A reader has two big debts and not enough money to pay off both.
Question: I was wondering which should I start paying off first. I have college loans totaling $18,000 and also child support arrearage totaling about the same. I was wondering what’s the best way to handle these two major debts? I know it’s probably the arrears, but I really would like to get rid of both without being broke every month. Need your advice.
— Wil in Texas
Howard Dvorkin CPA answers…
The answer to Wil’s question the answer is simple. Implementing that answer is hard.
The bottom line for Wil is moral, not financial. Child support isn’t the same as other forms of debt, because you’re hurting not just your credit score. You’re depriving a child — your child — of the resources he needs to grow up and be successful.
That said, I understand Wil’s frustration. He’s not earning enough money to pay off what he owes, which he wants to do. Thankfully, he (and others like him) have options.
Support for child support
Wil says his child support is in “arrears.” This is just another way of saying he’s past due on his payments. When you owe child support and don’t pay it, several increasingly terrible things can happen…
- A court can charge you interest. When you don’t pay your credit card in full, you get hit with interest charges, and the same can happen with your child support.
- Your wages can be garnished. Depending on your arrangement, even missing one payment can result in an automatic order for wage garnishment.
- You can lose your driver’s license. Rules vary according to the state. For instance, in Minnesota, this can happen when you fall three months behind, while in Alabama, it’s six months.
As you can see, not paying child support comes with severe consequences. Even more severe, you can’t get rid of this debt even by declaring bankruptcy, and you still owe the money after your child becomes an adult.
So the answer to Wil’s question is: Pay that child support before your student loans. However, Wil needs to check with the Texas Attorney General’s Child Support Division — it’s one of many states with a “debt compromise policy” — child support help for those who fall behind.
Each state has its own quirks, but the bottom line is this: If you’re proactive and contact them first, you might earn forgiveness on all the penalties you owe for paying late. You still owe the original amount, but getting those penalties forgiven is akin to having all your credit card interest wiped out and being required only to pay what you charged on the card — which is essentially what happens when you sign up for a credit card debt consolidation program.
If Wil signs up for the Texas program, he’ll potentially save thousands. He can do exactly the same with his student loans.
Easing (or erasing) those student loans
Even as Wil investigates his child support options, he has student loan options. The federal government offers five distinct programs that can consolidate all your federal (not private) student loans into one monthly payment with a much lower interest rate.
Much like the child-support programs run by state governments, this federal effort still requires you to pay off the original sums. However, reducing the interest rates makes a big difference.
Theoretically, you can apply for these programs yourself. If Wil has the time to study the differences between an income-based payment plan and an income-contingent payment plan, I urge him to research all five and see which ones he’s eligible for — and which will help him most. If that proves daunting, he (and anyone else) can call a Debt.com financial counselor for free at 1-888-472-0365. We can help navigate the bureaucracy.
Finally, depending on Wil’s profession, he might be able to wipe out his student loans. It’s called student loan forgiveness, and it applies to professions like teachers, firefighters, and nurses.
While Wil’s situation sounds dire, he does have options. They require a little legwork, but they can really help. I hope he takes advantage of them, or at least calls us for a free debt analysis. Good luck, Wil.
Have a debt question?
Email your question to firstname.lastname@example.org and Howard Dvorkin will review it. Dvorkin is a CPA, chairman of Debt.com, and author of two personal finance books, Credit Hell: How to Dig Yourself Out of Debt and Power Up: Taking Charge of Your Financial Destiny.