10 Questions for … a Student Loan Consultant

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Is there ever a point at which you advise people to forgo additional student loans to avoid taking on more debt?

I don’t look to establish an absolute threshold with my clients, but I do advise them to consider two key things: The first is that many experts caution strongly against borrowing more than you expect to earn in your first year of postgraduate employment. And the second is that borrowing over the limit on federal student-loan programs—up to $57,500 for undergrads and $138,500 for graduate and professional students taking out Perkins and Stafford loans—usually means not just greater debt, but worse debt that lacks the flexible payment provisions and protections of federal student loans.

What percentage of a person’s gross income is a reasonable amount to pay each month toward a student loan?

In general, the longer it takes to repay debt, the more the debt will cost over time, so there are distinct advantages to repaying debt fast … if you can. That said, you need a monthly payment amount that you can afford, and determining which repayment strategy is best for your circumstances depends on a lot of different factors, including total debt burden, income and projected future earnings.

Defaulting on federal student loans triggers significant collection powers: wage garnishment, tax-refund intercepts, social security seizure and penalties.

Income-based repayment plans can help a lot of people with federal student loans, and they are surprisingly underutilized, in part because they can be tricky to navigate. These “pay as you earn” plans set monthly payments at 10 or 15 percent of someone’s “discretionary income,” which is calculated based on adjusted gross income and family size. They are particularly good options for people who have relatively high debt-to-income ratios, and for people who may benefit from the relief afforded by public-service loan forgiveness, such as borrowers working in government and the nonprofit world.

RELATED: Paying Student Loans 101

Are there any instances when deliberately defaulting on a loan can work to a borrower’s benefit?

Not many. Defaulting on federal student loans triggers the government’s significant collection powers: wage garnishment, tax-refund intercepts, social security seizure, and huge penalties and fees.

You won’t hear this from your lender, but I can imagine scenarios in which it makes sense to stop paying a private student loan. If a person simply can’t pay every bill that’s due, it makes sense to first cover basic needs like housing, food and utilities. With the exception of the special treatment that private student loans enjoy in bankruptcy proceedings—in 2005, the bankruptcy restrictions that were conferred upon federal student loans were expanded to cover private ones, as well—these loans aren’t much different than other unsecured consumer debt.

RELATED: Student Loan Debt Thwarts Grads’ Goals 

  • Sabina

    Wonderful article

  • b-dd

    Please stop saying the student loan interest rate has doubled. That is a misleading statement. In fact, it has gone back to what it was before. I’m not saying this is a good rate, but for those of us who took out loans at the time, we are already stuck with paying this so I feel almost no sympathy for those who were lucky enough these last few years to have revived the cut in interest. That would save me thousands a year. Please put it in context when you say it has ‘doubled’.

    • kim

      You are absolutely right! The student loan rate was 6.8% and was halved and now people that took advantage of the lower interest rate are complaining! At the end of the day, whatever was borrowed needs to be paid back and preferably without whining. It would not be fair to give new batches of students lower interest rates when I am stuck paying 160k at 6.8% (medical school)! I intend to pay every penny of the amount I borrowed, and so should everyone else! I live below my means to pay my debt and so should everyone else! I see people complaining about student loan debt and how it should be forgiven with Louis Vuitton purses and new Audis. Enrages me!

  • Christine

    This article didn’t really give any actual advising or action items as to what we can do with our large amounts of debt. I would like to hear more of her advice rather than just general info.

  • Kay

    how will the new student loan deal going through senate currently impact those of us who aren’t students, but have graduated and are paying students loans (and will be for some time to come!)? or will there be no impact to those with existing loans, etc.?

  • ReneeMW

    I wish this article offered more advice for those who have Private Loans. This would have been helpful maybe 8-10 years ago when I was heading into college. There’s a wealth of information out there now. What about people who were completely misled by their financial aid office and banks? I only needed to take out private loans when financial aid said my parents made too much money, which was definitely not the case. So what happens when i graduate and my mom is later on disability and my father is on unemployment because the economy tanked? There’s no financial aid then, not when it comes to private loans. I now work for a non-profit and while i’ve been able to get IBR for my federal loans, we’re still stuck making loan payments close to $700. I still live at home like many of my friends who are in the same boat. Because my loan payments are like having a mortgage!

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