What to Do if You’re Having Trouble Paying Your Student Loans

April 2, 2013

student loansWe’ve all heard it said that student loans cannot be discharged in bankruptcy, so what do you do if your financial situation is a wreck – or if you’re unemployed – and simply don’t have the money to repay? There actually are a couple of ways to manage the situation even if the bankruptcy option doesn’t exist.

One comes in the form of a government program, and the other is a matter of financial guerrilla warfare.

Income-Based Repayment Plans (IBRs)

If you’re having trouble paying your student loans the government can be your best friend. There is a program available that will reduce the monthly payments on your loan if you have low income or are unemployed. The program is called the Income-Based Repayment plan, or IBR. The program was established specifically to help address the problems of people who are unable to manage their student loan debt payments.

The plan comes with certain limitations. It is based on your income and your family size, and that information will be reviewed each year you participate in the plan to account for changes in either your income or your family size. The loans can carry a term of up to 25 years, and will have a payment that can be substantially lower than what you’re currently paying. Also, since there are different student loan types, it’s important understand that not all student loans will qualify for an IBR.

The monthly payments are based on your discretionary income. The payments can be limited to 15% of that income, and this is the primary benefit of the program. There’s also a provision in the plan that will allow for the forgiveness of your debt in exchange for 10 years employment in certain public service organizations.

Don’t Qualify? Attack Your Debt!

If you can’t qualify for an IBR, there is one other option and though it’s difficult, it may be the only way out. That is to dig in and do whatever it is you need to do in order to pay off your student loan debt completely.

One of the fundamental problems with student loan debts is that they can go on for years. And since they are completely unsecured, you have no underlying collateral asset to sell in order to liquidate the debt. The only way to pay it off then is to dedicate yourself to spending a period of several years making the pay off your student loans your personal financial priority. If your loans are in the range of $50,000-$100,000 or more, you’ll need to attack the debt on several fronts:

Keep living expenses to a minimum.

As much as you may want to spread your wings and get on with your life, you’ll need to adopt a life on a shoestring. That may mean living at home with your parents, taking a residence with one or more roommates, or even living in a rented room. It will also mean driving the least expensive car possible, and cutting out any expenses that are not absolutely necessary.

Put all extra money into the debt.

The basic idea of living at a minimal expense level is so that you can throw any extra money at the student loan debt. You want to treat the payoff of the student loans as equivalent of a Chapter 13 bankruptcy. If the balance that you owe is very large, there will be no other way to pay off the loans without a significant degree of struggle.

Increase your income.

As an alternative to an extremely frugal lifestyle – or perhaps in addition to it – you can create a second income. This can be either a part-time job or a side business. You can either use the extra money to increase your payments, or as an alternative, you can dedicate the entire second income toward paying off the loan early.

Ignore other debt.

Unless you have a mortgage, it’s likely that your student loan is the largest single debt that you have. The sooner it’s gone, the sooner you’ll get some control over your finances. The best way to make that happen is to ignore your other debts and concentrate on your student loans instead. This will mean making the minimum payments on any other debts you have until your student loans are fully paid. It’s a matter of concentrating your efforts on the single most threatening financial problem you have, and letting the rest go until later date.

Don’t quit until the student loans are gone.

Paying off a large amount of student loan debt is a huge hurdle. If you’re going to make it happen you’re going have to fully commit to doing what you need to do. You’ll have to approach the payoff with an intensity bordering on obsession. How great that obsession is should depend upon how large your student loans are.

Are you aware of any other ways that you can get out of your student loan debts if you’re having financial troubles? Leave a comment!


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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.

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