Student Loan Plan: When You Can’t Afford Your Federal Loans

Michael Lux Blog, Strategy 0 Comments

In this edition of the student loan plan, we take a look at Mindy’s federal student loan issues. The monthly bill is more than her family can afford. She doesn’t know how she is going to pay for daily expenses like food, rent, and utilities. The lenders want her to put $1,000 per month towards her student loans.  If you want tips for dealing with your student loans, contact us.

The Letter: Managing Marriage and Monthly Payments

Hi Sherpa, 

I would like to receive assistance on options for repaying my loans. When I took out the loans, I was filing married but separate. We did look at the cost of filing married versus separate, and my husband would owe 10K, so we figured it would be better to put that 10K towards the loans and file married. Now I file married filing jointly, and my loans are based upon my household income. Currently, a 67K loan would cost me an average of 1K a month in which I do not have daily living and expenses. I am seeking options on the best route to go. I feel like going to school was a waste of time and a financial burden as I still have not found a position in my field and graduated three years ago. Thank you in advance.

Always Double-Check Your Servicer’s Math…

The first step in any student loan planning is to double-check the information being provided. Mindy is clearly signing up for an income-driven repayment plan because her loan servicer needs tax records to verify her income. This is a smart move because the income-driven plans normally result in the lowest monthly payments, especially for those households facing a student loan hardship.

The thing that seems odd about Mindy’s information is that her lender is expecting her to pay over $1,000 per month. This bill seems incredibly high. Unless Mindy and her husband are earning well over $100,000 per year, the payment she is being told to pay is incorrect. One of the most useful tools available to federal borrowers is the student loan simulator. Using this handy calculator, Mindy can plug in the information about her and her husband’s finances to get a pretty good idea of how much she should owe each month.

In this case, I’m extra suspicious that the information being provided to Mindy is wrong because a 1K payment on 67K in debt would have the loan paid off in about ten years, depending upon the interest rate. It sounds like the number is for the standard repayment plan, not an income-driven repayment plan.

If your lender is giving you inaccurate information, it might be time to give them a call to ask them to fix a mistake.

Making Debt Management Decisions

Once you have verified all of your repayment options, it is time to get to planning. Clearly, Mindy has already done her homework on the decision to file her taxes as married filing separately or married filing jointly. Unfortunately, there is still more work to be done.

Your objective should not be to find a way to just get through the next month or even the next year. A smart student loan plan is about eliminating the debt entirely. Ideally, that can be done by just earning more money each year, but for most of us, that isn’t an option. The next best step is to eliminate the costs you can and to pay what you can. Follow our seven-step method to get the debt eliminated as soon as possible.

[Further Reading: Getting the most from your minimum payment]

If the federal government requires over 1K per month on an income-driven repayment plan, it might be worth considering private loan consolidation. If a private lender can offer a lower interest rate, it could result in lower monthly payments and get the loan paid off much faster.

The Federal Advantage and Disadvantage in a Nutshell

Income-driven repayment plans are one of the key reasons that we encourage people to borrow student loans from the federal government instead of private lenders. Most borrowers should end up with payments at 10% of their monthly discretionary income. That can be a lot of money each month, but it should be affordable for most households.

Mindy’s situation shows one of the downsides of having federal loans. The loan servicers are not particularly great and are prone to mistakes. This can be very frustrating.

Hopefully, a phone call or two will have her situation under control.

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