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Help! I owe 500k in student loans (that’s half a million!!)

Repaying $500,000 in student loans is an epic challenge, but even on a salary of $72,000 per year, it can be done.

Written By: Michael P. Lux, Esq.

Last Updated:

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I recently heard from a reader with one of the largest amount of student loan debt we have seen.

Although most borrowers don’t owe half a million dollars on their student loans, many borrowers still face mountains of debt that feel impossible to climb.

If “Jake” can handle $500,000 in student loans, it’s a reminder that, no matter how daunting, you can manage your student loan situation, too.

The email explaining 500k in student loans

Hi Sherpa,

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%
  • Degrees – A.S., B.S., J.D., LL.M.
  • $72,000 a year Income
  • Married – Filed Separately to lower Income-Based Repayment
  • My credit score is 580-620.

Current Payments

  • $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.

– Jake

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.

Getting Started

Tackling student debt, whether you owe $500,000 or $5,000, involves largely the same steps. The process starts by sorting and distinguishing between your federal and private loans. It then continues with selecting a suitable repayment plan. Finally, you begin attacking your debt.

In Jake’s case, his private loans may actually be his biggest hurdle. This may seem surprising given the fact that he owes nearly $400,000 to the federal government and his private loan balance is a much smaller portion of his total debt. However, when it is all said and done, the private loans will probably be the hardest to eliminate due to their less flexible repayment options and lack of forgiveness programs.

Attacking the Private Loans

Negotiating lower payments on your private loans is a huge first step, particularly if you’re dealing with substantial debt like Jake.

Jake was able to use his many years of legal training to secure relatively low payments for his private debt, especially considering how much he owes on these loans.

[Further Reading: Getting Navient to Lower Your Private Loan Interest Rate]

It is important to recognize that private student debt doesn’t easily disappear. There are no forgiveness programs for private loans like there are for federal loans. That $132,244.69 is only going to get paid off when Jake makes $132,244.69 worth of payments plus interest.

Even though the interest rate on Jake’s private loans is really low, he may want to consider prioritizing repayment of this debt. Given that his federal loans have a higher balance and interest rate, this may seem counterintuitive. This approach makes sense, however, when you consider the forgiveness options available for federal loans. It would, therefore, be logical for Jake to funnel any extra funds he generates into repaying his private loans.

Some borrowers can use student loan refinancing as a tool to help make their private debt more manageable. Refinancing can help borrowers secure lower interest rates and better terms. Unfortunately for Jake, his credit score may keep refinancing off the table for now. This situation highlights the need to develop a broader strategy to manage and eventually eliminate student loan debt. For example, improving his credit health could be part of Jake’s long-term goals.

Federal Student Loan forgiveness

Given Jake’s salary and the size of his federal student loan balance, he may never be able to pay off all of that debt within a standard timeframe.

By signing up for an income-based repayment plan, Jake has positioned himself to have his remaining student loan balance forgiven after 20-25 years.

While eliminating all this student debt via forgiveness sounds great, it may come with a huge catch. The forgiven debt could be considered taxable income. This means that if the Department of Education wipes $400,000 worth of student loans off the books, the IRS may 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. This means Jake’s tax liability for the year of forgiveness could be substantial. If you are similarly planning to go this route, the time to save for that huge bill starts now.

Another option for Jake to consider would be to switch to a public service job. Employment with the government or a 501(c)(3) non-profit could make Jake eligible for Public Service Loan Forgiveness (PSLF). Under this program, student loan forgiveness can be achieved after 10 years instead of 25. Additionally, the forgiven debt is not taxable income. Although such jobs might offer lower salaries compared to the private sector, the financial benefits of tax-free loan forgiveness after a decade could make it a worthwhile trade-off.

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 only guaranteed the loans.

Consequently, many of these older loans are not eligible for student loan forgiveness. There is a workaround, however. If you consolidate these loans into a federal direct consolidated loan, they become eligible for forgiveness.

If you took out student loans before 2010, it’s particularly important to verify your loans’ eligibility for forgiveness programs. Doing thorough research and consulting with your lender can ensure that you take the necessary steps to make your loans eligible for forgiveness, potentially easing your financial burden in the long run.

The Bottom Line

Jake is on the right track with his student loans, but he clearly has a long way to go.

Successfully tackling debt, no matter the size, hinges on developing a solid strategy and consistently following it. Creating a tailored debt repayment plan involves assessing your financial situation, exploring all available repayment options, and choosing a method that maximizes your ability to pay down the debt efficiently. Once the plan is in place, the crucial part is to adhere to it diligently to ensure steady progress towards being debt-free.

About the Author

Student loan expert Michael Lux is a licensed attorney and the founder of The Student Loan Sherpa. He has helped borrowers navigate life with student debt since 2013.

Insight from Michael has been featured in US News & World Report, Forbes, The Wall Street Journal, and numerous other online and print publications.

Michael is available for speaking engagements and to respond to press inquiries.

15 thoughts on “Help! I owe 500k in student loans (that’s half a million!!)”

  1. Question: what will the IRS do when these huge discharged loans come through (or smaller ones) and people don’t have the funds or assets to cover them??

    Reply
    • Great question. I believe the IRS has procedures in place for people who are insolvent, but I don’t know exactly how this would be handled.

      There is also the possibility that the tax treatment of forgiven student loans will be changed by the time people are eligible. It will be over a decade before this issue goes from theoretical to real.

      Reply
  2. One critical piece of information is missing.

    That 400,000 dollar loan …in 25 years…will balloon upwards of 750,000 or more

    now THAT is discharged as taxable income at the highest tax bracket of 39% (ballpark).

    Now THAT is a huge tax bill to save for!!!

    Reply
  3. Im on the same boat! Almost had a heart attack when I was applying for an
    apartment and the realtor told me that my credit score was borderline unable to
    get me anywhere decent. Ran my credit when I got home and learned that I had
    over $550,000 (yes, more than half a million dollars) ALL in student loan debt.
    I have a Bachelors in Aeronautical Science and just got my MBA in mid 2015 (which
    was free with my scholarship). Basically the $550K was all racked up while
    getting my Bachelors and I didn’t even get to become a pilot because of medical
    problems.

    My advice is to do what an attorney told me straight forward – Liquidate all
    assets and put NOTHING in your name!!

    Here are a few actions I took (100% truth):

    -No Assets: About a month after meeting this attorney, God worked a miracle when
    a guy slammed into my Acura at a red light and totaled it. I hate financing but
    forced myself to finance a new car which means the bank owns the vehicle. To
    keep my payments very low, I put a high down payment plus asked the dealer to
    extend the payment by maximum allowed (6 yrs). Monthly car payments is $170.
    Oh, and I left that accident scratch free. Just had whiplashes for about a
    month. Reason: if student loans attempt to sue, they cant take my car cause I don’t
    own it.

    -Liquidate all assets: On every paycheck, I pay all my bills and once a
    month I withdraw $1,000 – 2,000 in cash and store it someplace safe. I make
    sure to leave $20 – 100 in there just in case I need it and to show that I have
    money but not too much (in the eyes of student loan collection companies).
    Reason: believe it or not, they ARE monitoring your assets. If you show below
    $5,000 in assets and consistent withdraws, they believe you really cant make
    payments and might not waste their time trying to sue someone who “really has
    no money”.

    -Play hide and seek: After receiving 100’s of harassment calls at work, on
    my cell, all hours of the night & day, and tons of letters from collections
    (not exaggerating); I unlinked all ties
    to finding me. Disconnected my home phone and linked all bills to the
    disconnected phone number, sent all bills to my PO BOX to make it seem that I
    lived at that address. Once you change your banking and credit card info,
    expect student loans to automatically start sending you papers there. Reason:
    make it hard for student loan companies and collections to find you. Send them
    on a wild goose chase if you have to. Overall the point is to try to avoid
    being served for the statute of limitation to end. In my case its 5-7 yrs.

    Before speaking to an attorney, the truth is I was paying $200 a month to
    one company, when I was working full time and working on my Masters. Then a one
    day I got a call telling me that I paid Loan A yesterday, but now Loan B
    payments are coming due so that’s another $100 a month, so like an idiot I
    started paying. A few weeks later it happened again for Loan C. I later learned
    that the same company was not consolidating my loans but charging interest on
    each loan I owed. So basically Loans A, Loans B, Loans C, Loans, D, etc… will
    have to be paid individually. I believe I had a total of 11 accounts (Loans A –
    K) and each with different interest rates and monthly payments due. A paralegal
    at my job saw my drained from working two jobs plus school. She pulled me aside
    and asked me if I was using drugs because I had changed: got skinny, always
    looked drowsy, sleepy, etc.. I broke down in tears and told her. That’s when I
    got the advice to seek an attorney and STOP MAKING PAYMENTS!!!

    Student loans companies don’t care! So stop making payments if you truly
    cannot afford it! You could only afford so much and whatever amount you cannot
    afford they mark your entire account as UNPAID. You might as well get your
    wallet and burn your money every month, because payments won’t be applied and
    you’ll never catch up after late fees, more interest, etc…

    Reply
  4. I wish you didn’t get the LLM, not worth it. Go into private practice and work your ass off. You have to earn more than that measly salary to ever win. Your wife makes almost as much as you without all that college. My plan for my debt is to pay until I die or it is forgiven due to public service and I am then taxed at a lower tax rate

    Reply
  5. I think he needs to focus on his career and increasing his income and apply everything he’s learned in school. His earning potential is much higher than where he’s at right now. With dedication, hard work, focus and effort there’s no reason he can’t double his income and clean up the mess in a few years.

    I don’t have $500k in student loan debt, but I do have $500k in business debt and was only making $88k income. After getting serious about it I was able to double my income with extra jobs, cutting business expenses, working 6 days a week 10-12 hour days. With a plan and a budget I’ll be done in 5 years or less and there’s no reason this same approach can’t be taken with his career field. Student loan debt should not be forgiven, it’s a legitimate debt that needs to be honored and repaid and I think the biggest issue here is figuring out a way to increase income to tackle it faster.

    Reply
    • The problem with student loan debt vs business debt is capitalized interest, so with business debt as you pay the principle balance you’re only building a small amount of interest. With Student Loan debt at the end of every year all the “unpaid” interest is capitalized and added to your principle balance. So if you’ve ever taken a forbearance or deferment your principle balance is growing every year based on capitalized interest. Thats a fact they almost NEVER tell students when they’re taking out student loans. Additionally, gone are the days of Attorneys all making 6 figures plus. I know plenty of attorneys (myself included) that put their nose to the grindstone everyday and make peanuts. Firms expect your to bill more hours and pay you less. And as for going into practice yourself, there are so many clients in crappy situations that its luck of the draw to see if you’ll actually get paid seeing as how the average person doesn’t have 5 – 10K just lying around to pay you a hefty retainer for your work. Then with the added cost of health insurance if you go out as a solo practitioner – in addition to PLF insurance that you’re required to have which is thousands of dollars a year, you’re fighting an uphill battle long before you ever get started. I think it is disingenuous and unkind to tell someone to focus on their career and increasing their income and apply everything they’ve learned in school – the earning potential even in this recovering market is not as easily obtainable as that statement would make it appear. A plan and a budget aren’t going to put this guy swiftly on the path to paying off that amount of debt in the near foreseeable future. It’s certainly not the same as business loan debt, particularly considering that you can discharge that debt in bankruptcy if times get hard for you. He simply doesn’t have that option.

      Reply
  6. An attorney aye? That is excessive.

    I saw the title and thought, “Hmm, he must be in the medical field.”

    There is only one other field that you can get $500,000 into debt and generate an income of 40-75k.

    It’s my former profession: Chiropractic.

    Jake is in good company.

    I can only speak from experience. There are tens-of-thousands of chiropractors well over $150k+ in debt.

    If you go back to the HEAL student loan days, there are chiropractors well over $500,000 in debt.

    Bottom line: Don’t take out student loans, no matter what.

    Unless Jack hits the lottery, his chance for a better life is (and I mean IS) over.

    What a shame.

    Reply
    • Yeah I’m a fairly recent chiropractor too. After enough missed payments, my loans are $430,000. It’s looking pretty grim these days.

      Reply
    • I agree CC about not taking out student loans. The sad thing is that kids are not aware of how bad it could get until its too late. I know I have to take responsibility for my action, but I really didnt think it could get this bad. All your years of high school they tell you go to college, follow your dreams, etc… but never once do they tell you how costly and stressful this would be. Ive heard stories of people trying to do the right thing but living in a card board box in NY and waking up everyday, putting on their suite, and going to work. Sad! Even worst, Ive heard of student being so stressed out with it, they commit suicide. I admit, I actually asked my attorney if I could actually go to court and ask to be put in prison to pay off my debt. My stress level was really high – cant find a decent place to live, cant even apply for utilities or services without being charged deposit fees. When signing a lease, landlord use it to their advantage to increase security deposits or make almost impossible to meet deals. I live now in a 1 bedroom condo for the past year, still sleeping on an airbed and no furniture but a TV stand. Decent neighborhood but because the place needs alot of work, landlord only charges $1,000/month. But when I moved in I had to really negotiate – paid 2 month security, plus 5 months rent in advanced. Thats $7,000 out of my pocket. Thankfully, I had money orders Ive been storing away for about 3 years and had to use it all.

      Reply
  7. That is a staggering amount. I would have expected that the income would have been much higher as at first glance this would only seem to make sense if it included medical school. You have good advice, and I think it’s the best approach for this big mountain to climb.

    Reply

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