Drowning in debt: The Guide to Lower Student Loan Payments

Michael Lux Blog, Lower Payments, Student Loans 2 Comments

Most student loan issues boil down to one simple problem: my student loan bills are too high and I can’t afford them. This one problem leads to many other problems: late fees, compounding interest, collection calls or even lawsuits.

This article is a collection of tools, tips, and tactics that can be used to get your student debt under control.  There are no quick fixes, but there are a number of steps that all borrowers, regardless of income, can take to address their student loans.

Dealing with Federal Loans

If you have federal government loans, your solution is simple.  Get signed up for an income based repayment plan.  At most you will pay 15% of your discretionary income.  If you are unemployed or make very little, your payments can be lowered all the way to $0 per month.  Dealing with your lender to get on the right repayment plan might be a headache, but once done properly, your debt is effectively under control.

Private Loans: A far more complicated problem

Unfortunately, dealing with private loans isn’t nearly as simple.  Because these loans are nearly impossible to discharge in bankruptcy, lenders know that there is a very low likelihood that the debt won’t eventually get paid.  Often, they are content letting fees and interest stack up.

For borrowers, the key to getting student loans under control is getting the lowest interest rate possible and attacking the principal balance.  If 90% of your payments are being applied to interest and/or fees, it is time to reevaluate your student loan plan.  If you are only paying interest, it means your lender is making a profit each month, but your student loan problems haven’t changed.

Make a budget

Getting out from under student loans you can’t afford isn’t easy, but it can be done.  Step number one is to take an honest look at your monthly budget.  Use tools like mint.com to track all of your spending.  Find ways to free up as much money as possible each month.  Hard decisions will have to be made.  The key is separating the needs from  the wants.  Putting food on the table is a need, eating out is a want.  Slash the wants from your budget and find the rock bottom monthly expenses that you can realistically stick to.  Most importantly, make a plan and stick to it.

Get lower interest rates on your student loans

Cutting your expenses is only half the equation.  While you can’t change how much you borrowed to pay for your education, you can change how much interest you pay on that debt.  There are two ways to accomplish this goal.  You can convince your lender to lower your interest rates or you can take your business elsewhere for lower interest rates.

Getting lower rates from your lender

Convincing your current lender to lower your interest rates is more of an art than an exact science.  There usually isn’t a lower interest rate provision in your student loan contract, nor are you entitled to a lower interest rate as a matter of law.  However, some lenders are beginning to come around to the idea that helping a borrower keep up with their loans and getting some interest is a better alternative to collections and litigation.

Sallie Mae actually first started this sort of program years ago, calling it the rate reduction program.  It isn’t something they advertise, but we do have a guide for signing up.  During Sallie Mae’s transition to Navient, we haven’t seen any changes to the rate reduction program.  Additionally, we have seen other lenders announce plans to create similar programs.

The key to getting enrolled in a lower rate plan is talking to someone who has the authority to help.  The person who picks up the phone when you call the 800 number for customer service probably can’t change your interest rates.  Someone in collections or management might be able to help.

For those who are not having any luck over the phone, the Consumer Financial Protection Bureau has put together this form letter for people trying to get lower rates.

Because each lender is different, and each circumstance is different, there is no one foolproof way to get this done.  Your best bet will be persistence.   Just because one phone call wasn’t successful doesn’t mean that phone calls two and three will fail.  In addition to customer service representatives, these large companies often have collections departments and ombudsman.  The more people you can call to talk to, the better your odds of success.

Another good practice is to keep detailed records of all of your interactions with your lender.  That means take notes of all of your phone calls, including who you talked to (ID# if applicable), what you discussed, and what you were told.  Save copies of all the letters and emails you send and the ones you receive.  This information is not only useful if you have to hire an attorney or end up in court, but it can come in handy if you have a disagreement with your lender.

Finally, if you feel you have been wronged, misled, or otherwise mistreated by your lender; you can get some help from the government.  The Consumer Financial Protection Bureau has a compliant form that you can fill out against your lender.  The great part about this is that you are involving someone from outside the offices of your lender, and your lender is obligated to respond to your complaint.  The records that you keep will give credibility to your complaint and help you get a better outcome if you go through the complaint process.

Get lower rates from another lender

One of the best ways to deal with your lender is to take your business elsewhere.  Unfortunately, it isn’t as simple as going to a new lender or just making a phone call.

Taking your business elsewhere means getting your loans refinanced or consolidated by another company.  While there is a huge list of student loan consolidation companies, the reality is that getting one of these companies to refinance your debt is hard for those who are deep underwater.  All of these companies run a credit check and compare your income to your debt.  If they think it will be a challenge for you to pay off your debt, you will have a hard time consolidating.

If often seems that those who need lower interest rates must work with their current lenders, but those that would like lower interest rates can consolidate.  The exception would be people with cosigners.  Suppose your parents cosigned your student loans.  Your current lender is less likely to be willing to help because they know that if you default, they can get the money from your parents.  If you are in this situation, you may want to approach your parents about cosigning on a student loan consolidation for you.  Adding a cosigner is usually a bad idea, but if you and your cosigner go from one company to another to get lower rates, it makes sense.

Don’t live in fear

Falling behind on your student loans is definitely a bad thing.  Late payments can hurt your credit score.  Bill collectors will start calling.  You may even have a lawsuit filed against you.

While these are bad things to avoid, it is important to keep perspective.  Your credit score is just a number.  Being sued isn’t any fun, but it isn’t the end of the world.  Putting food on the table and a roof over your head should always take priority.

Motivation to fix your student loans is definitely a good thing.  Fear is not.  Keeping perspective can help you navigate these difficult financial waters.

Find something sustainable in the long run

As you go through the process of getting your loans in order, remember that a deferment or a forbearance is a temporary solution.  In fact, it makes your long-term problem worse.  Interest compounds and the debt you can’t afford today is even bigger next month.  Along the same lines, interest only payments are only good for your lender.  They make a profit, but your debt stays the same.  These options may work for people who are about to start a higher paying job or have increased income in their future, but if your finances won’t be changing, these are traps to avoid.  Fixing student loans is all about finding a long-term plan that works.

At the same time, don’t make a mistake in the other direction.  If your lender wants $1500 per month and there is no way you can afford that every single month, don’t pawn your stuff or empty your savings account just to make one months payment.  These are things you can’t do every month.  If you empty your savings account in month one, what are you going to do in month two?  That huge payment isn’t going away any time soon.

Putting together a long-term plan may require sacrifices on your part.  However, it also comes with a huge benefit.  When you make a plan that works long-term, you get to see that light at the end of the tunnel.  It might be dim because it is so far away, but having a long-term plan means that you have a map from your Point A in the present to a debt free Point B of the future.

When do I think about hiring an attorney?

If you are struggling to pay off your student debt, it probably means you don’t have money spend on an attorney to represent you in court.

Between working with your lender, other lenders, and the CFPB, there are many steps that you can take on your own to resolve your debt.  If you have done everything you can and you still can’t put together a long-term plan, it might be time to start thinking about hiring someone to represent your interests.  Most student loan issues can be resolved without the help of an attorney, but for the more extreme cases, it may be necessary.

The Bottom Line

There is no quick fix to student loan debt.  No single email or phone call will make all of your problems go away.

However, the sooner you start, the sooner you can be on your way to getting your student loans under control.  Addressing these issues isn’t rocket science, it just takes some time, effort and persistence.