier graduate degree in English, in the 1990s.

Sherpa: There are a couple ways to look at this situation.  From an economic perspective, you can treat these events as a sunk cost.  The idea behind this concept is that the time, money, and decisions of the past are history.  Once spent, there is no recovery.  Thus, the smart economic move is to look at things objectively and focus on future decisions and future financial choices.  From a religious standpoint, the Serenity Prayer comes to mind.  You no longer have control over the decisions you made in the past and cannot change them.  Find to courage to accept the past for what it is and the strength to move forward.

Even though the numbers make me want to faint, I want to know what they’re likely to go up to by the time this is over, assuming I stay on PAYE and my income only rises by 3% each year. I want a calculator that is designed specifically to allow people like me, who are destined to watch large student loan balances grow for 20 or 25 years, see what they are in for. It would help prepare, if possible, for the “tax bomb.”

Do you know where a calculator like that exists? I’ve looked everywhere. I may have to ask my loan servicer, Great Lakes. Part of the problem is I don’t know how interest works on PAYE.

Sherpa: Such a calculator does exist!  It was actually made by the department of education.  It is called the Student Loan Repayment Estimator.  It assumes income increases of 5% per year rather than 3%, but it should give you a very good idea of the amount that will be forgiven when the “tax bomb” comes.  One other thing that you might want to look into is the Revised Pay As You Earn Plan.  A REPAYE perk is that only half of the extra interest gets added to your balance, which could make the tax bill at the end much smaller.

Also, please, if you have any advice on how to conceptualize this situation in a way that makes it easier to bear, I would appreciate it. I’ve been asking everyone.

+ My uncle said to think of the PAYE amount as an electric bill I have to pay each month.

Sherpa: This is a reasonable way of looking at it.  You are fortunate that your loans are federal and that as a result, monthly payments will only be a small portion of your income.  I treat the 10% payments as a monthly tax bill.  Instead of paying 15% in federal taxes, you actually pay 25%.  As your AGI drops, this tax bill also drops.  (Looking at it this way can help save for retirement: money contributed to many retirement plans lowers the AGI which lowers your monthly student loan payment).

+ A pastor said I was working and doing all I could to manage the debt, therefore what more could I do?

Sherpa: This seems wise.  Take the steps necessary to address your debt.  If you want to dedicate more energy to the subject, you can find ways to advocate for changes to the current system.  Stressing about past decisions and letting it consume you will just make you miserable without helping things.

+ A student loan counselor said that I am the reason income-driven plans were created–just stay in close touch with the servicer, don’t miss payments, and don’t look at the amount owed, if that helps. She also said never to be embarrassed by student loan debt.

Sherpa: Another healthy perspective.  Student debt is very common and many people are in the same situation as you.  Many are in even worse situations due to private loans.  You pursued an education.  There should not be shame in that.

+ A lawyer said I would have to accept that my debt-to-income ratio would always be out of whack.

Sherpa: This one I might disagree with.  Debt-to-income ratios look at monthly debt compared to monthly income.  Even though you have a huge student loan balance, your monthly payment could be relatively small.  The mortgage companies recently started accepting income-driven payments for mortgage calculations.  The consequences of the debt on your ability to get a home man not be as devastating as it first seems.

+ A coworker said to stop reading the news on the topic of student loans.

Sherpa: I’m probably biased about this subject, but being informed is a good thing.  For example, the REPAYE plan was created just a couple years ago.  Being an informed citizen is also a good thing.  If Congress is looking to change student loan rules in a way that helps you or hurts you, being knowledgable enough to speak up can make a difference.  However, if being informed causes unhealthy stress or a focus on past decisions you cannot change, it might be best to take a step back from things.

+ A friend said we all make mistakes and to give myself a break.

Sherpa: This sounds like thoughtful advice from a good friend.  People are usually happy to share their stories of success, but we rarely hear about the many mistakes that everyone makes.

+ Another friend said not to listen to Satan (yes, Satan), who wants me to feel bad about myself.

Sherpa: Feeling bad about yourself won’t fix anything.

+ Another friend said at least it wasn’t a terminal health issue.

Sherpa: Some perspective is definitely a good thing.  A difficult student debt situation is no fun, but your situation is manageable, and you clearly have an extensive support group that seems to be offering wise words of encouragement.

+ My dad said “ride it out,” and “things can change.”

Sherpa: There is definitely potential for change on this issue.  Many people are in similar situations.  There is also growing support for eliminating the “tax bomb” if the debt is forgiven.  We are over a decade away from the “tax bomb” becoming a major issue.  Lots can change in that time.

If you have anything to add or repeat from that list of advice, I would welcome it. I am looking for my “bright side” of things. I am of course thankful that I didn’t take on any private loans. I would be in default.

I am looking for the best angle on my situation I can find.

Sally

Final Thoughts

Thanks to Sally for sharing her feelings on student loans.  For far too many people student debt is more than just an economic hardship, it is a source of stress and self-doubt.

For someone like Sally, this might be a subject that is best visited a couple times a year.  You can revisit your student loans at tax time and when the time comes to re-certify your income-driven payment plan.  During this time investigate all the different repayment options again.  Call your servicer and ask lots of questions.  Make spreadsheets and do the math for how different choices might alter your financial future.  Once it is done, move on.  Pay your bill each month and rest easy with the knowledge that you have taken all the necessary steps to address your debt.

Treat your student loans as a financial obligation and nothing more.  Student debt is not a personal shortcoming, nor does it define you as a person.