19 answers

Student Loans - What Would You Do

I had a rough exit to college and it has spawned 2 problems. Yes, I'm an idiot. Don't judge! You don't know what I was going through. I just need a logical person with a logical thought process to tell me what I might be overlooking or point out something that hadn't occured to me. Or maybe a mortgage broker to tell me how this will affect me long term. 1) I'm 12 hours short of my Bachelors degree. I owe my old school $2000 and cant get my transcripts to take the last 12 hours I need until I pay it back. I paid a large chunk with income tax last year and I'm paying $100 a month toward the remaining 2 grand now.
2) I have a large govt student loan that has gone into default. It has tanked my credit and my $4,000 tax return is scheduled to be confiscated. I have 2 choices to deal with this problem that I caused myself. A. I can "Rehab" my loan for $448 a month for 9 months. That would get me out of default, put my loan in good standing, and take it off my credit. NO IDEA where I coul get $448 a month to pay this. In the meantime, my tax return will be confiscated, preventing me from paying off the $2,00 I owe to my old school. B. I can do a William D Ford Fed consolidation of my loan. It will get me out of default and allow me to get my tax refund. I'll end up paying between 200 - 250 a month for the rest of my life. Sounds like a good way to go, but if I go this route - it doesn't get taken off my credit. It will show that I had a deafulted student loan and that it was closed out.

I would like to buy a house at some point and credit is vital to everything we do. So, the rehab sounds like the responsible way to go. But, I dont have any extra money. I work a 9-5 now and live paycheck to paycheck. I'll need to get a 2nd job that pays enough to pay sitter and pay that $450. It's really hard to let go of the idea of the 4,000 tax return, but I have to make 9 monthly payments to remove the wage garnishment and I'd have to file tax next month. If I go ahead and consolidate I could file my taxes and get the refund. I could pay off my school and at least pass that hurdle. I make decent money now, but I need that Bachelors to make real money and get out of this debt cycle. But that damn default is still going to be on my credit until I pay off the loan - which will take my whole damn life! I have to make a decision right now that will have long term effects. I don't think it's as simple as a Dave Ramsey Cliche. Which is more logical? Consolidate and pay off my school so I can move forward with my degree and keep my credit in the toilet or get a 2nd job, buckle down and rehab this loan, put off school another year, and give up my tax return to repair my credit?

What can I do next?

So What Happened?™

Thanks so much for your support and well thought out answers. I kind of expected it to go the other way - I figured everyone would tell me to rehab - beacause it's much more difficult, it seems like it must be the right road. lol Somewhere it was drilled into me that the easy answer is never the right answer. But, in this scenario, I think I should just consolidate and take a breath. No point in making things harder than they need to be. Thank you all again.

Featured Answers

I was in the same situation a year ago. We did the consolidation route. I couldn't afford the extra money to rehab because it was going to be in addition to what they were already garnishing from my wages. I wasn't too happy about it, but for us it was the best option. I couldn't afford $650 a month in school loans (duh, that's why I was in default in the first place).

1 mom found this helpful

It really depends on how soon you want to buy a house!
I was in the same sort of predictament right after I graduated. I finished, but didn't immediately start making the big bucks, but the big student loan payments kicked in anyway!
I chose the consolidation route. That was almost six years ago now. My credit has been back in the good-great range for a long while. My credit score looked pretty awful for a bit, but was good enough to finance things again after 2 years.
Another thing that doing the consolidation also allow me to put my loans in deferrment. This meant I didn't make payments on the loan (though the interest continued to accrue). I did this 2x's for 12 months each time.
If I was you and I was not looking to buy a house in the next couple of years I would not put myself and my kids through all the hassle of rehabing the loan.

1 mom found this helpful

More Answers

I let my student loans go into default. It sucked. A lot. I would up doing a rehab program to get mine out of default. I paid $250 a month for 9 months. Then I was able to apply for economic hardship and get a deferment. Talk to the people at the rehab program and see if they're willing to take a lesser payment. They were really nice and worked with me. If you decide to go that route, make sure they know how much your expected tax return is going to be. They're still going to take it this year, but that $4,000 might help to get your monthly payments lowered.
If you consolidate your loans you're still going to have a large monthly payment that you most likely can't afford. At this point, it's just a matter of who you're paying your money too, know what I mean?
Sit down with your budget. Know how much money you bring in and what your bills are. List any extra expenses that you might have. Then keep track of what you spend your money on. There might be ways that you can eliminate some of the money going out. Do you use coupons for your groceries? Do you qualify for WIC or Food Stamps? Really be honest with yourself and tighten your belt.
There is a way out of the hole (trust me, I've been there too!) but it takes a lot of hard work and a lot of belt tightening.

4 moms found this helpful

First off, you are not an idiot. We all make money mistakes. I'm not really sure what to tell you about the rehab vs consolidation (although I think consolidation - at some poinit you should be able to afford to start paying extra and get rid of it early), but one thing you need to do NOW is to adjust your exemptions so you are bringing home more. $4,000 divided by 12 months is $333 per month - that can go a long way into getting you out of debt and you don't have to worry about losing it at the end of the year.

And I promise you, if you work the program Dave Ramsey is NOT a cliche. It changed my life, really!! We are out of debt with money in the bank and I now stay home with my kids instead of living paycheck to paycheck with over $20,000 in debt like we did before (and our income is less since I quit work). Even if you don't follow everything to the letter, the principles are sound, it is just a LOT of hard work - every bit of it worth it. Good luck whatever happens. You will get through this!!

4 moms found this helpful

I highly advise that you DO NOT REHAB. Here's why...
1 - I'm 99% sure that it will not be deleted from your credit.
2 - You do not have a plan or the ability to make the payments, so even if you're able to make the first one or two payments, there's a great chance that you'll default making your credit even worse than it is.
3 - Your education is important, you've worked so hard and are almost finished, why throw that away?

Here's why I think consolidation is the better choice..
1 - You'll be able to pay the school the $2,000. That elimiates your debt, allows you continue your eduction, and doesn't negatively effect your credit.
2 - So what if you'll be "paying for the rest of your life". You'll have $2,000 that you can put in the bank, and take out on a monthly basis to help make that payment. Making payments on a timely basis will improve your credit rating.
3 - Time. You are in no position to be buying a house in the near future. Before you can do that, you'll need a downpayment and money for closing cost. You'll have time to repair your credit.

Just one more thing to add.... Why in the world are you getting a $4,000 tax refund? Any one, regardless of filing status, income, etc, should ever get more than $1,500. This is one of the worst financial decissions you can make. Stop lending the government your money for free.

3 moms found this helpful

Personally, I would go the consolidation route. I have over 100,000 in student loans (so I get how much it sucks. I'm still amazed by how little in student loans some people accumulate given the cost of higher ed expenses). But, this route will allow you to be able to complete your degree, get a better job, then you can take some of the extra money your making and pay larger amounts here and there on the consolidation. It will also allow you a break if you return to school on having to pay it. Your credit may be hurt because of the default being on it, however, it is not on there forever and it should improve as you make payments on your debts no matter what route you go. Also, you can adjust your payments in some situation based on your family size and income (or at least I was able to do this which helped tremendously).

If your living paycheck to paycheck, then it's going to be difficult in general to buy a house anyway and honestly, I don't think either option is going to put you in a better state anytime sooner for doing it. I don't think it'll hinder you from getting a house later on as long as your current on your payments after a few years.

Oh and I've never heard of Student Loans being included in bankruptcy. They are pretty much the only things that can't be from what I've seen.

3 moms found this helpful

First of all we all make mistakes don't let anyone make you feel bad about asking for advice on this. I would tend to lean toward rehabing your credit just because it is so hard to do anything with out decent credit. Can you borrow from a family member if you can't get another job that pays enough for the difference? Can you get a family member to watch your child so you can work more to get the money? My last thought would be to consult a non profit consumer credit counseling service that can give you more expert advise on the best thing to do. Maybe there is another option you are unaware of. Good luck and I hope you are able to work it out.

2 moms found this helpful

The William D Ford consolidation is a better bet. It will allow you to finish your degree, thereby increasing your salary in the future. The higher salary, along with future raises and diligent savings will allow you to pay more than the 250 a month. Even if you could only swing $20 more at first that will make a big difference in the life of the loan and you won't be paying it for the rest of "life." As far as your credit, even though it is important in buying a home, it won't be the only factor and as long as you don't plan on doing it in the next year, even a default won't bring your score down that much if you keep everything else up to date and current. Pay bills on time, keep your credit card debt reasonable and in in a few years your credit won't be perfect but it should be good enough to qualify for a competitive mortgage. Also, with your college degree your salary would be higher, which helps in just getting a mortgage and you may have accrued enough for a decent downpayment that are all huge factors in obtaining a good mortgage. Your other option keeps you away from your child and your degree for a cleaner credit report that will probably have very little bearing on your future. Also, I wouldn't place a lot of faith on the "removal" of the default unless they've promised that to you in writing. You are doing a great job working for a brighter future for you and your child, don't let our screwed up student loan system intimidate you into working for them. You come first. Good luck!!!

2 moms found this helpful

I would suggest that you find a not-for-profit financial advisor and ask for a professional opinion. My opinion is that consolidation through a federal program is a much better idea. I owe over $30k in student loans (I know, young and stupid) and pay $305 a month (scheduled for the next 20+ years). However, if you are still in school, you can go into a deferrment program that will either be interest free (while in school) or accrue interest while in deferrment. Once you finish school, there's a 3 or 6? (can't remember) month grace period before your payments start. And, those payments will start out based on your income and gradually increase based on your "expected financial growth." Personally, I'm still holding out for the government to open up more "forgiveness" programs--for example, there is a current program that allows some % of loans to be forgiven once payments have been made on time for 10 years for people who work in "service" jobs (e.g. for the government, teachers, fire & police, etc). Also, there are options for forebearance if you lose your job or have other hardships.

Finally, I know the feeling of wanting to get into a house of your own. It is harder now to get approved, but you have to look at the bigger picture and decide what's more important long-term. For example, I had bought a car many years ago and it broke down (dead transmission) less that 1 year later! Nobody (dealer, manufacturer, financing company) would help AT ALL. So, I towed the car to the dealer and left it for them to deal with (still owed almost $8k on it). 1 year later I was approved to purchase another vehicle, 4 years later bought a condo, and now (7 years later) am preapproved for my 2nd house! So, it may seem like FOREVER, but eventually everything will even out. And, contrary to what somebody said... Student Loans do NOT disappear with a bankruptcy!

Good luck!

2 moms found this helpful

Wow. It sounds like you've researched your options.

What I've been hearing, is that credit rating is going to be really important going forward, because of the number of people who've had housing issues, and the changes in the credit and banking worlds. So, even though it seems the hardest choice, if you can find a second job that pays enough, this would be the one I'd go with. Nine months seems long now, but paying for the rest of your life (the monthly fee plus the bad credit rating) seems like it would hold you back from your other goals.

2 moms found this helpful

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