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What would you do?

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What would you do?

Hi and please forgive me if this has been asked many times. I have read through and searched for hours on this forum and my brain is basically mush at this point. 

 

I currently have $78,000 in student loans and my husband has $37,000 in student loans. Both of our accounts are in an income repayment plan which make sour payments $0. I want to tackle this but I am terrified to make a wrong move. I have read about consolidation and rahabbing them. Can I consolidate mine and my husband's together? We are currently snowballing $38,000 in combined auto and credit card debt which is due to be paid of in 20 months. 

 

The short term goal is to raise my credit score as quickly as possible. My long term goal is to pay these loans off. 

 

What would you do? 

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Re: What would you do?

Hi @22Carly22 if they are federal loans then you can't consolidate together through a federal program. They stopped that option in 2006 or so. I'm not familiar with the rehab process so hopefully someone else can chime in on that.

 

If you have federal loans though it can be an advantage over a private lender as we see with the Cares Act forbearance. Plus you have more repayment options. I would keep the federal loans as they are and try to tackle them. I have nearly 69k in federal student loans I am working to knock out. I would take on hubby's first with minimum payment and any snowball monies you have. Then only pay the minimum on yours until his is clear.

 

Or, you could try to refinance for the full balance of both loans.That is a possibility if your DTI would meet the requirements for the 115k loan. That may be worth trying to get one consolidated payment. The only downfall would be if they are federal loans, you lose the benefits and payment options outlined above. BUT you could possibly get a better interest rate.

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Re: What would you do?

I missed something here. You can consolidate individually for federal loans. So if you have multiple loans that make up your total you can consolidate those. You just can't put you and your husband's loans together. At best you could have 2 consolidations (one for you and one for your husband). If you opted to refinance, you would have to go to a private lender.

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Re: What would you do?



Rehabbing is an option to bring defaulted SL's out of default, and if you're current on an income-based repayment plan, then that isn't your situation.  As stated above, if these are federal loans you won't be able to consolidate you and your husband's together, but you should be able to consolidate both all of yours into one and all of his into one.  The current specifics of consolidating I don't know (it's been a long time since I consolidated mine), but I would contact your loan servicers and see what information they can give you on your options.

 

With regards to your long-term plans for tackling debt, I would leave student loans for the last rolls of your snowball.  Federal student loans are going to have a low interest rate compared to a lot of auto loans and pretty much any non-promo rate cc debt.  They also have much more flexibility in repayment (e.g. deferrment, forbearance, or your income-based plan), so in some ways they're the lightest kind of debt to carry.  In the short term, you should see a more immediate effect on your score if you apply your extra money to the cc debt first, since revolving utilization has a bigger impact on score and it looks like the amounts you would need to apply to clear util thresholds on your installments are much higher than on your revolvers.  After your cc's and auto are cleared, I would next snowball into private SL's, if you have any, since they have higher rates and less flexibility, and then into federal SL's.


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Re: What would you do?


@Slabenstein wrote:


Rehabbing is an option to bring defaulted SL's out of default, and if you're current on an income-based repayment plan, then that isn't your situation.  As stated above, if these are federal loans you won't be able to consolidate you and your husband's together, but you should be able to consolidate both all of yours into one and all of his into one.  The current specifics of consolidating I don't know (it's been a long time since I consolidated mine), but I would contact your loan servicers and see what information they can give you on your options.

 

With regards to your long-term plans for tackling debt, I would leave student loans for the last rolls of your snowball.  Federal student loans are going to have a low interest rate compared to a lot of auto loans and pretty much any non-promo rate cc debt.  They also have much more flexibility in repayment (e.g. deferrment, forbearance, or your income-based plan), so in some ways they're the lightest kind of debt to carry.  In the short term, you should see a more immediate effect on your score if you apply your extra money to the cc debt first, since revolving utilization has a bigger impact on score and it looks like the amounts you would need to apply to clear util thresholds on your installments are much higher than on your revolvers.  After your cc's and auto are cleared, I would next snowball into private SL's, if you have any, since they have higher rates and less flexibility, and then into federal SL's.



^^^^This!

Also my response about paying the student loan is assuming after the 20 months that you pay off the debt you listed. I would definitely leave the student loans for last. That's is what I did/am doing, simply due to the flexibility of federal loans. 

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Re: What would you do?

Honestly, if you two keep qualifying for $0 IBR plan, ride it out the 20 years and the balances then will be forgiven. That is what my SO is doing.

 

Why pay?

 

No sense in it unless you see a huge change in income down the road. Even at that, you recertify annually, so the 20 years I do not believe resets, and at the end whatever remains will be written off.

 

No consolidation or refinancing for a lower rate will save you more than that! While the balance look scary and can be annoying, one day they will simply be gone.

 

These SLs will not not drastically improve your credit scores until they are almost paid off. Personally, I would work on other aspects of your credit first before even bothering with these SLs when they have no required payment. They probably are hurting your scores very little unless they have lates and such, if not, plenty of member here have great scores and SLs over 100% utilization.

 

And lastly, you cant rehab anything unless they are defaulted and I say you shouldn't mess up the IBR program by defaulting. Kinda hard to do anyway, with a $0 payment.




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Re: What would you do?

@LaHossBoss I wanted to say I appreciate this. I didn't even know there was a $0 IBR. My assumption was that it was $0 because of the Cares Act! I learn something new up here everyday! I definitely wouldn't worry about these until my other debt was squared away (and possibly not at all if I kept qualifying for $0)! It would just be nervousness watching the interest accrue or the possibility that eventually you won't qualify for the $0 payment. But OP can probably gauge if and when they may not qualify anymore.

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Re: What would you do?

Only issue I see, under the current rules at least, is that $0 payments will cause that balances to grow and grow over the 20 years and that's a huge chunk that will be "forgiven" and leave you with a tax bomb at the end that needs to be paid instead. Hopefully for less than whatever the payments would have amounted to, but I highly doubt that. The tax bomb is then treated as "income" for what you'll need to pay.

For the $78k, assuming 5% interest rate in normal times, that would grow to over $200k after 20 years (with just accruing annual it would be $207k). For a 24% income tax rate, that would mean a bomb of $50k. If you don't mind it, also look into government work so you could qualify for PSLF and after 10 years there you would have it actually forgiven in full (and maintain the IBR as well).

Since you don't need to make payments on the SLs right now, I'd hammer away everything else and stop taking on any more debt then super focus on paying the student loans off.
as of 11/20/20
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Re: What would you do?


@ccquest wrote:
Only issue I see, under the current rules at least, is that $0 payments will cause that balances to grow and grow over the 20 years and that's a huge chunk that will be "forgiven" and leave you with a tax bomb at the end that needs to be paid instead. Hopefully for less than whatever the payments would have amounted to, but I highly doubt that. The tax bomb is then treated as "income" for what you'll need to pay.

For the $78k, assuming 5% interest rate in normal times, that would grow to over $200k after 20 years (with just accruing annual it would be $207k). For a 24% income tax rate, that would mean a bomb of $50k. If you don't mind it, also look into government work so you could qualify for PSLF and after 10 years there you would have it actually forgiven in full (and maintain the IBR as well).

Since you don't need to make payments on the SLs right now, I'd hammer away everything else and stop taking on any more debt then super focus on paying the student loans off.

Honestly there has been plenty of talk/examples of not being taxed on that "bomb". If they qualify for IBR of $0, they are likely also going to qualify to not be taxed on the remaining "bomb" at the end. I see no issue with it, still, as at the end of the day, in the extreme, $50k is still less than $78k + interest over the period of time it takes to repay. One has 20 years to save and if you save and/or invest wisely for those 20 years, it will be much less out of pocket than had you tried to pay it off faster. I would be interested to see if anyone has actually been taxed on this.




Starting Score: 2•20 | EQ 550 | TU 498 | EX 505
Current Score: 11•20 | EQ [F8 615] [F9 653] [EQ5 645] [VS3 657] | TU [F8 600] [F9 552] [TU4 563] [VS3 639] | EX [F8 587] [F9 573] [EX2 614] [VS3 631]
Goal Score: 680


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SO Starting Score: 2•20 | EQ 502 | TU 484 | EX 521
SO Current Score: 11•20 | EQ [F8 602] [F9 540] [EQ5 599] [VS3 534] | TU [F8 631] [F9 587] [TU4 572] [VS3 640] [VS4 634] | EX [F8 651] [F9 614] [EX2 630] [VS3 657]
Goal Score: 680


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Re: What would you do?


@LaHossBoss wrote:

Honestly there has been plenty of talk/examples of not being taxed on that "bomb". If they qualify for IBR of $0, they are likely also going to qualify to not be taxed on the remaining "bomb" at the end. I see no issue with it, still, as at the end of the day, in the extreme, $50k is still less than $78k + interest over the period of time it takes to repay. One has 20 years to save and if you save and/or invest wisely for those 20 years, it will be much less out of pocket than had you tried to pay it off faster. I would be interested to see if anyone has actually been taxed on this.


No doubt, and there's plenty of proponents for getting rid of the tax bomb as well. But the bigger part of the 20 years to save argument is that they're on a $0 payment right now. Either they're a big family or they don't make much - both of those lead me to think they might not have too much leeway for saving, but hopefully I'm wrong or there's something else missing in the picture.

 

And while 50 < 78 is true, the IRS doesn't give 20 year payment plans afaik right? I know they work with people though, just not sure to what extent.

as of 11/20/20
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