Is Your Student Loan Debt Hurting You Financially? Over 42% Say Yes
Wendy Connick, The Motley Fool
Updated
Given how expensive a college education is, it's no surprise that so many graduates end up with crushing student loan debts. And while these debts don't carry the extremely high interest rates that credit card accounts do, the sheer size of many student loans can be an overwhelming burden. Indeed, a PwC survey found that 45% of millennials and 42% of Gen X respondents said their student loan debts were limiting their ability to meet their financial goals. And the student loan delinquency rate is 11.2%, according to Student Loan Hero, indicating that many borrowers just can't keep up with such enormous debts.
If you're one of the many people suffering because of student loan debt, here are some ideas on how to lessen your burden.
Switch repayment plans
Federal loans make up the majority of student loan debt, which is fortunate, because the Department of Education provides a number of repayment plans that borrowers can adopt whenever they choose (assuming they meet the plan requirements). At graduation, borrowers are placed in the standard repayment plan by default. However, this plan has relatively high monthly payments, making it expensive for someone just starting their career.
Low-income borrowers are typically much better off choosing one of the income-based repayment plans. These plans allow you to pay a percentage of your monthly income, rather than an amount based on the size of your loan. In some circumstances, this can reduce your monthly loan payment to zero. Even better, the income-based plans lead to automatic loan forgiveness of any debt remaining after either 20 years or 25 years, depending on the plan.
On the other hand, if your income rises substantially, an income-based plan may lead to excessively large student loan payments. In that case, you're better off switching to one of the other repayment plans; you'll likely see your monthly payment drop considerably, which can provide some much-needed financial relief.
Student in graduation gown with dollar sign hanging from cap
Image source: Getty Images.
Balance your budget
If switching to a more suitable repayment plan isn't enough, you'll need to look for other ways to rebalance your budget, either by reducing your expenses or by increasing your income. Reducing your expenses can be as simple as downgrading or canceling a few monthly plans (cellphone, cable, satellite, Netflix, etc.), or temporarily cutting back on things like restaurants and movie theaters. Increasing your income could mean switching to a higher-paying job, getting a part-time job on the side, or starting up your own side gig.
If you're carrying credit card or other high-interest debt in addition to your student loan debt, getting rid of those bills may be enough to turn your financial situation around. Credit card debt is far more dangerous than student loan debt because of those insane interest rates, so rather than funneling all your excess cash into your student loan, make your credit card debt your top financial priority. Once you get rid of those debts, your situation will be much improved.
Student loan forgiveness
Some programs will pay off your student loan debt for you if you accomplish certain tasks. Joining one of these programs typically involves some pretty major sacrifices, but being able to get rid of a huge student loan burden with just a few years of hard work may be well worth the effort. For example, working for a nonprofit or government organization, or becoming a Peace Corps volunteer, can lead to student loan forgiveness through the Public Service Loan Forgiveness (PSLF) Program. Note that Congress' PROSPER Act, if passed, would kill the PSLF program for new loans if it passes as currently written, though existing loans could still qualify for the program).
However, be aware that getting your student loans cancelled out can come with a significant downside: You may have to pay taxes on the cancelled loan balance as though it were income you'd earned. For example, if you made $30,000 in salary this year and had a $60,000 loan balance discharged, the IRS would expect you to pay income taxes on $90,000. This can create a whole new financial nightmare if you're not prepared for the resulting taxes.
Note that this isn't an issue for all student loan forgiveness programs. For example, loan forgiveness through the previously mentioned PSLF program won't generate a tax bill. In government lingo, student loans that are discharged, rather than forgiven (i.e. canceled due to disability), are the ones that can bite you come tax time. If you end up with a huge tax bill you can't pay due to a student loan discharge, consider making an offer in compromise or seeking an installment plan from the IRS.
Once you've gotten your student loan payments under control one way or another, you'll be able to focus on other important financial goals: buying your first home, saving for retirement, creating an emergency fund, and so on. Those student loans may have enabled you to get a college degree, but they shouldn't hold you back from your future dreams.
