What To Do When You Can’t Pay Your Student Loan Debt

Student loans are becoming a problem for more college graduates — or more particularly the ability to pay them. Higher college tuition and fees has led to larger student loan debts with commensurately higher monthly payments. This can be a heavy burden for a young person trying to make their way into adult life. But it’s a much bigger problem for recent grads who are either unemployed or under-employed.

If that’s the situation you find yourself in, there are some options that can help.

Photo by Svadilfari via Flickr

Student Loans Aren’t Like Other Debt

What makes student loans particularly difficult to deal with when you can’t afford repayment, is that you can’t make them go away like you can with other debt types.

Most loan types can be discharged in bankruptcy, settled for less money or negotiated in some other way. Student loans however are insured by the US government and if you can’t repay according to the original terms, the consequences are much greater.

Your tax refunds can be seized to repay the debt, or your wages can be garnished. If you owe a very large amount, this can result in a burden that will last for many years. In the normal course of business, the only way to get out of a student loan debt is to pay it off. The best you can hope to accomplish otherwise is a reduction in payments and possibly a partial forgiveness of the loan balance.

Income-Based Repayment Plans

If you can’t pay your student loan debts due to either low income or unemployment, there may be help from the federal government in the form of an Income-Based Repayment Plan, or IBR for short. The program started in 2009 for just this purpose.

According to the IBR website, the plans have the following features:

  • based on your income and family size;
  • adjusted each year, based on changes to your annual income and family size;
  • usually lower than they are under other plans;
  • never more than the 10-year standard repayment amount; and
  • made over a period of 25 years.

The payments are based on 15% of your discretionary income, and can be extended out up to 25 years. The plan also has provision for debt forgiveness after 25 years of repayment, but that does come with other requirements. The forgiveness feature can be accomplished in as little as ten years for certain public service organization employment.

Not all student loan programs are eligible for an IBR, but there are other alternatives as well.

Other Ways to Deal with a Student Debt Problem

If you can’t qualify for an IBR, or if you just want your student loan debt to be paid as soon as possible there are certain steps you can take on your own. How much money you owe on your loans will have a major impact on how far you go in your efforts.

Keeping your expenses low is the most basic step, especially if your student loan debts are large. This may mean having a shared housing arrangement, driving a very inexpensive car, and forgoing luxuries like restaurant meals, vacations and travel, and high-priced clothing and entertainment equipment. You may have to do that for as long as it takes to payoff your student loans.

You can also use something like the “debt snowball“. If you have several debts, like a car loan or several credit cards, it will be easier to begin paying off your student loans when the smaller loans have been paid off first. The money that you save from the monthly debt repayments will lower your cost of living and provide you with extra cash to pay toward your student loan debts.

As an alternative, or maybe even as a supplement, you can look for ways to earn some extra income that will be dedicated to the repayment of your student loans. They can include a part-time job, a side business, or working your way toward a promotion or into a job that offers commission and/or bonuses in addition to your regular salary.

Work to Pay it Off Sooner

There’s sometimes the thinking with student loans that it’s okay to keep them outstanding because the interest rate and payment are low, at least in comparison with the balance owed. That may be okay as long as you have a job and you’re making good money, but a future job loss or pay cut could change that — in a hurry.

For that reason you should want to payoff your student loan debt as soon as possible. Student loan debt is still debt, you should want to make any debt go away as soon as possible.

How are you dealing with pain your student loan debts?

About the Author

By , on Nov 26, 2012
Kevin Mercadante
Kevin Mercadante is professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry. He lives in Atlanta with his wife and two teenage kids and can be followed on Twitter at @OutOfYourRut.

Leave Your Comment (22 Comments)

  1. Hi Nick–I agree completely, and it should especially teach about the perils of student loan debt! Problem is, schools will never touch that subject in a negative way because going to college – via student loans – is part of the big picture program, so to speak.

    They won’t be able to encourage kids going to college but at the same time warning them that what is probably the number one funding mechanism is somehow flawed. It’s’ up to the parents really.

  2. It should be a mandatory class for kids in high school to take a Personal Finance class right before they graduate to help educate them on debt issues so they can more easily avoid it. It should especially cover student loan issues with the total U.S. student loan debt now at over $1 trillion.

  3. Hi Christina, I’m with Jay here, look into an IBR. The link is in the post.

  4. Have you looked into Income-based repayment options? Sounds as if it may work for you and your husband.

  5. daveM says:

    Here is a source of information you can dig into
    http://www.nolo.com/legal-ency.....udent-loan

  6. Cristina P. says:

    I’m having a difficult time because I have a loan from Citibank with a interest rate of 11%. At the moment my husband works and we have a daughter with a disability (spina bifida) and i stay at home and care for her. My husband has his own loans as well. We pay about $800 a month- its becoming impossible to survive.

    We cant consolidate because we dont have a cosigner.

    Any advice?

  7. Hi Jenny–Avoiding (or minimizing) student loans is the way to go. Community college for the first two years is a big one. Working your way through is another. I don’t think that student loans are a bad thing, but we should never be too casual in our view of them either.

  8. Jenny says:

    I am encouraging my kids to avoid student loans at all costs. Paying for college, earning scholarships and applying for grants are ways to cover the costs without getting in deep debt. I also think community college for the first two years can save students serious money.

  9. MR–I have no specific advice to give other than to emphasize that he get legal representation involved immediately. The debt has exploded due to interest and it will continue to grow even larger.

  10. daveM says:

    Each jurisdiction has its own unique regulations. Roommate will have to get good legal advice as to remedies.

  11. MR says:

    Hello, my roomate has been unemployed for over 2 years. His business fell apart and he has no money. He has over 70,000.00 in student loans due to the default. It was only about 30,000.00 but after the interest aded up it got that high. Could he get the loans to go away on this financial hardship?

  12. daveM says:

    I have used, in the past, a few credit rating agencies in order to evaluate both personal and commercial loans. I quite agree that it is important to check periodically as there are any instances where mean spirited companies and agencies will intentionally give ratings that are nor appropriate. I learned through experience that credit rating is not always suitable and that the results given as a rating may refer to a erious incident in someone’s past that they have corrected and have since been penalized.

  13. One of the reasons I like to check my credit score is to see if there are errors. Many of the bureaus rely on public information which is easy to assign to the wrong person. I don’t want employers and creditors making judgments based on information that isn’t mine.

  14. That’s true Dave, a bankruptcy is a bigger negative on a credit report/credit score than a collection. However since it’s a government loan you will most likely be barred from participation in government related programs for several years. That can include FHA loans and of course additional student loans.

  15. daveM says:

    I was formerly in the collection business, one of the accounts I collected for was a student loan lender…… and they would take a settlement. Although it is bad for credit rating to go to a settlement, I believe it is better than a bankruptcy for the credit agencies.

  16. I agree Daisy, there may be some way to get out from under through a left field dodge of one sort or another, but there’s no substitute for paying the loan off. Bankruptcies and delinquencies lead to poor credit ratings that will have an affect well beyond the loans themselves. It makes a strong case for paying your way out any way you can.

  17. It’s so dangerous to not pay off your student loans – governments can actually approach your employer which looks bad on you. There’s always a way – whether it be to get another job or move to a cheaper housing arrangement. It may seem impossible but there are options.

  18. Hi Luis–You and Jay are almost certainly right on the bankruptcy point. Government programs are universal in being riddled with rare exceptions and bizarre loopholes. “You can not do this…unless you’re in a federal disaster area located in select counties of Northwest Montana, East Central Georgia, the island of Guam, the City of West Nowhere Nevada…” You get the picture.

    I do agree that undue hardship will likely be close to impossible to get.

    And thanks for the spelling error notification–no matter how much I edit, mechanically and visually, it still happens.

  19. Kevin, what Jay says does ring a bell as I think I heard a report on the radio on that very issue but the one thing that I remember for the report how hard it was to prove in court “undue hardship”. You might want to search the NPR website and see if there is a link to the report.

    What you say is very true. Student loans are extremely “sticky” and a lot of people think that because their interest rate is low and terms are long they can keep them around like a “house pet”.

    P.S. you got a typo in your last question at the end of the article. Do you really mean “pain” or “paying”?

  20. The case is Brunner v. NYS Higher Education Services Corp., and it’s the go-to test for discharge of student loans in bankruptcy. Feel free to take a look at my article outlining the lay of the land here:

  21. Hi Jay–I hadn’t heard about the undue hardship, can you cite the source?

    One issue I did think about with a discharge though is what happens when it’s the student loan debt itself that’s the primary reason for the bankruptcy? That’s the case for a lot of people. How will a bankruptcy court view that?

  22. Student loans can be discharged in bankruptcy on a showing of “undue hardship.” It’s not easy to prove, but for the right person it could be a life saver. Even if you can’t discharge your loans in a bankruptcy, you may opt for a Chapter 13 reorganization bankruptcy. This will allow you to repay your student loans and other debts over a 3-5 year period based on your disposable income; the student loan debt that remains unpaid at the end of the reorganization will not be wiped out, but the breathing room afforded by a 3-5 year reorganization period may be helpful.

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