How to Deal With Student Loans

Going Into Repayment

With student loans going back into repayment, you may be wondering what your options are to keep up with the payments. Especially if it seems like you won’t be able to make them. Here are some options you could consider to deal with your student loans directly and indirectly (freeing up money to pay towards your student loans).

Eliminate Other Debt So You Can Pay Student Loans

If you are unable to discharge your student loans in a bankruptcy. You could consider eliminating other debt to free up cash flow to pay toward your student loans. You could file a bankruptcy or pursue other debt relief options so that you can lower or get rid of your other debt payments in order to afford your student loan payments.

How are student loans treated in a bankruptcy when they are not discharged? 

If you cannot discharge your debt in a bankruptcy, a bankruptcy may still be helpful. Student loans are typically classified as general unsecured debts, but their treatment in a bankruptcy can vary based on the bankruptcy trustee's interpretation of the law. 

In a Chapter 7 Bankruptcy, if the student loans are not discharged, the student loans may just continue, but hopefully you could discharge some debts to free up money you can pay towards your student loans.

In a Chapter 13 Bankruptcy, student loans may be treated differently depending on the trustee’s interpretation of the law. Some trustees might group student loans with other unsecured debts potentially causing the loans to grow during a Chapter 13 repayment plan if they are not able to receive payments. Which would leave the borrower liable for the full balance along with the interest accrued during the repayment period. On the other hand, some trustees might have debtors continue paying their student loans throughout the Chapter 13 case to ensure they remain current on their debt. Although it would help pay the student loans down, it might not be as appealing because it would make the Chapter 13 repayment plan higher.

Options to Discharge Student Loans Besides Bankruptcy

What are your options if you can’t discharge your student loans in bankruptcy but you can’t afford to pay them back? Here are a handful of options you can consider:

1. Loan Forgiveness, Cancellation, or Discharge

Loan Forgiveness, Cancellation, or Discharge: According to the U.S. Department of Education, there are a handful of ways to get your federal student loans forgiven.
Specifically for: 

• Teachers
• Government employees
• Nonprofit workers
• Healthcare professionals
• Individuals with disabilities
• People under income-driven repayment plans.

You may also qualify to discharge your loans if your school closed or misled you or a handful of other reasons. To see a full list visit the U.S. Department of Education’s Student Loan Forgiveness page.

2. Alternative Repayment Plans

Alternative Repayment Plans: If you have a federal student loan, you could consider reaching out to your loan provider to work together on a repayment plan that would work for you. Some repayment plans are:

• Graduated repayment - increasing your payments every 2 years so you can have lower payments in the beginning with more entry level jobs.
• Extended repayment - extending your 10 year loan to a longer period (like 25 years) to have a lower monthly payment.
• Income-contingent repayment - payments are capped at 20% of adjusted gross income for up to 25 years. After 25 years, if the loan is not completely paid off the rest of the loan is forgiven.
• Pay-as-you-earn -  payments are capped at 10% of monthly income for 20 years. This requires being able to prove financial hardship. It may be hard to qualify for financial hardship but if you do you will be able to continue to do a pay-as-you-earn after you are no longer in hardship.

3. Loan Consolidation

Loan Consolidation: Federal student loans can be consolidated into a single federal loan, which may streamline repayment. See if you can consolidate your federal loans on the Federal Student Aid website. If you have private loans, you could also look to consolidate them with a lower monthly payment or interest.

4. Strategic Payment Methods

Strategic Payment Methods: Use pay off plan options like the avalanche, snowball, or savvy method to prioritize your payments towards our debt and reduce the principal so you can get out of debt cheaper, easier, and faster.

5. Refinancing

Refinancing: You could also consider refinancing your student loans with a private lender. Ideally you can refinance with lower interest rates so you can save on the interest. Lenders tend to consider your credit score, history, debt-to-income ratio, and other lending criteria when qualifying your rate and eligibility.

To check if you qualify for refinancing and what rate you could get. Check out Juno to find your best student loan refinance options.

6. Deferment and Forbearance

Deferment and Forbearance: Federal student loans offer options for deferment and forbearance, allowing you to temporarily postpone your payments. Deferment doesn't accrue interest during the approved period, while forbearance might add accrued interest to the principal. Check the Federal Student Aid page on deferment and forbearance for more information.

What Is Bankruptcy? How Does It Work?

Bankruptcy is legal debt relief process where a debtor can legally be forgiven (via a discharge) from some or ALL of his/her debts.

Bankruptcy is a legal way for people to get help when they cannot afford to pay back the money they owe. By going through bankruptcy, people can either get a fresh start wiping their debt (Chapter 7) or create a plan to pay back what they can over time (Chapter 13). Bankruptcy is a way to find relief and a chance to improve their financial situation under the guidance of the court.

Check out this video covering the pros and cons of bankruptcy.

Bankruptcy Alternatives

Looking for different ways other than filing for bankruptcy? Bankruptcy may be the last thing you want to end up doing so why not try something else. Well luckily, there are plenty of alternatives to choose from and learn about. For example, have you heard of home co-investment? It's not a HELOC or a reverse mortgage, and it doesn't require a monthly payment.

We will cover each one in detail below. If it's helpful, check out Justin's video where he covers bankruptcy alternatives and then our free bankruptcy alternatives calculator to estimate cost and options.

Here's the bankruptcy alternatives calculator that you can take to help you compare your different debt relief options, the costs, and the pros and cons of each option.

Debt Settlement

One bankruptcy alternative that you can look into is debt settlement. It can be a great option for you to move forward if your debt becomes unmanageable to continue paying. There are many similarities between debt settlement and bankruptcy.

So, what is debt settlement? Debt settlement is when an individual is able to negotiate to lower your debt less than what you originally owe. That way a portion of what you were supposed to pay back will be forgiven. For example, if you owe in debt $100,000, debt settlement is able to negotiate the amount down to $50,000. Though how does the process of debt settlement look like?

Understand the Process

When going through the process of debt settlement, most of the time you use a debt settlement company to guide you through the experience. Keep in mind when looking for a debt settlement company, always do your research before to make sure it is the right one for you. Now getting into the process, debt settlement companies are the link you need for what you owe in debt and the creditor. The debt settlement company will make you an escrow bank account for where all the funds will be collected. From there they will put together all the payments into one for the creditors. They will become your primary contact and negotiate for you to lower your debt. From there you will decide to either accept/decline your settlement and new monthly payment plan. Once accepted you will start sending payments to the creditors till you finding paying off your debt.

Sounds pretty good, though we also have to consider some of the negative impacts it may bring. Such as, how debt settlement can damage your credit score depending on your situation. Sadly, most of the time it will have a negative effect on your credit score throughout the process. So it’s a good idea to consider the pros and cons, depending on your situation.

Understand the Fees 

Debt settlement is a common alternative to bankruptcy, but you may want to think about the cost and fees of debt settlement. Debt settlement companies often charge fees based on the enrolled debt or the saved amount. You should also consider the FTC's guidance and look up whether your attorney general has specific insights for debt settlement in your state. These are just a few things you should think about before looking into debt settlement.

One of the most important things to consider with debt settlement are fees. Many debt settlement companies will charge between 15-25% of enrolled debt. That variance can means thousands of dollars in either less or more fees. This is why we love working with this company as they charge some of the lowest fees in the industry and also maintain an A+ on BBB and a 4.8 rating on Google based on 118 reviews.

Analyze The Debt Relief Companies Reviews

Another thing to consider is the debt relief company's reviews who you are going to work with. Many debt relief companies have positive reviews, but you can find that negative reviews reveal a lot about a company's operations. This is why we only work with 2-3 debt relief firms because many debt relief have a lot of negative reviews. 

While debt settlement is a common alternative to bankruptcy, debt management can preserve your credit score although your monthly payment may be quite a bit higher. Let's dive right in.

Debt Management

You can also consider another alternative called debt management. Debt management is when you collaborate with a company such as credit counseling or debt consolidation to help manage the debts you owe. Debt management isn’t a company that will lend you more loans or settles your debt. What debt management does is help lower your interest rates when paying through the company. For instance, debt management will try to negotiate the debt interest rate down (22% to 7%). As well as, be able to waive certain fees. This will help you to use that money towards the monthly payment that you owe. Which will allow you to pay off your debts faster. So how is the process like to apply for debt management?

Understand the Process

When meeting with a debt management counselor, the agency will look through all your debts. From there they will determine and estimate the amount it will take to pay off your debts with a certain time frame. Typically it is about three to five years long. That is when a monthly payment will be created for you depending on how much debt you need to pay off. Then you will start making those payments towards the company and they will pay your creditors instead. So no need to worry about paying every month since they will be paying for you. After a couple of years, you have paid it all off. Though don’t be fooled just yet because there are also some cons you have to remember.

The thing that credit counseling companies and non/profit debt management agencies are great at doing is making it seem so simple to do. Although you need to make sure you are getting the full picture when thinking about using debt management. Something you should definitely know is the service/maintains fees you will have to be paying for. So not only you will be paying off your debts through the monthly plan but also the added fees for using the companies/agencies. Adding those additional fees may not be saving you any money when paying off your debts. Not only that but you must close all your credit cards because they want to make sure you don’t owe more in debt over time. Understand the credit score impact. Many people also compare debt settlement to debt management. Besides that, depending on your situation this can still be a good option to move forward with.

Debt Payoff Planning

An alternative you can consider is using a debt payoff planner. Such as the Savvy Debt Payoff Planner for this option. It is an app on iOS and Android where you can get out of debt faster. The Savvy debt payoff planner has a zero-based budget and will encourage you throughout the process. It will show how your debt freedom date moves closer and your debt decreases in real-time. It is also super simple to use. You are able to add your bank accounts, credit cards, and loans that you are paying off. As well as automate a budget and a payoff planner for you to use to help reduce expenses.

What is different about the Savvy Debt Payoff Planner is their own savvy method, compared to the snowball or avalanche method to pay off your debt. So, let’s go over each one of the snowball, avalanche, and savvy methods to get a better understanding of it and compare.

Debt Snowball Method

The snowball method is when you start by listing all your debts from smallest to largest. Then from there, you start paying off your smallest debt first and make your way to the largest. This is one of the more common methods much use because of how motivating it can be. When you start seeing your debts being paid off it can become encouraging to keep on going until the end.

Debt Avalanche Method

The avalanche method is when you list your largest interest to your smallest interest debt. Then you start off with the minimum payment on all your debts. Though once you start paying them off you use those funds towards paying off the highest interest debt. From there you will keep on going with the same routine until you have paid off all your debts.

Debt Savvy Method

The savvy method uses both snowball and avalanche methods combine. Using the savvy method will help encourage you as you pay off your small debts. Though it will also gain some of the interest savings by adding the avalanche method. This will help you keep a lookout on your interest rate while also getting psychological benefits from seeing your debts being paid off.

If this aligns with your financial situation, then maybe this could be your option to use to help pay off your debts.

Home Co-Investment

Bankruptcy exemptions can help protect your assets from a Chapter 7 bankruptcy. That said, one of the biggest challenges with a bankruptcy is when your home has equity that is well above your state's bankruptcy homestead exemptions.  For example, let's say you have $200,000 in home equity and the homestead exemption in your state is $50,000. You have $150,000 above the exemption, so if you file Chapter 7 bankruptcy, you may lose your house. If you file Chapter 13 bankruptcy, your Chapter 13 plan payment may be too expensive. You also may be in a position where you cannot get a HELOC or do a reverse mortgage. 

This is a challenge for many people, so there's something called home co-investment where a company will invest in your home for a share of equity in your home. So, when you sell your home, you will get some of the equity, and the home co-investor will also yield a profit from the equity.

The benefit is that you can access equity in your home debt free.

If you are interested in this option, you need to understand whether your home would be eligible. To check eligibility, you can use this link which will show you eligibility and how much you may be able to unlock. If you use this option, please consider reading all the pros and cons of this option and read through the costs. For example, for this option, there may be a lien that is put on your house. You may also consider reading how long you have until you would have to share the equity back with them and how much equity you would need to share with them.

Debt Consolidation Loan

You can also look into a debt consolidation loan as another alternative for you. Basically, a debt consolidation loan is a loan that combines all your debt into one. Since it is just one loan now, you will only have to deal with one payment. For example, let’s say someone has 5 credit cards and $10,000 owed each, so $50,000 and let’s say payment is $500 per month. So your average interest rate is 18%. What Debt consolidation can do is; $50,000 loan - $475 per month and the interest rate are down to 15% now.

That way you aren’t as stress paying different loans back and lose track. Getting a debt consolidation loan also may lower your interest rate as we see in the example. Although to get a debt consolidation, it does depend on your credit and how much you want to combine your debt. One thing to mention is to not worry about your credit score/report. It won’t hurt it! A debt consolidation loan can become more manageable for you to use if this aligns more with what you are looking for.

Mortgage Refinancing

Now even though it is not the most common alternative, mortgage refinancing could be a good idea. How mortgage refinancing works is when the homeowner acquires a new mortgage loan and replaces their previous one. For instance, let’s say the mortgage is $500,000 worth and $300,000 owed → You have $200,000 in equity. Then you refinance your mortgage for $400,000 and get $100,000 in cash. It is nice because now you have more funds and also save more on your mortgage interest. Though here is the problem → $400,000 loan now, so your monthly payment is higher. Also, let’s say you had 20 years left on a 30-year loan. Now, with $400,000 loan, you are back to a 30-year loan. Definitely doesn’t sound fun, but it could still be of use as an alternative.

Help From Family or Friends

An alternative you can do is to also ask for help from your family and/or friends. Sometimes in certain financial situations, this might be an option you should consider. Most of your family and friends don’t ever want to see you financially struggle. So it never hurts to ask to borrow money as a loan or to even donate to you. The worst thing to happen is if they say no. From there you can move on to the next friend or family member who you are close with that may help you out. Just remember that it never hurts to ask.

Increasing Income

Increasing your income can be another option for you to do. You can increase your incoming by picking up a second job to make some extra income on the side. Such as working at a retail store or your local restaurant. You can do this by doing some research online or going around town to see who is hiring. Keep in mind, if you are looking for a second job, find one that you can also earn tips from. If you have a car, you can also look into working for companies like Uber, Lift, and DoorDash. What is nice about doing that is it is on your own schedule and time. So whenever you are free you can go around town picking people up or dropping off someone’s meal. It is also a great way to earn more tips on the side.

Freelancing is also another option you can look into. Such as using Upwork to find small job opportunities to do for others. Such as re-writing articles, proofreading an essay, or doing a few sketches for someone. Again, it is nice to look into this if you are on your own schedule.

Decreasing Expenses

You should also look into decreasing your expenses you may not even use or have better offers. Check for any subscriptions you may have. Such as Netflix, Hulu, HBOMax, STARZ, and Apple TV to see if you are really using all of it. If you aren’t using those subscriptions, delete them and only stick with one subscription for now.

You can also decrease your expenses by not going out as much to eat, like take-out food. Instead, cook at home, it will save you money over time. If you love coffee, maybe stick with at-home coffee instead of going to Starbucks in the morning every day. You will save a ton of money by not spending your money at takeout places. It might be hard at first but worth the sacrifice.

You should also look into your cell phone service provider and see if you are getting the best offer. In fact, look into other providers as well and see which one is more beneficial for you financially. Such as T-Mobile vs AT&T and Verizon ($40 deduction per month and unlimited GB vs 2 Gb). Just cutting back these few expenses can make a big difference financially for your future.

Doing Nothing

I would generally not recommend this option, but what can happen if you have debt and stop paying? Well, nothing good and it will just get worse. Doing nothing will cause creditors to possibly sue you for unpaid debt. They will sue you when they think they can start collecting the debt. Such as your property, amount of debt you still owe, state laws on garnishment, and statutes of limitation.

If you are being sued there are a few things you can try and do before going to court. For instance, you can try and settle your debt on your own. Though you also have to remember you can still be sued in debt settlement programs. If you are, in court most judges will be lenient depending on your case with a valid reason. Though it is always a good idea to try and resolve the issue before heading into court.

If a judge goes against you, a few things may happen. The debt collector can attempt four different ways. For example, Wage garnishment of a paycheck, Levy/garnishment of a bank account, Lien on property or assets – Home mortgage, and Continue normal collection practices. This is why you should never get to this point of “doing nothing” because that will become the biggest mistake of your life.