Question: I am 38, went to college, but since have struggled to find a career I enjoy. I now have over $208,000 in student loans, but only make $47,000 a year. I work a job I hate, I get up and hate life daily. While I wanted to go to college, I didn’t want this to be my life — and unless you live it, you have no idea what this feels like. The debt is overwhelming me: I had to do a Chapter 13 bankruptcy years ago and then it switched to a Chapter 7, because I lost my job and only had my husband’s income. I was able to get rid of $40,000 of credit card debt and some medical debt, but I was in full default with my student loans. I’ll never be able to purchase a home in my name, even though I have some savings. What should I do?
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Answer: The first thing to realize is that you’re not alone in suffering mental health consequences from debt. In a recent Prudential survey of borrowers with $5,000 or more of debt, 42% said their student loan debt triggers high levels of mental and emotional stress – even more than other types of debt. “Financial issues can cause depression and severe mental stress,” says Grace Yung, a certified financial planner at Midtown Financial Group in Houston. “There’s no shame in this … Consider speaking with a [mental health] professional to help find your spark and to help work through your stress.” As for your financials, we asked experts what you — and others suffering from student loan debt — should consider doing, from rehabilitating loans, to refinancing (see the lowest student loan refi rates you can qualify for here), to loan forgiveness, to income-based repayment plans and more.
In your case, first up, let’s address that your loans are in default, and what to do about that. Right now, collections on your defaulted loans, assuming you have federal loans, are likely on pause thanks to the COVID-19 relief measures. (The COVID-19 emergency relief for federal student loans is scheduled to end on January 31, 2022.) And Mark Kantrowitz, author of Who Graduates from College? Who Doesn’t?, says it’s worth looking into whether you can rehabilitate these loans, which would clear the default from your credit history. “Many defaulted borrowers will be eligible for rehabilitation of their defaulted loans,” he says. (If your loans remain in default after the collections pause ends, you could be subject to wage garnishment, tax refund withholding, and collections.)
Here’s how it works: “If a borrower makes 9 out of 10 consecutive, full, voluntary, reasonable and affordable monthly payments as part of a loan rehabilitation agreement, their loans are rehabilitated and the default is cleared from their credit history. This is a one-time opportunity, so if the borrower re-defaults, they will have no further ability to rehabilitate the loans,” Kantrowitz explains. Note that the suspended payments happening during the COVID-19 relief period will likely count towards your nine required payments: “If you haven’t made, or been given credit for, the nine required payments by the end of the payment suspension, you will have to make the remaining payments to complete loan rehabilitation,” the Department of Education explains here. Kantrowitz adds that if you, or anyone else, rehab your loans, you should “either get into an income-driven repayment plan, which is often required as part of rehabilitation, or get a deferment or forbearance if you are unemployed or struggling financially.”
To reduce your monthly loan payments, an income-driven repayment plan is worth considering, as it bases your monthly payment on how much money you’re earning, so those with lower incomes will have lower payments. However, these are typically only an option with federal loans. “An added benefit of income-driven repayment plans is if the borrower’s loans are in the Direct Consolidation Loan program and the borrower works full-time in a qualifying public service job … the remaining debt will be forgiven after 10 years-worth of payments.”.
Next up, it’s important to keep current with your new loan payments, so it can help to increase income or cut expenses to make it possible to pay off the debt. “Options for increasing income can include asking for a raise, working overtime, or working a part-time job in the evening and weekends. One should also consider selling things that haven’t been used in over a year,” says Kantrowitz.
Lastly, it’s not impossible to reopen the bankruptcy case and seek a discharge of student loans. “This will require an adversary proceeding [learn about these here] and the borrower will need to demonstrate undue hardship, which is a harsh standard. But when the loan payments exceed the borrower’s income, and the borrower has no reasonable prospects for increasing income and has explored other options for dealing with the debt, the borrower might be successful in getting a full or partial discharge of their student loans,” says Kantrowitz.
Note that a bankruptcy settlement could have tax consequences: If a borrower does get a student loan settlement from, say, a Chapter 7 filing, the amount of canceled debt is treated as income by the IRS, but if the borrower is insolvent (total debts exceed total assets), the IRS may forgive all or part of the tax debt, explains Kantrowitz. “If the IRS does not forgive the tax debt, there are other options. One is to negotiate an offer in compromise by filing IRS Form 656,” says Kantrowitz. “The other is to request a payment plan of up to 6 years by filing IRS Form 9465. Since the tax debt is less than the student loan debt that was forgiven, the payment plan may be less burdensome than the student loan debt.”
While a refinance doesn’t seem like the best option in your case, as you seem to have federal student loans and likely need to get on an income-based repayment plan, they are an option for those struggling with private student loans, as rates are very low right now. (See the lowest student loan refi rates you can qualify for here.)
*Questions edited for clarity and brevity