Question:
Dear Steve,
I graduated college in 2007. After years of financial hardships and the lack of knowledge of student loans and deferments/forbearances, my loan and interest has risen to $66,000 at a 7.4% interest rate.
I’ve tried getting lower rates with negative results. I apply for IBR which brings my monthly payments from about $640 to $550. I just consolidated so I can get more forbearances but I know that will only make things worse. I called my lender and their response was “we can’t help, just pay what you can.”
I work in law enforcement and plan to do the public service plan, but, my IBR payments are still too high. Over the last 10 years, I’ve paid about $20,000, almost all going straight to interest. They don’t take into account the fact that I live in the bay area and half my income goes to rent.
I simply don’t know what my options are. I have no problem owing what I borrowed but due to my lack of knowledge, about $25,000 of interest has accrued and added to my principal and I need help of what I can do, if anything, for some debt relief or how to lower my payments to something closer to $400? Please help me!
Lana
Answer:
Dear Lana,
Thank you for your role in law enforcement in what ever capacity you serve. I was a police dispatcher in college.
It’s a shame you didn’t get into a position to consolidate and make your loans eligible for credit towards the Public Service Loan Forgiveness (PSLF) program. But the good news is it sounds as if you are now.
It’s easy to see how the balance could have exploded so much. Periods of deferment or forbearance only allow the balances to grow much faster. So while you’d paid a lot, the balances increased even more during those no payment periods.
I can appreciate the servicer says, “pay what you can afford” but that’s not awesome advice. I know they’d rather get some payment but a partial payment is going to age your account further behind, the payments won’t count towards the PSLF forgiveness, and you’d eventually wind up in default.
I made some assumptions in using the Department of Education online payment estimator. I assumed you are single and make about $65,000 a year and that gets you an IBR payment in the range you mentioned. But you can run the calculator yourself.
As you can see there are repayment options like REPAYE and PAYE that would bring your payment to around $390. Payments in those plans will count towards your PSLF and give you a loan forgiveness of about $50,000.
Switching to REPAY or PAYE and out of the IBR will lower your monthly payment. The downside to both of those programs is if you are married, the income of both partners will be counted towards the payment calculation. However, the loophole under PAYE is it will count only if you file a joint tax return. So don’t file a joint tax return or if you are married and filing a joint tax return now, stop doing it.
You might want to talk to your servicer about switching you into the Pay As You Earn (PAYE) program and if you are not getting anywhere then I would suggest getting some professional help to assist you with making the right switch for you. One person you can talk to is my friend Damon Day.
Steve Rhode
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This article by Steve Rhode first appeared on Get Out of Debt Guy and was distributed by the Personal Finance Syndication Network.