Tips for a Teacher on Managing Excessive Debt

I have a dire question that needs urgent results. I took out a loan in college (undergraduate). I was foolish and took out the maximum loan amount that I could each time. Upon graduating, I moved to another state and began my teaching career. In the beginning years it was hard for me to make payments and I made bad choices and went into forbearance and many times missed payments, etc. So now my loan (on which I pay $450.00 a month on my teacher’s salary) has reached a balance of $53,000. I have been making the $450.00 a month payment continuously for about a year now and there is no dent in the balance. I have an opportunity to go to graduate school and become a media specialist, but I can’t make ends meet with the payment I have now. I need help and I don’t know where to get it. Is there any way that it can return to the original loan amount of $20,000.00? — Kalie B.

You are having difficulty repaying your current student loans and want to go back to school to pile on more debt? The increase in salary from a graduate degree as a media specialist is unlikely to cover the cost of the additional debt plus all the interest that will accrue while your current loans are in an in-school deferment. Your financial situation is already difficult. You should not compound the difficulties with more debt.

You are not seeing much of a dent in the principal balance in part because about two-thirds of your monthly payment is going to the new interest on the loan. Loan payments are applied first to collection charges (as much as 25% of the payment), then late fees (as much as 6% of the payment), then interest and finally the principal balance of the loan.

But a $20,000 debt does not grow to $53,000 without an extended period of nonpayment. In all likelihood you’ve accumulated a lot of accrued but unpaid interest due to the long periods of nonpayment. Now that you’re repaying the debt, the monthly payment has to first pay off the accrued but unpaid interest before it can pay down the principal balance.

It may not look like you’re making a dent in the loan balance because the loan statement lists the principal balance separately from the interest balance, but you are reducing the total amount owed, albeit slowly.

There is, however, some good news. If your loans are federal education loans, look into income based repayment and public service loan forgiveness. Income-based repayment is a new program that started on July 1, 2009. It bases your monthly payment on your income, not the amount you owe. After 25 years in repayment, any remaining amount owed will be forgiven. However, as a teacher you probably qualify for public service loan forgiveness, which can accelerate the forgiveness to 10 years. You’ll need to get your loans into the Direct Loan program if they aren’t already in the Direct Loan program. (You can move them into the Direct Loan program by consolidating them at loanconsolidation.ed.gov.) After ten years of full-time employment in a public service job while repaying your loans in the Direct Loan program, any remaining amount owed on your federal student loans will be forgiven.

Unfortunately, there is no similar option for private student loans.

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