Q Dear Rick:
I have a problem that I hope you can help me with. I graduated college about five years ago. To make a long story short, I was not very good with my money. I put way too much on my charge cards and I’ve gotten myself into a bind. In fact, I just have had to give up my apartment and move back with my parents. Currently, I owe nearly $30,000 on my charge card. I also owe other debts including back rent for my apartment, some utility bills and the big one, my student loan. I am contemplating bankruptcy; however my parents are discouraging me from going that route. Now with me living at home my expenses have been dramatically reduced and in addition, I have been talking to my charge card company and I think I’ll be able to work out something with them. The main problem I have right now is with my student loan. Even with my reduced expenses I’m having trouble making the payments. I have done some looking online and I found a company that claims that they can help you reduce your payments on your student loan. The company charges you $1,500 and they claim they can change your payment plan. My dad thinks it’s a scam. The company is relatively brand new so I wasn’t able to find out much about them. My question to you is if you know of any other alternatives for my student loan or know of reputable companies that I should contact.

Thanks.
S.D.

A Dear S.D.:
I first want to comment on the thought of bankruptcy. I am not one who encourages people to automatically file for bankruptcy; however, I believe in many situations bankruptcy is a viable alternative and something that people should consider. There are consequences to bankruptcy; however, one of the great things about our system is the fact that we do give people another chance and that is exactly what bankruptcy does. Yes, there still is a stigma about going into bankruptcy but that stigma is not as great as it used to be. In addition, even if there is a stigma, cleaning up your debt situation and getting a fresh start may outweigh that stigma. Keep in mind as you make your decision, student loans are not dischargeable in bankruptcy.

I have seen many ads online offering all sorts of deals when it comes to student loans. Some of these ads offer debt forgiveness or reduced payments. In fact, some of the ads refer to the Obama Student Loan Forgiveness Program. Unfortunately, most of these ads are bogus and are nothing more than scams. Even the ads for legitimate companies are only doing what you can already do for free.

When someone has difficulty with their student loan, the first thing they should do is contact their student loan servicer. The student loan servicer is a company that handles the billing and other services for your student loan. The student servicer is not a company you select but rather, one assigned to you by the U. S. Department of Education. It is the student loan servicer that can help you lower your monthly payments, consolidate the federal student loan, help you with defaults and even provide loan forgiveness. What is so great about contacting your loan servicer about these issues is that it is free. What many of these so called student loan forgiveness companies do is just offer you the federal government program but package it as their own. My philosophy: Why pay for something that you don’t have to.

When it comes to federal student loans, there are ways to reduce your payment. In fact, the federal government offers four income-driven payment plans. These plans are the Revised Pay-As-You-Earn Repayment plan (REPAYE Plan), the Pay-As-You-Earn Repayment plan (PAYE Plan), the Income-Based Repayment plan (IBR Plan) and the Income-Contingent Repayment plan (ICR Plan). Not all these plans will apply to your individual situation but one should.

Even if you decide an income driven repayment plan is not right for your situation there are other repayment programs. For example, there are ways to extend your payment plan or even ways to temporarily suspend payments through a deferment or forbearance. The bottom line: there are options and you don’t need to pay anyone for them. The key is to contact your loan servicer and discuss your individual situation with them.

Good luck!

Rick is a fee-only financial advisor. His website is www.bloomassetmanagement.com. If you would like Rick to respond to your questions, please email Rick at rick@bloomassetmanagement.com