I recently ran across an interesting article about a person who has a tremendous amount of student loan and credit card debt and isn’t sure how to handle it. Here’s a slimmed down version of his story:
As a college freshman, I went crazy with student loans… In the end, I totaled $265, 000 in student loans (about $56, 000 went towards the actual tuition/school)… Adding insult to injury, I ended up using credit cards to fill in the gaps whenever my student loan money ran out…
My salary [after graduating] was $41, 000 starting. My overtime helped me rake in approximately $70, 000 per year. Considering the fact that I had to work 60-70 hours a week, it wasn’t the most attractive thing in the world, but it brought in extra cash to help me formulate some type of a plan to attack this debt…
I am almost done with eliminating my credit card debt (I have approximately $12, 000 to go – it used to be $23, 000). I will begin paying on [the student] loans in a few months. The minimum payment will most likely be upwards of $1, 800-$2, 100 dollars per month.
The story also mentioned that he was terminated from his job as a State Trooper following an on-the-job accident. The good news (if you’d call it that) is that he’s collecting worker’s compensation, and is hoping for a sizable judgment in a resulting personal injury lawsuit.
This might seem like an impossible situation, and some people might just throw in the towel and quit paying down their debt. Instead, I thought it would be more productive to talk about what can be done to help his finances. I’m writing this post as if it’s an email to him, but the information should be helpful to anyone in similar circumstances.
Defer your student loans
If you’re unemployed, this should be your first step as you try to regain your financial footing. This should qualify as having a financial hardship. When calling, check with the customer service representative as to whether or not interest will accrue — since you have some private loans, it probably will. If so, find out how the interest will be treated — will it be added as a lump sum at the end of the deferment?
Finding employment should be your priority
While you’re looking for steady employment, seriously consider spending a few years working with program that can forgive as much of your student loans as possible. Some options I found while searching included:
- AmeriCorps: They have a loan forgiveness program, but it doesn’t appear to cover a huge amount.
- Peace Corps: They have a program that can forgive up to 70% of your student loans – check it out!
- Teach in a high need area: These programs vary from state to state, but it’s a job with health insurance and other benefits, and some federal programs can help forgive your entire student loan.
- College Cost Reduction and Access Act of 2007: If you’ve been employed for 10 years in public service and having been making your student loan payments, you could have the balance forgiven.
I would also recommend checking to see if you could get a job as a State Trooper elsewhere and have it count as public service.
Consider a part time second job or side business
With many of the loan forgiveness programs, the jobs themselves will not pay much, so look for ways to earn extra money while you tackle your debt. Since you’ve worked a lot of overtime in the past, this might not a huge adjustment for you.
Build a small emergency fund, just enough to stay afloat
Dave Ramsey recommends starting off with $1, 000 and Suze Orman recently said you should set aside 8 months of expenses. That’s quite a range. So… How large should you emergency fund be? I really can’t say because I don’t know the details of your situation or your comfort level. In general, you should set aside enough to protect you from any problems that might arise and drive you back into the credit card trap.
If you still have that Mercedes that you bought in college, consider selling it to jump start your savings. Replace it with a cheap but reliable used car. When in college, I was fortunate to find a Geo Prizm for $500. Hopefully this will also get you cheap car insurance.
Live simply and attack your credit card debt
I’m assuming that the credit card debt has a higher interest rate than the student loans. If it were me, I would live very simply until I completely paid off the credit cards and give yourself a little wiggle room in the budget afterwards.
Also, given the possibility of a judgment that could wipe out a huge chunk out of your debt, I’d suggest that you plan as if you’re not going to win. If you do win, great, but it could take years to get your share. It’s probably best not to count on that money to solve your problems.
What do you guys think?
Have any of you ever dealt with this amount of debt? Whether or not you have, what sort of advice would you give to this guy?