Home > 2014 > Students

The Wrong Ways to Get Rid of Your Student Loans

Advertiser Disclosure Comments 1 Comment

Class of 2014, the time has come to find a job and start paying down your student loans. Like many young graduates, you probably don’t feel like embracing this particular change. If that’s the case, I’d like to suggest you at least consider shaking its hand.

Commencement season is here, which means a torrent of speeches about risk-taking and being bold on life’s journey — with a laugh line here and there about the student loans new graduates will have to start paying down. However, given today’s job market, most folks wearing caps and gowns will fail to see the humor.

Almost universally, commencement speakers tell the newly graduated not to worry too much about being perfect, but to always do your best as you wend your way through the vales of Not Failing toward Success. That said, one of the first places many graduates will encounter failure in 2014 is in the job market.

A recent Slate article joined the murmuring throng of pieces about the job prospects for new graduates:

“It used to be that more than half of these overeducated young workers would find themselves in ‘good’ jobs — meaning that they’d pay at least $45,000 in today’s market. Today, less than 40 percent do. Meanwhile, more than a fifth of this group were in low-wage jobs, meaning they paid $25,000 a year or less.”

For many graduates, the first dose of reality hits when they discover that the amount of money they actually make is radically different than that which they estimated would be their likely starting salary when they originally took on the burden of those student loans.

The big problem here is that there is rarely an elegant exit from most student loan debt (for example, if you become totally and permanently disabled, or if you die – to name a couple possibilities — your debt might be discharged). Otherwise, for the most part, the only way to get out from under that dark mountain is to pay your way out. That said, there are always people who think they can game the system and avoid paying.

Here are three ways student loan borrowers try to escape their fate and why they won’t work.

1. Not Paying

Difficult as it may be to fathom, many people have tried this tactic. It seems simple enough. “I mean hey, what can a lender really do to me if I don’t pay?” How about plenty — and none of it is good.

When you don’t pay, the debt hangs around like a really bad canker sore in a mouth full of hot sauce. Unlike credit card debt, there is no real bankruptcy option on the horizon for student loan debt. With penalties and interest accruing, the obligation keeps growing and there’s no escape. It’s a modern day version of owing your life to the company store.

Additionally, this approach will prove to be an albatross around your neck when you try to get a mortgage (or even rent) down the line. That’s because student loan payments tend to be some of the first credit accounts new graduates have to their name. If you miss payments, it will hammer your credit score — one of the first things lenders (and landlords) look at when determining whether to lend or rent to you. If you want to see where your credit currently stands and how your student loans are impacting your scores, you can see two of your credit scores for free every month on Credit.com.

2. Paying With Credit Cards Then Declaring Bankruptcy

Here’s another misconception that will cost you — big time. The rates on your credit cards are much higher than those on student loans. So unless you have an unquenchable thirst to waste your money on unnecessary interest payments, the only reason to pay your student loan debt with credit cards would be a feeble and misguided attempt to change the character of the obligation and discharge the debt in bankruptcy.

Make no mistake, the bankruptcy court will see right through this scheme. The student loan debt will still be due, and you will have 7 years of ugly credit.

3. Using Your Home Equity to Pay Off the Loans

For some borrowers who have returned to school later in life, they may think that using equity in their home will help them consolidate their student loans and lower their monthly payments. While this option may work, it’s most likely not a good one, and actually could have disastrous consequences.

The hitch here is that most student loans have comparable interest rates to what banks are charging homebuyers right now. You’re not paying off debt, just trading it in for some new debt tied to your home.

Another consideration is that by encumbering real estate with further debt, you could be putting your house (perhaps your only asset) on the line. Missing a student loan payment is bad enough, but if you miss mortgage payments you put yourself at risk for foreclosure.

If you’re having trouble meeting your obligations on federal student loan debt there are options out there ranging from Income-Based Repayment and Pay as You Earn plans to Income-Contingent Repayment. There are ways to legitimately satisfy student loan debt. After making income-contingent payments for a long period of time you can qualify for relief. If you work for a qualified employer — the government or a tax-exempt non-profit — you may qualify for public service forgiveness after 120 qualifying payments.

The bottom line when it comes to paying down student loans in an anemic job market: You are not alone — tens of thousands of new graduates are in the same boat. You are going to have trouble meeting obligations that you made long before  you even decided upon your major. While the seas will be rough, you don’t have to feel like you bought a ticket on the Titanic.  If graduates face repayment in an open way, communicating regularly with lenders, there are solutions — although none of them get you a Get Out of Debt Free card.

More on Student Loans:

Image: mkr1150r

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

  • John M.

    IRS perception do taxes – Sorry, you don’t quality for a child credit because you make too much money. Sorry, you can’t deduct student interest because to make too much money. Fannie May perception of parent applying for a student loan – Sorry, You didn’t get the loan because do don’t make enough.

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team