Student Loan Debt: Why Taking Control Is Essential

July 3, 2012 by  Filed under: Debt 

For students who have emerged from college with a mountain of debt, it can be tempting to stick their heads in the sand. In the past, it was possible to simply wait to write them off in the bankruptcy court, but this is no longer possible. Clearing student loan debts requires more proactive steps.

While no-one relishes the idea of filing for bankruptcy, it is often the only option when lenders and other creditors are making final demands for payment. And while the result can be harsh, the weight of debt is at least lifted. However, the fact remains that taking control of these debts and adopting some financial discipline is the best option overall.

When it comes to student loans and finally clearing them, there are options open to everyone. They may require some significant changes to lifestyle, but they can result in a clear account – as well as a clear conscience.

Why Bankruptcy is Not an Option

The history of the relationship between bankruptcy and student loan debts is a long one. Back in the 1970s, it was possible for individuals to include the loans taken out to pay for college fees in the list of debts to be written off, but this changed in the 1980s.

The economic crisis has seen an increase in the number of people aged around 30 that see filing for bankruptcy as the only option open to them. But they are not permitted to include those student debts. With the average 25-year-old graduate leaving college with a minimum of $30,000 in consumer debts as well as student loans, this creates many problems.

While their debt is hardly impacted on before turning 30, a student loan is seen as different by the lending industry because there has already been a delay granted on repayments. So, lenders are unhappy about seeing the debt simply written off.

Available Repayment Options

Arguably, the most suitable way to clear student loan debts is to sign up to one of the forgiveness programs that the federal governments offer students who have been educated with the aid of federal loans. These can vary from serving in law enforcement to working for a charity. For example, Alaskan graduates can see 20% of their debt written off for each year served as an Alaska State Trooper.

Another option is to seek a consolidation loan, which can mean a more manageable debt. For example, debt of $50,000 requiring $1,000 in repayments each month for 60 months, can be bought out and then repaid at a rate of $550 for 120 months (10 years). With monthly repayments almost halved, filing for bankruptcy might prove unnecessary.

A third route is to renegotiate the repayment structure with the existing student loan lender, and then formulate a strict budget around the new schedule. For example, extend the loan term by 5 years to reduce the monthly sum, and cut out unnecessary daily expenses.

Bankruptcy is Not Ideal

Clearing student loan debts through bankruptcy might seem like a good idea, and there are many who are calling for the government to permit it. But, there are long-term effects that should be considered too. It will take at least 2 years for most lending institutions to consider graduates for loans again. Even if when they do, the interest rate will be high and loan limit low.

Filing for bankruptcy is an expedient way to lift the weight of debt off shoulders, but it can be more difficult to rebuild financial credibility after the ruling than to bite the bullet. Bankruptcy to clear a student loan might be necessary, but it never ideal.

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