Question:
Dear Steve,
Private Student loan balance: ~$260,000 in private loans between Discover and Sallie May (Average APR is about 8%)
Federal Student loan balance: ~110,000 (which I plan to repay using income based repayment)
Credit Score: 680 (will increase to about 720 if I pay off my credit cards).
Current state of residence: Florida
Degree: Master’s of Science that could get me a job in the $50-60k/yr range
I am currently drowning in student loan debt that will enter repayment in November. I really don’t know what to do at this point. From the looks of it, I will have to pay my entire salary just to pay off these loans and that’s unacceptable. I would like to pay them off, but the only way it seems I could afford it would be to refinance the private loans over 30 years with a very low interest rate (which looks near impossible). What would you recommend I do given my situation? I would like to live comfortably, and living comfortably does not seem like a possibility at this point.
Some things I have considered are:
-Not paying the private loans, but my credit will be ruined
-Moving to New Zealand and be able to live comfortably with potentially new credit (do I risk not being able to come back to the USA?)
Thanks!
Stefan
Answer:
Dear Stefan,
If you left the U.S. and decided to not pay your private student loan debt, you would be able to come and go from and to the U.S. without any issue.
I hate to ask the obvious but did you contemplate spending $370,000 for education that was only going to earn you a salary in the $55,000 range? How did that math ever add up?
It seems as if no matter what you are going to do, that expected income is never going to be enough to service the loans.
As you noted, the federal student loans are eligible for one of the income driven repayment plans. These plans will all you to consolidate your federal loans into a new Direct Loan and select an income-driven repayment plan.
You should absolutely not default or go delinquent on your federal loans so entering an income-driven repayment strategy is a good first step.
On the private student loans you have a few options:
- Make the minimum contractual monthly payment.
- Pay what you can afford but if you don’t pay the full amount the loans will still go past due and ding your credit.
- You can stop making payments and hope to negotiate a settlement or reduction of the private student loan debt.
- Depending on the school and how your private student loans were used, you may have some basis to discharge the loans. I would suggest you visit this page.
Defaulting on your private student loans is a valid strategy as long as you are well informed about the consequences and you are aware what may happen to your credit.
To get some reduction or special negotiation for repayment that is out of the norm, I would expect your credit is going to take a hit when you modify the repayment.
In the grand scheme of things, that’s not the worst outcome.
