I recently ran across an interesting article about a person who has a tremendous amount of student loan and credit card debt and isn’t sure how to handle it. Here’s a slimmed down version of his story:
As a college freshman, I went crazy with student loans… In the end, I totaled $265, 000 in student loans (about $56, 000 went towards the actual tuition/school)… Adding insult to injury, I ended up using credit cards to fill in the gaps whenever my student loan money ran out…
My salary [after graduating] was $41, 000 starting. My overtime helped me rake in approximately $70, 000 per year. Considering the fact that I had to work 60-70 hours a week, it wasn’t the most attractive thing in the world, but it brought in extra cash to help me formulate some type of a plan to attack this debt…
I am almost done with eliminating my credit card debt (I have approximately $12, 000 to go – it used to be $23, 000). I will begin paying on [the student] loans in a few months. The minimum payment will most likely be upwards of $1, 800-$2, 100 dollars per month.
The story also mentioned that he was terminated from his job as a State Trooper following an on-the-job accident. The good news (if you’d call it that) is that he’s collecting worker’s compensation, and is hoping for a sizable judgment in a resulting personal injury lawsuit.
This might seem like an impossible situation, and some people might just throw in the towel and quit paying down their debt. Instead, I thought it would be more productive to talk about what can be done to help his finances. I’m writing this post as if it’s an email to him, but the information should be helpful to anyone in similar circumstances.
Defer your student loans
If you’re unemployed, this should be your first step as you try to regain your financial footing. This should qualify as having a financial hardship. When calling, check with the customer service representative as to whether or not interest will accrue — since you have some private loans, it probably will. If so, find out how the interest will be treated — will it be added as a lump sum at the end of the deferment?
Finding employment should be your priority
While you’re looking for steady employment, seriously consider spending a few years working with program that can forgive as much of your student loans as possible. Some options I found while searching included:
- AmeriCorps: They have a loan forgiveness program, but it doesn’t appear to cover a huge amount.
- Peace Corps: They have a program that can forgive up to 70% of your student loans – check it out!
- Teach in a high need area: These programs vary from state to state, but it’s a job with health insurance and other benefits, and some federal programs can help forgive your entire student loan.
- College Cost Reduction and Access Act of 2007: If you’ve been employed for 10 years in public service and having been making your student loan payments, you could have the balance forgiven.
I would also recommend checking to see if you could get a job as a State Trooper elsewhere and have it count as public service.
Consider a part time second job or side business
With many of the loan forgiveness programs, the jobs themselves will not pay much, so look for ways to earn extra money while you tackle your debt. Since you’ve worked a lot of overtime in the past, this might not a huge adjustment for you.
Build a small emergency fund, just enough to stay afloat
Dave Ramsey recommends starting off with $1, 000 and Suze Orman recently said you should set aside 8 months of expenses. That’s quite a range. So… How large should you emergency fund be? I really can’t say because I don’t know the details of your situation or your comfort level. In general, you should set aside enough to protect you from any problems that might arise and drive you back into the credit card trap.
If you still have that Mercedes that you bought in college, consider selling it to jump start your savings. Replace it with a cheap but reliable used car. When in college, I was fortunate to find a Geo Prizm for $500. Hopefully this will also get you cheap car insurance.
If you have any items that you don’t use frequently, consider having a yard sale or selling them on eBay to further increase your emergency fund and/or accelerate your debt repayments.
Live simply and attack your credit card debt
I’m assuming that the credit card debt has a higher interest rate than the student loans. If it were me, I would live very simply until I completely paid off the credit cards and give yourself a little wiggle room in the budget afterwards.
Automate your debt payments and request that your student loans be changed to a graduated payment or income contingent plan. While getting out of debt might take a long time, it can be done.
Also, given the possibility of a judgment that could wipe out a huge chunk out of your debt, I’d suggest that you plan as if you’re not going to win. If you do win, great, but it could take years to get your share. It’s probably best not to count on that money to solve your problems.
What do you guys think?
Have any of you ever dealt with this amount of debt? Whether or not you have, what sort of advice would you give to this guy?
I second most of the advice already given.
Find a job, maximize your income, build an emergency fund, minimize expenses, stop using credit, and address your overspending.
What I would add to this advice is that this is a marathon not a sprint. You are not going to be able to cut every big expense and live like a pauper for the time it is going to take. There will be weddings to attend, vacations, cars break down, layoffs, marriages or babies.
So just mentally prepare yourself for that, but by no means throw in the towel. Keep going!
Thanks everyone for your feedback, thoughts, and suggestions.
I hope that high school seniors and college students look at this and understand that taking out enormous loans now can have a huge and limiting impact on your future.
Finding a job should be the top priority since it will bring in the biggest stream of income in the shortest amount of time. Starting a side business or new income stream can also provide a nice “bonus” income you didn’t otherwise have.
Also, it’s very important to live simply as you mentioned. Those in debt need to be more financially aware than those who are not. This is somewhat contrary to the natural order – our protagonist likely became saddled with debt by living a bit beyond his means. When you are saving very little to nothing at all, getting discounts, trimming expenses, and living frugally can make a big, big difference – http://wrinklydollar.com/2009/04/small-discounts-make-a-big-difference-in-savings/ .
Deferring credit card debt should be his first step. He should then concentrate on paying down the credit card debt after building up an emergency fund. The reason he should save up before paying down is that even if he pays off his credit card debt, credit is way less accessible today than cash.
He is teetering on the brink of financial collapse, but that said he still might be able to get through it. I agree that the amount he owes is too large for him to work at without debt consultation or bargaining down the amount.
Hopefully he can also sell some of the stuff he bought using that money.
Deferring student loans is a critical tool, but he should also look into lines of public service work that comes not only with a paycheck but student loan reduction contributions from the federal government as well.
Everything this person says makes me think he has some massive judgment problems. I would focus on those as the root of the financial and employment issues. Many people spend a lot of time planning to get ahead, but their actions keep taking them into new levels of disaster.
You have some great advice here…esp regarding student loan payment options. I am still currently in school so I am trying to create multiple streams of income to prevent taking out so MANY loans. It is really depressing to think that after getting an education some go in the red trying to pay for it.
As far as credit card debt, I don’t have much. My biggest payment is my car. I have a part time job…I am going to FORCE myself to apply all of the funds from that job to my CC debt. I will be checking your blog for more tips!
You need to be very careful about loan forgiveness. A close friend of mine had a student loan forgiven becuase of serious medical illness. Her debt was sold to a collection agency, who used the fact that student loans do not require court judgements to garnish wages (she got treated, got better and five years later started working again) She was willing to pay the original debt, but the collection agency tacked on about $80,000 in interest and fees for a debt they probably paid pennies on the dollar for.
I actually looked into the Peace Crops program when I graduated with $70,000+ in student loans. However, their program only forgives up to 70% (after working 4 years) on federal Perkins loans. I have $0 worth of Perkins loans and therefore it was not right for me.
They do however offer deferment and if it helps you get a great job out of it, it may be beneficial in that regard.
Hate to be the bearer of bad news:
“The good news (if you’d call it that) is that he’s collecting worker’s compensation, and is hoping for a sizable judgment in a resulting personal injury lawsuit.”
In MOST states, if you are collecting worker’s comp., you are unlikely to be able to obtain a personal injury award from the same occurence.
That being said, his state may be different, GET YOUR BUTT TO AN ATTORNEY TODAY…you may be playing with fire (if you aren’t already burned) with the Statute of Limitations.
One option to consider is serving in the military. They often have great programs for paying down student loans.
Great suggestions.
This person sounds like they have serious spending problems ($56K for the school, but $265K in loans and $23K in credit cards). They sound like the need debt counseling. They spent roughly $58K per year (assuming 4 years in school) on top of the tuition. I didn’t even make that kind of money for years after college.
I think looking at mountain of debt can be disheartening and daunting,but, this can be dealth with. The tips suggested are excellent. I would also suggest that one needs to lookat eliminating debt one by one. First kill the smallest one in value terms and then go for the next (much like Dave Ramsays Debt snowball theory). Most important aspect is to have a nice emergency fund. This will ensure that you ride out of any bad patch that may come across.
I think a key part of it can be selling/downgrading some of the things you own. If you’ve spent credit card debt on “things” (as opposed to education, food, etc.) then you can sell them to pay down that debt.
I know someone who has $30,000 in credit card debt and a collection of 300-400 DVDs. Needless to say that a lot of that credit card debt went into buying those DVDs, and fortunately enough they are something that can be sold to get back some of that money.
Paul
Pretty much covered it.
I’m curious to see this guy’s response to your advice.
You gave some great advice here. I have nothing to add to it.