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Is Forbearance Bad?



Question: I have about 72k in private student loan debt (about 90K including interest). I’d like to refinance it, but my credit score is too low. I think a large portion of this is due to my credit card debt (7k) which up around 75% of my limit. I’m unable to make a real dent in paying off my card because my monthly loan payments are around $1,100 and I can’t refinance to get lower payments because my credit score is low due to the credit card debt. And the cycle continues. I make 50k a year and I still have issues making monthly payments on everything. I’m thinking about entering forbearance on my loans so I can focus on repaying my credit card debt. Then, as my credit score rises, I could refinance my loans and get lower monthly payments. Is that idea crazy or could it work?

Mitch H. in Michigan

Steve Rhode, the Get Out of Debt Guy, responds…

I understand what you are trying to do but I don’t think it will work much in practical sense. Here is why.

When you put your student loans into forbearance all you are doing is saying you want to rapidly increase the total balance due. When you are given permission to not make payments, all the unpaid interest building up gets added to the loan. It would not take a long time for your now $90K student loan balance to become $100K+ by being in forbearance. That’s one way an original $72K loan can become a $90K balance.

I would suspect the credit card debt is the result of spending to help make ends meet. Sometimes people spend more than they can afford to pay for fun, stress reduction, or just to get by. The underlying reasons are many, but the resulting debt is not the problem. It’s the symptom of the reasons why.

There are a number of factors surrounding your private student loans that need examining. For example, was the school you went to a Title IV qualified school or were your loans used for unqualified educational expenses? If so, then you may be able to get these loans discharged through bankruptcy.

Crushed by student loan debt and worried you’ll never pay it off? There is help available.

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It might just be that the amount of the student loans you owe is just not supportable on the income you earn from the field you are in. It’s like buying a Ferrari on a minimum wage worker income. So, if your student loans are just not affordable, you should read this.

I would also not assume that your credit score is just low because of your credit card debt. Your credit score, which is really a creditor risk rating, is calculated using a number of factors. One of those factors is the percentage of balance amount you are carrying. But others include payment history, type of amount of credit you have, etc.

And here is a bigger concern I doubt you’ve even begun to consider; retirement. I would be surprised if you are even considering building your emergency savings account or maximizing your retirement savings at a time you can’t make ends meet. Yet those two issues are probably the most important to be focused on.

My experience tells me that your current financial stress is not caused by the already exploding student loan balances or the credit card debt. What you really need is a comprehensive evaluation by a financial professional to better understand how you got to today, where you are, where you need to go, and how to get there.

Don’t compound an already bad situation by leaping before you investigate all of this and come to an informed decision.

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