How do I deal with massive student loan debt?

Dear Liz: I’m starting to think that I made a huge mistake when it came to my choice for an education, but I was accepted to my “dream school” and I couldn’t pass up the opportunity to attend. As of now, I have a degree from a top-rated university as well as a master’s degree and about $115,000 of debt. I’m only making about $27,000 a year and must remain in my job for the next two years. I am paying over one-third of my monthly income towards these loans and don’t know how I am going to survive with this amount of debt. I really hope I don’t come to regret my schooling decision and all of the hard work I put into it. Right now, though, I have nothing to show for my effort other than a piece of paper. What’s your advice?

Answer: Unless your income will shoot dramatically higher in the next few years, the amount of debt you incurred was insane.

Generally, you shouldn’t borrow more for school than you expect to make in your first year out of college. If you have to take on much more debt than that, then you really can’t afford the education you’re buying, “dream school” or not.

What you’ve done is saddled yourself with debt that will inhibit or even prevent you from pursuing other important goals, like buying a house or saving for retirement. You’ve dramatically increased the chances that you’ll fall further into debt just trying to live day-to-day, since so much of your income is going toward these loans.

This is not a burden that you can escape, either. Unlike most other unsecured debt, student loans can’t be erased in bankruptcy court. Lenders are allowed to pursue this debt virtually to the grave: the U.S. Supreme Court recently ruled that student lenders could garnishee the disability check of a senior citizen for unpaid loans.

You might be able to put a small dent in the amount you owe with a loan forgiveness program, which typically pays part of your debt in exchange for activities like teaching in an inner-city school or enlisting in the armed forces. You can explore the details at a financial aid information site like FinAid.org.

But the real solution to your problem is pretty basic: you’re going to have to find a way to earn a lot more money. You didn’t explain why you have to keep your current job for two years, but if you really can’t move on then you should spend the time readying yourself for the highest-paid profession for which your degrees qualify you. This might not be your “dream” job, but it could save you from the nightmare of excessive debt.

Dealing with Multiple Debts

Dear Liz: I just graduated from college and landed a job that pays $43,000 a year. Three years ago, I purchased two houses as rentals. To tell you the truth, my mortgage debt is high, but I have only $5,000 in student loans and about $3,000 in credit card debt. The mortgages have fixed-interest rates that are low.

Should I focus on paying down the mortgages or is it a big mistake to do that and lose the tax deduction? What do I do if the housing market crashes? Have I taken too much risk?

Answer: What’s important is not how much debt you have. It’s what kind of debt and how well you’re managing it.

Credit card debt, for example, is almost always a bad idea. The interest typically isn’t deductible and can be jacked up if you make a single misstep (such as paying late or maxing out your cards).

Many people erroneously believe that credit card debt is normal in America, but in fact Federal Reserve figures show the majority of U.S. households have no credit card debt, and the median balance among those that do is just $2,200.

Student loans and mortgages, meanwhile, are usually classified as good debt because the things they buy (education and homes) are considered investments.

As long as you haven’t overdosed on such debt � by buying too much house or borrowing more for your education than you’ll make in your first year out of school � you don’t need to be in any particular hurry to pay down this debt.

In fact, most people find there are much smarter uses for their money than paying down low-interest, tax-deductible debt such as mortgages and student loans.

You, for example, should be contributing at least 10% and preferably 15% of your gross pay to a 401(k) or other retirement account. You probably should have a fat emergency fund as well to cover those inevitable months when you’re between tenants and your homes sit empty.

Now, all this assumes that your rental houses are paying for themselves � in other words, that the rents you receive cover your mortgages and other out-of-pocket costs. If that’s not the case, then your homes may not be building wealth: They could be eroding it.

Some people bought money-losing rental houses assuming that double-digit appreciation would bail them out, but those days are over for a while. If these homes are money pits, you may be wise to sell them while you can.

Credit card tax burden can be on employer

Using Home Equity Loan to Pay Student Loans OK?

Dealing with a Student Loan Nightmare

Q: We have a huge problem that we’ve been trying to solve without success. We co-signed a $40,000 student loan for our eldest child and then had a serious run of bad luck. My husband was critically injured and out of work for a long period, we lost money in the stock market, and our son has had trouble finding a good job after graduation. A lawyer told us bankruptcy would help our situation, but it didn’t — the lender sued us and now we owe an additional $30,000 because of interest and fees. We hired a second lawyer, but he only made things worse. We make less than $50,000, don’t own a house and have old cars that aren’t worth very much. Our only asset is a retirement account worth $30,000. We have begged the collection agency for a repayment plan that we can afford, but our pleas have been ignored. We have two more kids to help with college and feel as if we are living in a nightmare. Do you have any hope for us?

Answer: You’ve discovered the modern reality of student loans: Once you’ve got them, you’re stuck with them.

A federal law change in 1998 made most student loans virtually impossible to erase in Bankruptcy Court. (The recent bankruptcy reform act tightened the law even further to include loans for education made by for-profit lenders.) Unlike most other secured debt, there’s also no statute of limitations on student loans. That means a lender can sue you decades after the loans were made. The statute of limitations on other debt is typically a few years.

All this means student loan collectors can really play hardball with debtors. You can’t run, you can’t hide, and the collection agencies monitor your credit reports so they can jump in if your financial situation seems to be improving.

You may be understandably soured on attorneys. But if your requests for an affordable repayment plan are being ignored, your best bet might be to hire another lawyer — one experienced with student loan debt — to deal with the collection agency. The National Assn. of Consumer Advocates at (202) 452-1989 or http://www.naca.net can provide referrals.

You probably need to give up on the idea of helping your other kids with college. Your priorities need to be paying off this debt and saving for your own retirement. You also need to get your oldest son to contribute his part — he’s the one who benefited from all this debt, after all.

Options for Hefty Student Loans