Student Loan Repayment Series – Part V – Moderate Debt But No Degree

July 12, 2013

If you borrowed to pay for college and made it all the way to graduation, you have something to show for it. Even for those grads struggling to find a job in this tough economy, there’s hope that your degree will pay off one day soon. But the future may feel more uncertain for those who took out student loans but for whatever reason, weren’t able to complete their degrees. If this is your situation, then today’s blog will offer you some ideas for how to contend with your debt.

Earnings by educational level

Image source: BLS.gov

Debt Scenario

With an average of $27,000 in student loans for a Bachelor’s, let’s assume three years of college completed with a total student loan debt load of $20,000 at 6.8%. Under a 10 year plan, the payments would be $230 per month. From the chart above you can see that median earnings for those with some college are $727 and for an Associate’s are $785. We’ll land in the middle for our scenario and assume a weekly wage of $750.  This equates to annual earnings of $39,000.

With a monthly take home of roughly $2,200 and expenses of $1,985 that leaves $215 to deal with $230 in debt and not a lot of wiggle room in the budget. See the Debt Scenario and Model Budget below for details on assumed expenses. Any little hiccup such as a rent increase, car trouble or other financial mishap and the budget could be busted and you would have to choose between student loan payments and rent or other necessities.

Model budget for student loans

Image source: Tuition.io

So what’s a cash-strapped borrower to do to manage their student loans on a modest budget and without a degree? Here are some possible strategies to try and regain some financial control:

#1 Income Based Repayment

To give yourself some immediate breathing room in your monthly budget, apply for Income Based Repayment. This income should land you with an AGI of around $31,000 and a monthly IBR payment of $172. This isn’t dirt cheap, but is a little more affordable than $230. However, this will tack roughly five more years onto your student loan repayment period taking it from 10 to 15 years and increasing your interest paid from $7,600 up to $11,360.

Income based repayment

Image source: Tuition.io

#2 Pay as You Earn

For more wiggle room in your budget, Pay As You Earn under this debt and income scenario will lower your payments to $115 that would likely increase to a maximum of $230 assuming 4% annual wage increases. Under this scenario, payoff would take roughly 17 years to pay off and increase interest from $7,600 up to $16,290. This is a significant increase in interest paid and is a much worse deal in the long run. But if any of your expenses are higher than the scenario or your income is lower, this may be the plan that makes your budget livable.

Pay As You Earn

Image source: Tuition.io

#3 Debt Avalanche with PAYE

To get a grip on your loans while making your monthly payments more affordable, PAYE can be a good starting point. The $115 payment will cover your interest so that at least there won’t be any interest accruing, but until the monthly payments exceed the interest amount the principal will remain steady. But as we’ve recommended before, paying off your loans sooner rather than later is best for your long-term financial well-being. This can be accomplished in record time using a debt avalanche plan. You can read more about it here.

Under this plan, any extra money you get should be devoted to your principal. Sources of extra cash can include income tax refunds, cash from a second job, cash gifts for birthdays and Christmas – any and all extra cash you get or wage increases or expense decreases should be devoted to your debt. This will get you free and clear of your loans sooner, save big money on interest and get rid of your debt for good.

Debt with no degree

Image source: OccupyStudentDebt.com

Strategies to Avoid

There are some options you could take that could reduce your monthly payments such as the extended repayment plan, deferment and forbearance (if you could qualify), but postponing the debt will allow it to grow and make it more difficult to deal with in the future. And if your income changes for the worse, perhaps if you lose your job or are cut from full-time to part-time, you should act immediately to alert your lender to your change in your circumstances and to see if you can have some temporary relief while you get back on your feet.

For many people, not being able to complete their degree doesn’t hold them back and hopefully that’s your case as well. Still others are able to go back and finish their degrees later (hopefully without accruing any student debt) if this is their end goal. One of the best ways to get – and stay – on the right track with your student loans is to use Tuition.io’s free student loan debt management tool. Our clear dashboard lets you view all your loans in one place, track payments, payoff schedules and try on repayment scenarios for size. Try our tool now and click here to learn more about Tuition.io today!