We recently received an email from a reader with one of the largest student loan mountains we have ever seen.
I’ve been looking for a long time for a forum to discuss student loan issues. Much appreciated.
Here’s my situation…. It’s quite shocking:
$132,244.69 – Private Loans at 3% interest
$383,095.45 – Dept of Ed Loans between 6% – 8.5%
$11,573.81 – Federal Loans at 6.8%
A.S., B.S., J.D., LL.M.
$72,000 a year Income
Married – Filed Separately to lower Income Based Repayment
She does not have student loan debt and has great credit. She earns $60,000.
My credit score is 580-620.
$778 a month – Private Loans (had to negotiate it down to that)
$0 a month – IBR for Dept of Ed and Federal
The $0 payment is based upon my tax return last year when I was in school and had no income. IBR will kick in for the big loan balance currently at a $0 in September or October.
I am screwed when the Dept of Ed and Federal loans kick in.
Any advice or suggestions would be appreciated. I feel all alone in trying to figure this all out.
Thank you for starting this.
Thanks for the email Jake. For the readers who may be wondering how Jake racked up this much debt, the key is all the letters he has after his name. J.D. means lawyer. LL.M. means master of laws. Jake has spent more time in law school than most lawyers even do. That is a lot of college.
Tackling student debt, whether your owe $500,000 or $5,000, is largely the same. Sort out your federal and private loans, find a repayment plan that works, and attack your debt.
In the case of Jake, the private loans may actually be the biggest hurdle. This may seem surprising given the fact that he owes nearly $400,000 to the federal government, but when it is all said and done, the private loans will probably be the hardest to eliminate.
Attacking the Private Loans
Negotiating lower payments on your private loans is a huge first step. Jake used his many years of legal training to get pretty low payments, especially considering how much he owes on these loans.
They key with this debt is realizing that it is not going anywhere. Unlike federal loans, there are no programs to help you knock it out. That $132,244.69 is only going to get paid off when you make your lender $132,244.69 worth of payments plus interest.
Even though the interest rate is really low on these loans, Jake may want to consider using any extra money he generates towards paying down the private loans. Given that the federal loans have a higher balance and interest rate, it may not seem logical, but the approach makes sense if you consider…
Federal Student Loan forgiveness
On Jake’s salary, and with his federal student loan balance, he may never be able to pay off all of that debt.
By signing up for IBR, Jake puts himself in a position to have his student loan balance forgiven after 25 years. Eliminating all this debt via forgiveness is great, but it comes with a huge catch. That student loan forgiveness is considered taxable income. This means that if the Department of Education wipes $400,000 worth of student loans off the books, the IRS will consider that as $400,000 of extra income. If Jake normally brings in 72k per year, the year his $400,000 is forgiven, he will be taxed as though he made $472,000… which means a huge tax bill. If you are going to go this route, the time to save for that huge bill starts now.
Another option would be for Jake to find a public service job. Working for the government, or any 501(c)(3) non-profit will count. By working a public service job, you can qualify for Public Service Student Loan Forgiveness. This means student loan forgiveness after 10 years instead of 25. In addition to your loans disappearing earlier, the forgiven debt is not considered taxable. In this case, it makes a lot of sense to take less money to work a public interest job.
One important side note
There are a number of graduate student loans that were issued prior to the federal government directly loaning the money. In the past the government just guaranteed the loans. Many of these loans are not eligible for student loan forgiveness. However, if you consolidate these loans into a federal direct consolidated loan, they become eligible for forgiveness. Do your research and contact your lender to make sure all of your loans are eligible. This is especially true for people who took out student loans prior to 2010.
The Bottom Line
Jake is on the right track with his student loans, but he clearly has a long way to go. When it comes to attacking debt, regardless of the amount, the key is to put together an attack plan that works and to stick to it.