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I have a large student loan from grad school that's over $41,000. I graduated in 2007, before the economy crashed and I was locked into some very high interest rates. I consolidated the Plus and Stafford loans. I owe 7.8% on over $40k and I pretty much only pay interest since I make the minimum payments. Very little goes to the principal.

I don't think I am managing this well and I need to find a way to start paying down on the principal, but my work is sporadic and I am in transition. Money isn't regularly coming in and I have a lot of expenses right now, so I am just paying the minimum.

Two questions:

  1. How can I best manage this loan payment and work to bring down the principal, while still being able to pay bills?

  2. Do I have any options now that my loans are consolidated to either refinance or lower the interest rates? And if so, what are they and where do I look?

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    Do you work for a non-profit or public service organization, e.g. a 501(c)3? If so, public service loan forgiveness may be one option for you. – John Bensin Aug 16 '13 at 18:58
  • I do not. If I did work for one in the future, it would probably be registered in Africa first, so I am not sure that this would count. I know the forgiveness scheme you are talking about, but no, I do not work as a public servant for the government. Thank you though. – Elena Aug 17 '13 at 16:28
  • As long as it was an American 501(c)3 (which is different from being a government employee; many US hospitals are non-profits too) or the US government, it doesn't matter where you work geographically. – John Bensin Aug 17 '13 at 21:07
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    Also, even if you don't qualify for public service loan forgiveness, you may still qualify for an Income Based Repayment Plan, which has lower monthly payments than many other payment plans. I presume you're looking for a stable source of employment/income, right? – John Bensin Aug 17 '13 at 21:16
  • yes, definitely would like a stable source of income! I would like to get my principal down as soon as possible! I would really like to see if there are options for refinancing and getting the interest down, at 7.8% it's huge! I pay almost all interest currently – Elena Aug 19 '13 at 21:14
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As someone with a lot of student loan debt, I can relate - the first thing you should do is read the promissory note on your current loans - there might be information there you can use. For govt loans (stafford, etc) made after July 1, 2006 the interest rate is going to be fixed and even a federal direct consolidation is not going to lower the rates themselves. If anything, consolidation will just increase the repayment period, which means you'll end up paying more in the long run.

Most private Loans usually offer variable interest rates, which today are quite low. But unless your financial situation is very comfortable and stable, consolidating out of federally guaranteed loans into private loans might not be the best path. You might lose options like deferment, forbearance, and maybe even things like a death benefit (if you die, your loans die with you). related - if you have a co-signer you don't get that death benefit! But refinancing into a variable rate private loan is going to push a lot of risk to you in terms of interest rate inflation, etc. Most financial professionals will agree that interest rates can only go up in the long run.

Keep in mind, student loans are completely unsecured - meaning lenders are taking a fairly large risk in loaning money (and probably why the fed govt has to guarantee most of them). I've heard of people borrowing against their home equity to pay down student loan debt - but I can't think of a reason you'd want to substitute secured for unsecured debt and possibly lose the loan interest tax deduction.

The bottom line is you're unlikely to find an alternative lending source at a lower interest rate for an unsecured student loan.

Another option may be the income based repayment plan. If you qualify, it caps student loan monthly payments at 15% of your discretionary income (discretionary is your income minus whatever the poverty threshold income amount is). And if that 15% doesn't even cover the interest on the loans, the govt picks up the tab for the difference (for up to 3 years). You have to re-qualify every year by sending in all sorts of documentation, but if you somehow stay on IBR for 25 years, your loans are then forgiven. Obviously the downside here is that you are probably paying little to no principal, but if you do the math and determine that your IBR payment would be next to nothing, and your current situation is barely paying interest-only... well, maybe IBR isn't a bad thing for a couple of years (or 25 if you think you will never have a larger income).

Personally, I went through all these options as well and decided that my best option was to just earn more money... a 2nd job or side project here and there helps me pay down the debt faster, and with less risk, than moving to private variable rate loans.

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    Note that the student loan interest deduction is phased out at certain income levels, so the deduction alone may not factor into someone's decision to swap secured for unsecured debt. Also, welcome to money.SE! When you have a chance, check out the tour page to get a better feel for the site. – John Bensin Sep 24 '13 at 19:22
  • Also, if your loans are forgiven after 25 years, you may owe taxes on the amount forgiven. Hopefully that won't be a large amount, but it's something to consider. – John Bensin Sep 24 '13 at 19:24

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