Student loans are a big problem today. With the 68% of bachelor’s degree recipients graduating with student loan debt, and the average being $30,100 per borrower (in 2015), this feels like it’s no longer just “one of those things” a new adult needs to contend with; it’s now a situation that can crater one’s ability to become wealthy.
After all, remember that debt and wealth are on the same wealth continuum, like a number line. If you start out in your adult life heavily on the side of debt, then it’s going to take you that much longer to get to the point where you have a positive financial net worth, much less any accumulated wealth
Because of this, it’s understandable if you want to get rid of your student loans as quickly as possible. (I wanted the same thing!)
However, while that impulse is valid, sometimes it can lead people to want to find a shortcut. A way to get out of it, without actually getting out of it.
Beware. They’re onto you. Here are some ways that people think they can get out of paying back their student loans.
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Back in the 1970’s and before, you used to be able to declare bankruptcy and get your student loans discharged, along with your other debts. However, that’s changed. The reasoning went, perhaps, is that these educated ne’er-do-wells were getting an good education, and then declaring bankruptcy, in order to get a free education.
I’m not sure I buy that argument, personally. Bankruptcy is a painful process with far reaching implications, and I can’t imagine that people would elect to do it. Maybe the government was just lobbied by the lenders to make it harder to get out of it.
The point is that education, in most cases, can’t be discharged in bankruptcy anymore. Sorry.
I say “in most cases” to be in full disclosure. There are actually a few cases where debt can be restructured or even wiped out. You have to prove something called “undue hardship“. But for most people, this isn’t going to apply to you. So you shouldn’t think of bankruptcy as a way out.
These days, the phrase that’s on everyone’s mind is “income-based repayment”. Since 2009, there have been options for borrowers to get on a payment plan that’s tailored to their income. And after 20-25 years, if there is still an outstanding balance on the loan, it can be forgiven.
Similarly, there is the Public Service Loan Forgiveness program, which allows for forgiveness in 10 years if you work in certain public or non-profit fields.
It sounds great, to be able to pay the minimums and coast it out for a decade or two, and then have the loans go away.
The problem is, there’s really no guarantee that this forgiveness will happen. We’re already seeing that some people who have reached the threshold are getting the runaround on their forgiveness.
And meanwhile, by paying the minimums, you’ve been paying much more in the way of interest. And in fact, if you’re paying less than the interest that gets added each month, your balance is growing each month.
Finally, you could die.
This won’t help you personally, of course, but it is an option.
Or is it? While federal loans will be forgiven when you die, certain other loans won’t. Specifically, private loans may not be discharged. It really depends on whether they have a “death discharge” clause. (I’m not making this up.)
In the news recently, a local Portland activist had a radicalizing moment when her brother died and Sallie Mae went after her family to pay off his loans.
I didn’t know that this could happen. I assumed that all student loans were discharged in death. After all, you can’t benefit from knowledge after you’re passed on. So no one’s going to do this to “game the system”. This is a trick you can only do once.
But it makes sense. A private loan is just a loan, and it doesn’t matter what it’s for. And when you die, your debts aren’t wiped out; they just become part of your estate. (Your debts are taken from your assets, and what remains is passed on to your beneficiaries.)
A better idea
Paying off such a huge bill as your student loans is really hard. I’m not going to tell you otherwise.
But paying off your student loans outright is still the best option. All your other options are risky and/or borderline unethical. (And one of the options results in your death, so let’s rule that one out on principle.)
You took out the loans. You signed up. If you didn’t know what you were signing up for, that’s unfortunate, but there’s nothing to be done about that now.
Your best bet is to get yourself on a plan, and make it a priority to pay down your debt. Signing up for income-based repayment is fine, if you need it, though the goal would be to get off it as soon as possible. You want to be paying down principal. There’s no shortcut, unfortunately, so you might as well put it out of your head.
But enough about me. What’s your plan for paying down your student loans?