Overwhelmed with Student Loans

by **SND** » Wed Aug 20, 2008 8:05 am

A friend recently came to me for some financial planning wisdom. She and her husband are newly married, a couple of years out of college and saddled with over $130,000 in student loans between them. Their combined income is currently $50,000. So far they have been very diligent with their budgeting. They are saving for a down-payment on a house that they would like to purchase in the next 5 years. They are putting aside a small portion for retirement; although they can't afford much they understand the importance of starting early. Their student loans are spread out over 30 or so small loans both Federal and Private, all with varying interest rates. (With the average being 6%.) They are currently paying the according to their established payment plans which is $1,042.86 a month total. As far as I can tell unless they can significantly increase thier income, but maintain the same lifestyle, and apply much, much more to the principal of these loans, they will never get out from underneath them. Other than increasing their income, does anyone see any other alternatives?

by **Planner X, MBA, CMFC, CFP** » Wed Aug 20, 2008 11:29 am

I think your friend is going to have to have what I call a "Come to Jesus" moment. I know you can't really ask this of your friend, but how did they accumulate $130,000 in combined student loans and only make a combined $50,000 per year (that's a rhetorical question, of course)? Maybe there's long-term potential for significantly increased income and their just taking their 'lumps' for now?!?! Anyway...I don't really think there's any real genius in what needs to be done here, but here is a practical, common sense start:

a) Unless there's a compelling reason to continue saving for a house, then stop! Your friend's "house payment" right now are her and her husband's student loans and this extra savings should probably go toward paying these down.

b) Obtain second jobs...or third jobs.

c) Don't maintain their same lifestyle. Reduce it. If their goal is to one day be homeowners and pay off their student loans, there isn't much choice. Maintaining their current lifestyles AND getting out from underneath of their loans, is not likely an option.

I know these might not be pleasant suggestions, but they sound as if they've got themselves into a permanent predicament, the severity of which might only be correctable by making some difficult decisions.

Good luck!!

by **SND** » Wed Aug 20, 2008 3:18 pm

LOL!! We did have that serious moment of, "You're education has cost you that much...it had better be worth this much!"

They will have higher earnings potential in the next year or so we're analyzing how much they would need in income to pay down those loans preferably within 20 years, instead of the current 50 year schedule. We did also discuss the possibility of moving back in with parents and taking on additional jobs. But if there's another way, as in get jobs with higher wages, I'd prefer that route for their own sanity and quality of life.

Thanks so much for your comments!