Ask Money

Dealing with the student loan debt burden

Chris Farrell May 14, 2012

Question: I am extremely in debt with my student loans. At Age 25, I am wondering about the best way to resolve this debt. I currently have a part-time job and make less than $600 a month. How do I go about refinancing with such little tangible income? Jennifer, New York, NY

Answer: We’ve been focusing a lot on student loans on the show, so it’s no surprise that the questions are pouring in. Assuming these are federal student loans (or mostly federal student loans), you have a number of options to reduce your payments for now. The price for a measure of financial relief is a potentially bigger overall bill for your college education. I say “potentially” because there is no pre-payment penalty with student loans. You can always accelerate paying down principal when your financial circumstances improve. To get some long-term relief, I would look into one of the income-sensitive repayment plans. The newest option is an income-based repayment plan. Here’s how describes it.

Income-based repayment is intended as an alternative to income sensitive repayment (ISR) and income contingent repayment (ICR). (Both ISR and ICR plans will continue to exist.) It is designed to make repaying education loans easier for students who intend to pursue jobs with lower salaries, such as careers in public service. It does this by capping the monthly payments at a percentage of the borrower’s discretionary income, which is based on the borrower’s income and family size, not the total amount borrowed. The monthly payment amount is adjusted annually, based on changes in annual income and family size.

Most borrowers will have a monthly payment under income-based repayment that is less than 10% of gross income. This includes single borrowers with less than $50,000 in income and married borrowers with two children who have less than $100,000 in income.

I would also run the numbers on the income-contingent and income-sensitive options.

If your finances really deteriorate, you can buy some short-term relief by putting the loans into forbearance or deferment. Finaid offers a good review of the options for the financially oppressed.

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