New York (MainStreet) - On a flight back from Washington D.C. a few years ago, I sat next to a young woman named Jessica. Over the course of the flight we chatted, as seatmates do, about what had brought us into the city. I had come to take a few interviews, she had just returned from visiting law school campuses.
“I plan on practicing public interest law or maybe going into foreign aid” she told me confidently. “My parents want me to go for something with a little more money, but I want to help people. I feel like it’s my responsibility.”
I groaned subtly and tried not to say a word, because on planes the only thing worse than someone who reclines his seat is a neighbor who gives unsolicited advice. Inwardly, though, I shuddered. Poor, naïve, college student, I thought. You have no idea what you’re in for…
The reality is that we've begun to price out the do-gooders. Public service professionals such as teachers, social workers and, yes, public interest lawyers have always operated on pretty tight salaries. You rarely get rich helping others, but it used to be that you could make a decent living.
Today student loan payments are increasingly devouring that decent living, and young graduates are reacting the only way they know how. They’re fleeing from the jobs they love. How bad has it gotten? According to Department of Education numbers we lose half a million teachers per year, and it has a lot to do with money.
This is one of the many heartbreaking ripples of our disastrous experiment with student debt, not just the millions of graduates who struggle in jobs they hate but all of the would-be artists and NGO workers who will never even get to try the ones they love.
It doesn’t have to be this way. Student loans aren’t like other forms of debt. Sure you may end up eating ramen for the two meals per day you can afford, but there’s always a way to make it work.
Jan Miller, a financial consultant who specializes in student debt, said there are ways to make those loans manageable with passion professions. It just takes some finesse.
First thing’s first, according to Miller: take a breath, then look at the numbers.
“I have clients who have $5,000 and $10,000 and $15,000 in debt and can’t pay it now,” he said. “I have clients who are six figures in debt. I have one client who’s $500,000 in debt and makes $65,000 as a podiatrist in Florida.”
What unites all of them is that they can get those debts paid.
A lot of borrowers freeze in the face of their loan statements. They throw the letters away unopened and for a while that even works… until a notice of collection arrives. Other graduates just mentally check out, resigning themselves to a debt they’ll never repay. It can’t, they think, get any worse.
It can. It does. Playing possum just doesn’t work, and even if you were really dead, they’d come for your estate.
“Make sure they sign up for all of their accounts online and look at it,” Miler said. “When I give a presentation or workshop, I always say open that letter.”
“A ridiculous percentage of students default within the first two years of repayment," Miller added. "That means that they didn’t even make one payment. If they’d just made one phone call. If they had just opened that letter and signed up online they could have prevented that… I know it’s hard, but look at what that debt is.”
Explore income based repayment. Unfortunately, it’s less widely available than many people would believe. In fact, according to Miller less than 20% of borrowers qualify. As the number of lenders and minimum payments per account pile up the usefulness of IBR diminishes, but for those in a passion profession it can still make a world of difference.
“I went to school for professional performance and racked up a lot of debt,” Miller said. “And I’ve got friends who come to me and say, 'I went to school for opera and I’ve got $80,000 in debt and make $14,000 per year. What do I do?'”
For someone in that position, the plan can reduce payments sometimes even down to zero. Put some money aside though. In 20 to 25 years, student loan forgiveness will kick in and the remainder of your debt will be eliminated. On that day the IRS will come knocking. As far as the agency is concerned, you just got an $80,000 windfall, and the IRS will want a piece of it.
It’s a little known fact: eliminating a debt without paying for it counts as income.
After that, explore debt consolidation, but be careful. Miller called debt consolidation one of the most dangerous tools in the trade. With proper planning, it can help someone streamline their loans into a more cohesive, affordable whole. Without planning around variable interest rates and protection clauses, though, it can create a real mess.
Inadvertently consolidate a government loan into a private one, for example, and you switch from a protected rehabilitation program in case of default to an accelerated payment clause. (In other words, miss enough payments and the lump sum becomes due. Because clearly someone who doesn’t have $800 per month will have $80,000.)
In general, if you can consolidate your loans into something with lower interest and under a government program, it’s worth considering. Otherwise, Miller said, “it might make your payments more confusing, and you might have to write more checks every month." That said, it might help you make your payments in the long run.
Next, consider moving. Yes, it's frustrating to have to give up a fun city in favor of someplace a little more low speed, but it might just be worth it to chase a dream. The hard truth is that federal programs don’t take into account local costs of living, and Manhattan musicians live on razor thin margins.
“It happens all the time,” Miller said. “If you live in a small town middle of Nebraska and you make $50,000 per year, you can get yourself a new house. You make that and you live in a large city, any large city, that might cover your transportation costs.”
Don’t think of it as exile, think of it as a temporary assignment. Move to the Great Plains and build your career a bit. Pay off some debt and return to the bright lights when you’ve gotten some seniority. Five years in Minnesota might well be the difference between job satisfaction and starting conversations with “when I grow up…”
Also, shoot for a target of 10 to 15% of your income. That’s a good number for balancing quality of life with debt repayment. Yes, maybe you can cut lower, but should you? After all, you do want to pay these things eventually. Throw extra money into that pit because it will fill up, albeit slowly, and focus on the high interest loans.
Above all else, pay attention to your private loans.
“The magical thing about federal loans is that it’s just really never too late," Miller said. "There are multiple ways to fix them if they are defaulted, if they’re delinquent. Private loans, which most graduate students have, are another issue altogether. They come with acceleration clauses and aggressive collection tactics. You never want to default, but you really never want to default on a private loan.
Finally, explore obscure options.
The student loan system is in fact a lot more complicated and riddled with loopholes than people think. There’s a web of forgiveness and aid programs in place to help graduates get back on their feet. Spend time researching and on the phone with your lender to find one that applies to you. Don’t assume that income-based repayment and consolidation are the only tools available. There’s repayment aid available for nurses, social workers, doctors, and many, many other professions, especially those who work either for the government or a non-profit.
“It can make a big difference if you really understand how the whole thing works,” Miller said, “and very few people do, because it’s so complex and it’s changed so many times.”
At the end of the day, Miller looped back to his original theme, never, never, never give up. Don’t get overwhelmed and assume that this is a hopeless battle, because it’s not.
“That’s usually why the borrower is there in the first place: they’re not emotionally and psychologically capable of dealing with the lender,” Miller said. “[But] with student loans, you don’t ever have to give up. There's always a way out.”
--Written for MainStreet by Eric Reed, a freelance journalist who writes frequently on the subjects of career and travel. You can read more of his work at his website A Wandering Lawyer.