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“Debt is the slavery of the free.”
—Publilius Syrus

A Startling Revelation

Almost one year after graduating law school, Gary sat at his desk, mentally preparing himself for the tedious task of sorting through a large stack of motions, petitions, and other correspondence sent to the judge for whom he worked. It was the seventh month of his clerkship, a job which involved researching and preparing lengthy opinions disposing of issues in a broad array of civil cases, including professional malpractice, personal injury, contract disputes, insurance coverage, and zoning issues.

Gary was confident that he had seen it all, at least until he came across a motion asking the court to enter judgment against the defendant in the amount of $250,000.00. This was a pretty common request—if a defendant does not respond to a lawsuit within a certain amount of time, the plaintiff can ask the court for a default judgment. Afterwards, the plaintiff can begin collecting on that judgment by levying on bank accounts and property or by garnishing the defendant’s wages from his or her job.

But this motion was different. The defendant was a recent college graduate who had taken out $200,000.00 in student loans but failed to make regular payments. The plaintiff was an infamous corporation that that buys the debts of others at a discount then viciously seeks legal recourse against the debtor to collect whatever they can. The amount requested included $50,000.00 in attorney’s fees.

“Oh shit,” Gary exclaimed in disbelief.

Disturbed, Gary logged on to his own Sallie Mae account. Although he had been faithfully paying the monthly required amount on his loans, he realized that the principal had not budged. In fact, the principal on many of his loans reflected a greater amount than what he had borrowed.

Gary realized that, although he was extremely knowledgeable about the law, he did not fully understand his student loans or general financial situation. Gary vowed to get to the bottom of this.

An Epidemic of Financial Ignorance

“Asking an 18-year-old with little to no experience how to invest $100,000 is really a bit mad.”
—Benjamin Little

Gary is not alone. So many college and graduate students willingly take out student loans to help pay for tuition, books, and living expenses without realizing the full consequences of their actions. They exist in a three- or four-year fantasy in which the focus is getting good grades, earning prestigious internships, and growing close to new friends and acquaintances. They, unfortunately, pay little attention to their financial situation.

For example, consider the following recent posts on Twitter:

• “Financial aid/student loans is too confusing.”
• “I love how looking at my student loans can make me cry… I swear they don’t get smaller.”
• “Two payments made on student loans so far! Only 358 to go…”
• “Been out of law school for 8 months & I still have not fully sorted out evry1 I owe money to in student loans. #anothersurprisebill”
• “If anyone with student loans wants a good laugh, go check out your ‘net worth’ on your bank’s online services.”
• “Got my student loans deferred for 12 months. #winning” Note: this person is not “winning” as her unpaid interest will increase her principal. See below.

The authors of this post work for Gradvocates Editing, a business that edits personal statements, resumes, and other documents for students seeking to get into law school, graduate school, or college. We also edit resumes and cover letters for anyone trying to get a job. Nothing is more satisfying than helping a deserving individual fulfill his or her dreams. However, we strongly believe that to achieve the full benefits of your degree after graduation, you need a solid financial education.

So let’s get started.

Demystifying Student Loans

We first ask—no, we require—that you watch the following clip, which is the pure truth as spoken by Suze Orman:

Here’s what makes absolutely no sense whatsoever. Student loan debt is the only debt that in 99.9999999% of the cases cannot be discharged in bankruptcy. The federal loan debt that you can incur from the Stafford Loans usually does not pay for the cost of a university education. So you end up doing what? Getting private student loan debts from banks. Banks aren’t regulated like the federal government, where the maximum interest rate on a Stafford Loan is 6.8%, on a Plus Loan you’re looking at 7.9%, 8%…bank loans have the ability to go to 15, 18, 19%. And the United States government bankruptcy laws protect those banks. The banks can screw you with the interest rates that they charge you, and you do not have any rights whatsoever to say “I cannot afford this.” Then the system allows you to defer your student loans, to do forbearance on your student loans. What does that mean? It simply means that you don’t have to pay it right away but the interest continues to accumulate. . . . When you don’t pay it back, [banks] are thrilled. They are thrilled because [the interest] starts to compound and compound and compound and $40,000 turns into $80,000 turns into $150,000 and then you think you’ve been getting away with something because you haven’t been able to pay it and then they contact you and you have got to pay back that $150,000. You can’t. What do they do? They will garnish your wages even if you’re old enough when this happens, they will garnish your social security checks. So when you are taking out student loans, parents out there, when you are cosigning a private student loan, you better be very, very careful.

First, it is important to understand some basis concepts of student loans.

Principal:

The principal is the amount of the loan that you took out. For example, if you borrowed $15,000.00, then $15,000.00 is the principal. You pay interest on your principal until it is paid back in full. The principal amount of the loan will increase if unpaid interest “capitalizes” as more fully described below.

Interest:

Interest is the fee that the lender charges for loaning you the principal. It is how the lender makes its money.

How Interest Accrues:

Interest accrues on a daily basis and is calculated in the following manner.

Daily interest amount = (Current Principal Balance x Interest Rate) ÷ 365.25

Therefore, if the Principal balance is $15,000.00 and the interest rate is 8.5%, the following calculation should be used (first convert 8.5% to a decimal by dividing by 100, which is 0.085):

Daily Interest Amount = (15,000.00 x 0.085) ÷ 365.25

This means that our Daily Interest Amount is $3.49.

Alternatively, you could use the following formula to quickly calculate the approximate interest due each month. So we don’t have to account for varying amount of days in each month, we will use the following formula for the rest of the article.

Monthly Interest Amount = (Current Principal Balance x Interest Rate) ÷ 12

This means that for a loan of $15,000.00 at 8.5%, you will be paying about $106.25 each month. But wait, there’s more! The principal of “amortization” has to be taken into account with all payments made. This is more fully described below.

Repayment Plans and Minimum Monthly Payment:

When your loans become due, you will need to make monthly payments to the student loan provider. Your minimum monthly payment depends on what repayment plan you pick. Read about them here http://studentaid.ed.gov/repay-loans/understand/plans and leave us a comment if you do not understand your options. Choosing the right repayment plan is critically important. Be sure to click each plan and visit the link that lets you calculate your estimated loan payments.

The calculator for the Standard 10-Year repayment plan reveals that the minimum payment for our $15,000.00 loan at an 8.5% interest rate would be about $185.98 per month for ten years.

There are obviously a lot of things to take into account when choosing a repayment plan. If you can afford it, you should choose the standard plan, which will have your loans repaid in exactly ten years if you pay only the minimum monthly payment.

You will, of course, have to first create a budget to see what you can afford. More on this later.

Amortization:

When you make your monthly payment on the loan, the payment is first applied to the interest that has accrued on the loan for the month, and then what remains is applied to the principal. This explains why if you choose a plan with a lower minimum monthly payment than the standard plan, you will be paying more interest on your loan over the course of many more years. Because interest accrues no matter what, a lower monthly payment goes mostly to interest and barely makes a dent in the principal.

Take, for example, our $15,000.00 loan at an 8.5% interest rate repaid at the Standard Ten-Year plan. Using the payment estimator from http://studentaid.ed.gov/repay-loans/understand/plans for the standard plan, our minimum payment will be about $185.98 per month.

Using the formula provided before, we know that the interest due in the first month will be $106.25. Therefore, from our payment of $185.98, $106.25 goes to interest and only $79.73 gets paid to the principal, making the new principal balance $14,920.27.

In the second month, we recalculate the interest due using the new principal balance. This means that from our monthly payment of $185.98, $105.69 will now be paid to interest will be due and $80.29 will be paid the principal. The new principal will be $14,839.98.

This pattern continues for the life of the loan and can be summarized as follows: in the beginning of repayment, most of your payment goes toward interest and only some to principal. As time goes on, however, these amounts change as the principal becomes reduced—more of your monthly payment starts to go to principal instead of interest.

The full “amortization” schedule for our hypothetical loan is as follows:

Month	Principal	Interest	Payment
0	15,000.00	106.25	185.98
1	14,920.27	105.69	185.98
2	14,839.98	105.12	185.98
3	14,759.11	104.54	185.98
4	14,677.68	103.97	185.98
5	14,595.66	103.39	185.98
6	14,513.07	102.80	185.98
7	14,429.89	102.21	185.98
8	14,346.12	101.62	185.98
9	14,261.76	101.02	185.98
10	14,176.80	100.42	185.98
11	14,091.24	99.81	185.98
12	14,005.07	99.20	185.98
13	13,918.29	98.59	185.98
14	13,830.90	97.97	185.98
15	13,742.89	97.35	185.98
16	13,654.26	96.72	185.98
17	13,564.99	96.09	185.98
18	13,475.10	95.45	185.98
19	13,384.57	94.81	185.98
20	13,293.40	94.16	185.98
21	13,201.58	93.51	185.98
22	13,109.11	92.86	185.98
23	13,015.98	92.20	185.98
24	12,922.20	91.53	185.98
25	12,827.75	90.86	185.98
26	12,732.64	90.19	185.98
27	12,636.85	89.51	185.98
28	12,540.38	88.83	185.98
29	12,443.23	88.14	185.98
30	12,345.38	87.45	185.98
31	12,246.85	86.75	185.98
32	12,147.62	86.05	185.98
33	12,047.69	85.34	185.98
34	11,947.04	84.62	185.98
35	11,845.69	83.91	185.98
36	11,743.61	83.18	185.98
37	11,640.82	82.46	185.98
38	11,537.29	81.72	185.98
39	11,433.04	80.98	185.98
40	11,328.04	80.24	185.98
41	11,222.30	79.49	185.98
42	11,115.81	78.74	185.98
43	11,008.57	77.98	185.98
44	10,900.57	77.21	185.98
45	10,791.80	76.44	185.98
46	10,682.26	75.67	185.98
47	10,571.95	74.88	185.98
48	10,460.85	74.10	185.98
49	10,348.97	73.31	185.98
50	10,236.29	72.51	185.98
51	10,122.82	71.70	185.98
52	10,008.55	70.89	185.98
53	9,893.46	70.08	185.98
54	9,777.56	69.26	185.98
55	9,660.84	68.43	185.98
56	9,543.29	67.60	185.98
57	9,424.90	66.76	185.98
58	9,305.68	65.92	185.98
59	9,185.62	65.06	185.98
60	9,064.70	64.21	185.98
61	8,942.93	63.35	185.98
62	8,820.30	62.48	185.98
63	8,696.80	61.60	185.98
64	8,572.42	60.72	185.98
65	8,447.16	59.83	185.98
66	8,321.01	58.94	185.98
67	8,193.97	58.04	185.98
68	8,066.03	57.13	185.98
69	7,937.19	56.22	185.98
70	7,807.43	55.30	185.98
71	7,676.75	54.38	185.98
72	7,545.15	53.44	185.98
73	7,412.62	52.51	185.98
74	7,279.14	51.56	185.98
75	7,144.72	50.61	185.98
76	7,009.35	49.65	185.98
77	6,873.02	48.68	185.98
78	6,735.72	47.71	185.98
79	6,597.45	46.73	185.98
80	6,458.21	45.75	185.98
81	6,317.97	44.75	185.98
82	6,176.74	43.75	185.98
83	6,034.52	42.74	185.98
84	5,891.28	41.73	185.98
85	5,747.03	40.71	185.98
86	5,601.76	39.68	185.98
87	5,455.46	38.64	185.98
88	5,308.12	37.60	185.98
89	5,159.74	36.55	185.98
90	5,010.31	35.49	185.98
91	4,859.82	34.42	185.98
92	4,708.26	33.35	185.98
93	4,555.63	32.27	185.98
94	4,401.92	31.18	185.98
95	4,247.12	30.08	185.98
96	4,091.23	28.98	185.98
97	3,934.22	27.87	185.98
98	3,776.11	26.75	185.98
99	3,616.88	25.62	185.98
100	3,456.52	24.48	185.98
101	3,295.02	23.34	185.98
102	3,132.38	22.19	185.98
103	2,968.59	21.03	185.98
104	2,803.64	19.86	185.98
105	2,637.52	18.68	185.98
106	2,470.22	17.50	185.98
107	2,301.74	16.30	185.98
108	2,132.06	15.10	185.98
109	1,961.18	13.89	185.98
110	1,789.09	12.67	185.98
111	1,615.79	11.45	185.98
112	1,441.25	10.21	185.98
113	1,265.48	8.96	185.98
114	1,088.47	7.71	185.98
115	910.20	6.45	185.98
116	730.66	5.18	185.98
117	549.86	3.89	185.98
118	367.77	2.61	185.98
119	184.40	1.31	185.98
120	-0.28	0.00	185.98

This means that for our $15,000 loan at an 8.5% interest rate repaid over 10 years, we will owe $7,317.32 in interest.

Of course, it is entirely possible to get rid of your loans more quickly and pay less interest. Simply pay more than the minimum amount. For example, if we paid $50.00 more per month ($235.98), then that extra $50.00 will go directly to principal, causing the loan to be paid off in 7 years with only about $5,000.00 in interest.

Is paying more each month easier said than done? Not necessarily. More on this later.
However, understanding your amortization schedule for each loan you have is an absolutely necessity. Download the Free Gradvocates Amortization Chart to help you get started.

Capitalization of Interest:

The Federal Government pays the interest that accrues on subsidized loans while you are in school. But if you have unsubsidized loans, then interest will accrue during your time in school even though payment on that interest is deferred until after graduation. This means for our loan of $15,000.00 at 8.5%, if we go to school for three years and do not make interest payments during that time, $3,825.00 in interest will have accrued.

After graduation, you will likely receive one letter in the mail advising that you can pay the accrued interest if you want to avoid it from capitalizing. The letter will advise that this is not mandatory.

IMPORTANT: If you do not pay the interest at this point in time, it will be added to your principal. Therefore, your $15,000.00 loan will immediately become an $18,825.00 loan. In other words, once this unpaid interest capitalizes, you will be paying interest on your interest! This will increase your repayment period by several years.

This is why it is highly recommended to try to pay interest during your time in school or immediately thereafter before capitalization occurs.

Capitalization can also occur after periods of deferment, when your loan provider allows you to postpone payments. This means it is always better to switch your payment plan to income-based repayment, paying less per month than the Standard 10-Year Plan, instead of deferring, which lets interest accrue that is eventually capitalized into additional principal.

Creating a Budget

“Your economy, I suppose, begins now to be settled; your expenses are adjusted to your revenue, and all your people in their proper place. Resolve not to be poor: whatever you have, spend less. Poverty is a great enemy to human happiness; it certainly destroys liberty, and it makes some virtues impracticable, and others extremely difficult.”
—Samuel Johnson

Now that you know the basics, you need to develop a plan of attack. The first step is creating a budget.

Creating a budget is a pretty simple concept. First, begin with your take home income for the month (the amount you actually get after taxes). Then, make a list of all of your recurring expenses.

For example, let’s say you take home $4,000.00 per month and have the following fixed or non-discretionary expenses (expenses that you must pay no matter what):

• Rent: $1,000.00 per month
• Utilities (cable, electricity, gas): $230.00 per month
• Car Insurance: $70.00 per month
• Gym: $75.00 per month (this, along with your smart phone, is a fixed expense because you signed a contract)
• Smart Phone Service: $80.00 per month
• Food and Groceries: $200.00 per month
• Gasoline: $160.00 per month
• Student Loans: $950.00 per month (the sum of the minimum payments due on each loan)

This leaves you with $1,235.00 per month of discretionary income. You should now consider all of your non-essential expenses:

• Buying lunch each workday: $200.00 per month ($10 per meal, 5 meals a week, four weeks in a month)
• Going out to eat with your significant other once per week: $280.00 (four meals at $70.00 each)
• Going out with friends on the weekend: $200.00 per month ($50.00 per weekend)
• Going to the movies: $40.00 per month
• Coffee: $60.00 ($3.00 per weekday)

The remaining balance is $455.00, which will be subject to any unexpected expenditures, such as birthday presents, car repairs, medical expenses, traveling to see family, and shopping for clothing or other necessary household items.

Mapping out your expenses as we just did is an incredibly important part of paying off student loans. Clearly, this person’s budget is very wasteful and does nothing to get the individual out of debt.

Let’s see what we can cut and what consequences these cuts will have on repaying the student loans.

The True Cost of Your Smart Phone

“Right, my phone. When these things first appeared, they were so cool. Only when it was too late did people realize they are as cool as electronic tags on remand prisoners.”
—David Mitchell

Today, it seems as if everyone has a smart phone. Somehow Apple, Research in Motion (Blackberry), Google (Android), Verizon, and AT&T have convinced us that we need email and Internet at our fingertips, 24/7.

Unfortunately, unless the service is being provided by your employer, having a smart phone could cost you anywhere from $70.00 to $110.00 per month for the service alone. For purposes of this example, let’s say that it costs you $80.00 per month.

You might be thinking: “So what? $80.00 per month is only $960.00 per year. I can afford that.”

Well, let’s take our example of the $15,000.00 loan at 8.5% interest with a minimum monthly payment of $185.98. This will take 10 years to pay off and will cost you $7,317.32 in interest.

What if you took that $80.00 per month in smart-phone service and applied it to this student loan? The result would be significant. Instead of paying your loan off in 10 years, you would pay it off in 6. Instead of paying $7,317.32 in interest, you would pay $4,216.08.

So, in this scenario, your smart phone would be costing you $3,101.24 more in interest, and it would still cost you $9,600.00 ($80.00 per month for ten years) in service. Therefore, that smart phone would technically be costing you $12,701.24 over ten years.

If you want to pay down your loans more quickly, it is worth looking into more affordable cell-phone service. Before canceling your contract, make sure that it is cost effective to do so as your carrier will likely charge a termination fee. If it is not cost effective, then simply wait until your contract expires.

Please note that we are not advocating that you get rid of your smartphone altogether. You can still use your smartphone over Wi-Fi to check email, download apps, and surf the Internet.

There are also several services to help you make the transition:

• Park My Phone: http://www.parkmycellphone.com “park” your cell phone number here while making the transition and forward all your calls to another phone for only $3.00 per month.
• Skype: http://www.skype.com With a webcam and Internet access, you can video conference with friends and family for free.
• 3jam: http://3jam.com Route calls to phones or Skype; two-way SMS texts from mobile, web, or email; voicemail service
• Google Voice: https://www.google.com/voice This is a free virtual phone service, which includes calling and receiving text messages from your computer. There is even a Google Voice App for your smartphone (to use over wireless).

Reducing the Cost of Food

“Rather go to bed supperless, than rise in debt.”
—Benjamin Franklin

Look at the sample budget that we prepared above. Does that person really need to spend $200.00 per month on lunch? Of course not. This is a luxury that this person cannot afford.

The 4-Hour Body by Tim Ferriss is an incredible book about weight loss and exercise. One of the most interesting items in the book is a subsection titled $1.34 PER MEAL?, which shatters the common myth that eating healthy is expensive. By buying basic, health food items such as eggs, chicken breasts, beef, frozen vegetables, and canned beans, the author lost weight and reduced his food cost substantially.

By following these same principles and bringing lunch to work instead of buying it, any debtor can save a significant amount of money, which they can then put toward their student loans to get out of debt at an accelerated pace.

Can’t cook? Become proficient in just a few hours by reading The 4-Hour Chef.

The Cost of Your Gym

“Few people know how to take a walk. The qualifications are endurance, plain clothes, old shoes, an eye for nature, good humor, vast curiosity, good speech, good silence and nothing too much.”
—Emerson, Ralph Waldo

The person whose budget is listed above also pays $75.00 per month for a gym membership. The concept of health and fitness is incredibly important and this person should be commended for desiring to live a healthy lifestyle. However, it is entirely possible to eliminate that large monthly payment by exercising at home.

For cardio, the person could simply resort to running outside after reading this article for proper guidance: http://www.endurancewod.com/blog/1/post/25. He or she could also invest in a jump rope or exercise DVD.

For weightlifting, the person could invest in PowerBlock dumbbells, a weight bench, and a pull-up bar. This would, of course, require a small initial investment, which would pay for itself after about five or six months.

The Moral of the Story

The point of these budgeting examples is to show the consequences of living beyond your means or spending money on unnecessary things. Instead, strive to minimize these unnecessary expenses so you can reroute that money toward payments on the principal of your student loans.

Additional Tips for Paying Student Loans

Experiment with the Free Gradvocates Amortization Chart to Determine Which Loan You Should Target First

As a general rule, you should strive to pay off the loan with the highest interest rate first. However, every person’s situation is different. If you have a lower interest loan with only a little bit of principal remaining, it could benefit you to focus on paying that loan off in full so that can direct some of the minimum monthly payments toward other loans or other expenditures in your life.

The only way to figure out what is the best plan of attack is to do the math. Fortunately, we have provided you with a free chart to help you get started. Simply enter your remaining principal, interest rate, minimum monthly payment, and any extra monthly payments that you will make. The chart will automatically calculate your estimated amortization schedule.

Try adding extra payments and see what effect this has. You could easily reduce the lifespan of a loan by paying a little bit extra per month.

This chart is like no other because it will show you the exact moment that you will pay off each loan. Therefore, when one loan hits zero, you can add the payments from that loan to another loan in the “extra payment” column for an extremely accurate portrayal of the repayment of all your loans.

Download the free chart here: Free Gradvocates Amortization Chart

Ask Your Loan Provider to Break Your One Loan Group into Individual Loan Groups

You should also ask your loan provider to break your student loans into individual loans. The default setting is one big loan group, meaning that you do not get to control to which loans extra pay
ments will be applied.

Thinking about each loan by itself is critical to developing a plan of attack. Your massive amount of debt is not one big loan and should not be thought about as such. You can take action to pay the highest interest loans off and then apply those payments to other loans. Breaking your loan grouping into individual loans is the only way to accomplish this. By knocking over one domino, the rest will fall more quickly.

Use Mint.com to Track and Manage Your Finances

Mint.com is an incredible, free service that lets you track and manage your finances. Simply input all of your bank account, credit card, and student loan information into the secure server to get started. You can then view your accounts all in one place, see where you are spending most of your money, and monitor cash flow.

Using Mint.com will help you stick to your budget by providing you with alerts whenever you go over your allocations for each category. If you spend too much on fast food or get charged an ATM fee, Mint.com will call you out on it—every time.

Most importantly, Mint.com will warn you several days before your bills are due, meaning that you will never forget about a student loan payment, which is important for avoiding late fees and other penalties like capitalization of interest.

If Your Income Increases, Avoid Increasing Your Expenses

There may come a time when you are lucky enough to increase your income through a raise, new position with a higher salary, monetary gift, or side job. After receiving additional income, many people fall into the trap of increasing their spending: purchasing a new car, going out to eat more, or buying a new phone. Other people might use the increased money to justify current unnecessary expenses, such as the $80 to $120 paid per month on a smartphone contract.

Do not fall into this trap. Take caution from the numerous case studies involving people who won the lottery, increased their spending drastically, and eventually had to declare bankruptcy because they could not afford their new lifestyle.

It’s great that you increased your income, but you should continuously strive to eliminate unnecessary expenses. Devote that new income to paying off your student loans. This obviously does not sound as fun as buying the new iPhone; however, we guarantee that getting out of debt as quickly as possible will increase your quality of life more than any Apple product ever could.

Take our example of our student loan of $15,000.00 at 8.5% interest. The minimum payment is $185.98 under the ten-year repayment plan. Let’s say your salary increases by $5,000.00, which we will assume is approximately an extra $300.00 per month after taxes. If you put that extra $300.00 per month toward this student loan, then the loan will be paid off in full in just under three years. Instead of paying $7,317.32 in interest, you will pay approximately $1,986.26.

But best of all, by quickly paying down this loan, you will free up $185.98 of your income. So you would have effectively transformed your $300.00 per month raise into a $485.98 per month raise. You could then channel that extra $485.98 to other loans, creating a domino effect that quickly gets you out of debt.

Do Not Assume that Consolidation is the Best Option

Right now you likely have multiple student loans of varying principals interest rates. Consolidation, as the term suggests, takes all of your loans of varying principals and interest rates and merges it into one huge loan with a single interest rate.

We strongly urge you to do the math and research before you consolidate your loans. Don’t assume that this is something you should do because all of your friends have consolidated their loans. Once you consolidate, there is no going back. Get educated before resorting to this drastic remedy.

Advantages. You will make the physical act of repaying loans easier because you will repay one giant loan instead of having many individual loans, which could possibly have different payment due dates and be with multiple lenders. Also, you will extend your repayment term, which lowers your monthly payments. If you have any loans with variable interest rates, consolidation will give you a fixed interest rate. Depending on your situation, there could be more advantages, and we encourage you to research them.

Disadvantages. By consolidating your loans, you will be in debt longer and pay more interest. You will lose the ability to pay more money toward individual loans, which means you cannot employ the “domino” strategy of repaying your student loans to get out of debt as quickly as possible. As you recall, this method involves paying more toward high-interest loans to pay them off as quickly as possible, then diverting those payments toward the next high-interest loan, and repeating the process until all loans are paid off in full. By consolidating, you will have one huge loan that isn’t going anywhere for quite some time because you cannot use creative repayment methods.

Please weigh the pros and the cons and do the math. Consolidation calculators can be found at https://loanconsolidation.ed.gov/loancalc/servlet/common.mvc.Controller?controller_task=startCalculator and http://www.finaid.org/calculators/loanconsolidation.phtml. We see consolidation as a drastic remedy, which should be avoided at all costs if possible.

Be Wary of Student Loan Forgiveness

There are generally two ways to get your student loans forgiven: 1) certain public service employment for a period of ten years; and 2) faithfully paying your loans under the income-based repayment plan for a period of twenty-five years.

Let’s start with ten years of qualifying public service. Ten years of qualifying public service employment is a long time. These jobs are almost always low-paying and emotionally-taxing. It takes serious (and we mean SERIOUS) passion to work in that capacity for ten years.

Subtract ten from your current age and try to recall where you were in life. For many of you, this might be high school or college. Wasn’t that long ago? Haven’t you had a plethora of interesting experiences and life developments since then? Hasn’t your career path changed?

Now try to imagine the next ten years of your life. How old will you be? What do you want from life? What will make you happy? Do you want kids? Do you want to travel? Do you want to own a home?

To be eligible for public service student loan forgiveness, you generally must consolidate your loans and use the income-based repayment plan. Re-read the section on consolidation above. Once you consolidate, there is no going back.

Now let’s say that around your fifth year you can no longer deal with your emotionally-taxing public-service position or you decide that your low salary is not furthering your life goals. You switch to a non-qualifying position that pays twice your previous salary. However, because you were on the income-based repayment plan, you will not have made a single dent in the principal of your loans. Because you consolidated your loans, you cannot develop a plan of attack for repaying individual loans to get out of debt quickly.

And that is the danger of public service loan forgiveness—you can’t change your mind for ten years. You must earn a low salary for ten years. You must pay every month on your loans for ten years. Ten years is a long time. And what if the government, whether federal, state, or municipal, decreases the funding to your organization causing you to lose your job? What if your rent increases and you need more money? Things beyond your control can happen in those ten years.

Public-service work is not the “get-out-of-jail free” card as many believe. Unless you have a deep passion for public-service work, choosing this option can be extremely risky.

You can also be eligible for student-loan forgiveness if you faithfully make payments under the income-based repayment plan for twenty-five years. Please note that loan forgiveness under this option IS A TAXABLE EVENT. Let’s say that at the end of twenty-five years, you still have $100,000.00 worth of student loan debt. This will be forgiven; however, you will be taxed by the government as if you just received $100,000.00 of income. This is called “cancellation-of-debt income.” Horrible, right?

Don’t Overdo It

We advocate paying off your loans as best you can. However, it is important to leave enough money on which to live and survive. Otherwise, you will be defeating your purpose of getting out of debt by passively transferring your relatively modest interest rate student-loan debt to absurdly higher interest credit-card debt.

In other words, if you have no money, then you will be forced to use a credit card, which has an astronomically higher interest rate than your student loans.

We Need Your Input!

Do you have any tips or advice for paying off student loans? If so, we need your input. Please comment with your advice or tips, or share your own story about your student-loan experience. We will incorporate your advice into this article for others to see. Because Congress isn’t going to fix the student-loan crisis in our country any time soon, we must stick together.

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