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Worst to First Advice About Your Student Loan Payments

Lately I have been visiting various Facebook pages and blogs to see what people are saying about student loans. There are a lot of credit clearing companies, banks wanting to refinance such loans and general information sites. I am stuck by the range of suggestions given to struggling borrowers. Often, the advisor is another struggling borrower. Here is a ranking of some of the worst advice to some of the better advice I have seen.
5. Worst Advice Ever: “Ignore the loan servicer. There is really nothing they can do if you have no tax refund coming.” This is just such incredibly bad advice I can hardly believe that it is out there, but not a day goes by but someone is posting this recommendation. Of course, your credit can be ruined. Ah, they tell you. You don’t need a credit card. But your insurance rating may be destroyed, your business reputation may be lost, your professional or business licensure lost, your Social Security garnished, and so on. There is no statute of limitations of the collection of federal direct student loans. If you don’t resolve the debt now, you will have a lifetime to deal with it.
4. Next Worst: “Make a partial payment. That way your loan servicer will know you are trying.” Let’s begin with the proposition that needs to drive every thought you have about your debt. Your loan servicer doesn’t know or care about you and whether you are trying. They are not your friend or your parent. There’s no caring. There’s only the loan document terms which will be strictly construed in the lender’s favor and against you. If you send a partial payment, the lender will accept it, apply it first to the past interest due, note that you failed to make the proper payment, put your loan in default and charge you a default interest rate and likely a penalty on top of that. Making a partial payment depletes your resources and does nothing to save you from very bad consequences.
3. Very Bad (Especially Since Most Borrowers Are Once Again Signing Documents They Don’t Understand): “Apply for one of the many Income Based Repayment Plans and Reduce Your Monthly Payments.”If you think being poor is painful when you are 27, wait till you see how it feels when you are 47. You will not be stronger and able to work longer hours at 47. You may (or not) be making significantly more money at 47. If you enter an IBR plan, you will need to update your annual income with your servicer regularly and your payments will increase as your income increases. Some people signing IBR plans still don’t know that any loan amount remaining at the end of the repayment period that is forgiven will trigger forgiveness of indebtedness income. That means, the borrower after struggling for years to make minimal payments may be hit with a large, interest bearing tax bill in middle age.
2. Not Bad, but No Panacea: “Call Your Servicer and get a Forbearance or a Deferment.” This is not terrible advice if you use it for a real one-time short term emergency situation. If a forbearance is available to you, the loan will still accrue interest while the payments are suspended. If the borrower is granted a deferment, then interest doesn’t accrue during the period of the deferment. If you think you might need a forbearance or deferment, begin by checking out the information available at Federal Student Aid: Deferment and Forbearance. After you have sufficient understanding of what your options are, then call your loan servicer and tell them what you want to do and why. The good news is (and what really good news can there be other than perhaps your lender lost your loan documentation entirely) is that your use of the options of forbearance and deferment and attempting to work with you loan servicer can be evidence of your good faith attempts to pay your loan in the event that you must file bankruptcy in the future.
1. Painful, but often Workable: Get a second and/or third job. Move back in with mom and dad. Develop and follow a budget. Use every spare cent you can find to repay your debt and research all state loan forgiveness programs. Do this as quickly as possible following graduation as everyday you are not paying down principal on your loan is a day it is accruing interest. That interest is added to the principal (that’s the meaning of capitalized interest) and your loan is growing larger and larger and larger. The real savings are to be found in knocking down the principal amount of the loan in the early years.
In the end, the best advice is the one that is hardest to swallow. There’s is no easy way out of debt. A lot of people have made their debt situation dramatically worse by waiting to grapple directly with it while hoping that something will happen that will relieve them of the need to deal with it themselves. I do think that a generation of people have been sold a bill of goods about the value of a college education and the real cost of debt. For the record, I think it’s unlikely the guilty will be punished. For their own sake, I think the best advice given to any young debtor is that at 1 above.
Next up? What about the middle-aged debtor who went back to school in 2012 to ride out the recession and increase their marketable skills? What should they do?

About the author, Rose McConnell

Rose McConnell is an attorney practicing in Atlanta, Georgia. She is the author of Shun Student Loans; Get the Education You Need for the Fabulous Life You Want. Her concern over rising debt levels grew out of observing the devastating impact of excessive debt during the 2008 financial crisis. Many of her clients lost their homes, had their retirement savings decimated, and have never financially recovered. She podcasts to warn families of the dangers of student loans and to offer information to debtors struggling with repaying education loans.

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