Student Loan Repayment Series – Part II – Single with High Debt and Low Income
June 21, 2013

We recommend paying as much as you can on your debt as soon as possible, but that’s not always possible. In this second installment of our student loan repayment series, we look at what options are available to a debtor that’s single, has high student loan debt of $45,000 and is earning just minimum wage because they can’t find a job in the area of their major.

Assuming student loan debts of $45,000 at 6.8%, the standard 10 year plan would require monthly payments of $518! If you’re earning $12 per hour as a barista, retail checkout cashier or office temp, your monthly gross (if you work full time) is $2,080 which will net you roughly $1,710 after taxes each month. That makes your student loan payments a whopping 30% of your take-home pay and that’s only sustainable under very limited circumstances.

You can see below in the model budget that there’s no room in this budget for student loans – it’s a paycheck to paycheck subsistence situation. This budget was constructed as break-even assuming living in a modest apartment or roommate situation. You may have a different mix of expenses, but if you’re earning minimum wage, the core assumption of student loans being unmanageable is likely true.

To deal with debt like this, you will have to get creative – you may have to swallow your pride – you may have to rethink what you want to be when you grow up and look to a different career path that’s more viable. Here’s some suggestions:

#1 Consolidation As in Part I of the series, we dismissed this out of hand. A consolidation would only lump all of your student loans into one payment – it would not lower your total payments, so this is a waste of ink and paper.

#2 Forbearance or Deferment If your situation qualifies as “economic hardship,” you may qualify for one of these programs that will suspend your requirement to make monthly student loan payments for a limited amount of time. However, when you use the Federal economic hardship calculator, the results (see chart below) show that although your financial situation isn’t rosy, you probably don’t qualify.

As a caveat, if you’re working less than 30 hours or making closer to the Federal minimum wage amount, you could qualify. But for purposes of our discussion today, we’re going to explore other options working under the assumption that forbearance and deferment are not available.

#3 Income Based Repayment To see how manageable your payments could be while you’re stuck in a no-degree required lower paying job, let’s look at IBR. Income based repayment caps payments at 15% of adjusted gross income and allows loan forgiveness at 25 years. At this income level, you’ll likely be asked to pay no more than $10 per month toward your student loans and for the first three years you’re in IBR, the government will cover the interest on your subsidized loans. Any interest not covered by your payments (which will be all of it in this scenario) will accrue and increase the loan balance.

See the IBR chart above and you’ll notice that if your income continues to be low, after 25 years you’ll qualify for loan forgiveness. However, making minimal payments, your loan balance will have rocketed to over $120k. When this is written off, it will become a taxable event that will cost you around $20,000 in income taxes! So IBR is a good starting point, but you must combine it with other long-term strategies to avoid the tax liability. And if your income does increase later, you’ll be facing your original loan balance plus more than $3,100 per year in accrued and capitalized interest.

#4 Pay As You Earn Pay as you earn is much like IBR but allows you pay a lower percentage of your income. It’s only available to those who borrowed after October 2007 and who had no outstanding balance prior to that. You also must have had a loan disbursed after October 2011. Under PAYE, you can qualify for a $0 per month payment and 20 year forgiveness, but this lands you in the same ultimate boat as IBR. This is a band-aid solution for a slowly hemorrhaging money situation. It will keep you going now, but will kill your finances in the long run! This option is only viable alongside a smarter long-term financial strategy.

#5 IBR or PAYE with Debt Avalanche We’ve recommended often the debt avalanche method of tackling your student loan debt. This takes any and all spare cash and puts it toward student loans. The interest on your loans totals $255 per month in the early years and will never decrease so long as the principal remains unchanged at $45k. Unless you can pay at least this amount per month, you loan value will continue to climb. So how can you generate $255 per month (or more)?

Overtime: If you’re working a steady 40 hour per week, any additional hours will be at time and a half. By picking up a few extra shifts totaling 17-18 hours, your take home will increase by about $265 that you can dedicate to your loans with only the sacrifice of a few hours of your spare time.

Ditch the Car: If you live somewhere there’s public transportation, unloading the car and its associated payment will generate enough cash to cover your interest – even with the cost of public transpo!

Ditch the Rent: If your parents (or grandma or aunt) have a spare room they’re willing to let you crash in for awhile, you can make a serious dent in your student debt. By moving into a rent-free living situation, you can devote about $600 to your student debts. Still apply for IBR, just in case things don’t work out, but then devote all of your savings toward the principal on your loan.

Every year you can stay at home, you can carve over $5,000 off your debt. This can be a great solution until you can find a better paying job (hopefully in the area of your degree). Plus Dad might appreciate help with the yard work and Mom will appreciate the time with you (as long as you’re well behaved).

#6 Career Change If you can’t find a job in the field of your major, you need to figure out the root cause. Is this a stagnant career area where prospects don’t look to improve? If so, a career change may be in order. See the above chart from SoftwareAdvice.com on shortfalls in skilled labor fields. With this amount of student debt, going back to school and piling on more loans to get a different degree is likely not wise. Instead, consider some other options that will allow you to address the strained economic reality of your situation.

Public Service: After 10 years of public service work – while making payments under IBR or PAYE – you can get tax free forgiveness on the balance of your loans. Public service doesn’t pay stellar salaries, but it does offer a rare benefit in this day and age: a paid pension after a couple of decades of service! Add to that the loan forgiveness and excellent medical and dental insurance and it’s something to consider.

Teaching: Depending on what your degree is in, you may be able to land a teaching job. Many states offer entry level teaching positions to degree holders even if they don’t have teaching certificates. There’s a grace period to get the required certification, but in the meantime, your service period starts marking time for 10 year tax free loan forgiveness! Benefits include 7-8 hour workdays, excellent benefits, summers off and pension!

Skilled Labor: There is a shortage of skilled labor in many fields that you can apply for with a minimum of training or a simple certification. Many skilled labor positions pay wages comparable to white collar jobs if you can prioritize economics over usability of your degree. Depending on what field you choose, union protection, excellent benefits and pension are all possibilities. If sheet metal work or plumbing isn’t to your taste, consider interior design, aquarium design/maintenance or medical assistance.

Final Thoughts No matter what you choose, it’s important that you choose something. Don’t just throw up your hands and do nothing because you can’t afford your loan payments. Apply for IBR or PAYE as soon as possible – if you let your loans go into default, many options will be closed off to you. To get yourself off on the right foot, use Tuition.io’s free student loan tool to keep track of your student debt, check out repayment plans and contact your lender if you need to talk to them about your financial predicament.

For more help, check out some of our other recent blogs on managing your student loan debt:

5 Tactics to Avoid When Paying Off Student Loans

Struggling to Find a Job and Pay Student Loans? Consider a Change to I.T.

Proposed Michigan Law Would Help Pay Off Your Student Loans

Is Pay as You Earn for You?

Last Ditch Student Loan Measures – How to Choose Deferment vs Forbearance