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What To Do If You Have Monster Debt

Unfortunately, this situation is not only NOT rare, but it is becoming increasingly common.

I know people who have nearly a million dollars in debt. I know people with $250,000 in student loan debt. There’s no doubt that people with monster debt are in some serious financial hot water. Consider these four factors:

  1. Huge debt
  2. Relatively high interest rate debt
  3. Low income
  4. Living in an area with a very high cost of living

Why is this so bad? The interest alone on $250,000 is about $16,250 a year. So it will cost them more than $1,354 in after-tax dollars a month just to stand still and cover the interest. That may be 25% of their after-tax monthly incomes!

The problem is that many people don’t realize that this is a problem. These people need to save; they need to develop a financial plan. Even if they’re having a little trouble prioritizing their savings, that’s a relatively minor issue. The major issue is the hundreds of thousands of dollars in debt.

Dealing with this bullshit requires a radical solution. It’s important to look at the income to debt ratio. If you make $100k as a nurse and have $250k in debt, this is a ratio of 1:2.5. This sucks but is doable. I hate to say that 1:4 (or even 1:3) probably isn’t. Those people are survival mode.

Here’s what you need to consider.

  1. Mindset Change It’s time to change your mindset. You’re not only broke, you’re far worse than broke. You’re over $250K away from broke. You’re in a worse financial position than 99.99% of other Americans. A homeless guy living under the bridge is in better financial shape than you are. You’re in no position to buy a house. You’re in no position to help anyone else financially. You’re in no position to live in a high cost of living area, no matter how many family members you have there. You’re in some deep shit. Your debt to income ratio is radical, and a radical solution is required.
  2. California Is Part of the Problem Here’s another consideration: living in California is probably a significant part of the problem. A person leaving California for a less balmy climate typically gets heavily rewarded for suffering through it. Lower state taxes, a lower cost of living, and probably even higher salaries. After-tax, it wouldn’t be unusual to make 50% more and spend half as much. That 2X ratio could easily be knocked down to 1.5X.
  3. Boosting Income Too many financial blogs focus on reusing paper towels to save money. That isn’t going to go very far against a debt that accumulates $1,354 in interest a month. People in the healthcare industry have a high ability to earn; it’s time to take advantage of that fact to improve your financial fortune. Extra shifts, a better paying job, a side gig, you name it. Plus, when you’re working you’re not spending. “Live like a student” can refer not only to your spending habits, but also your working habits.
  4.  Don’t Fear Refinancing Refinancing your student loans with a private lender does come at a price. Don’t be so worried about not being able to make the payments that you do nothing. Cutting that interest rate in half if possible would go a long way to paying these loans off quickly. If something terrible happens to your income and you can’t make the payments, the refinance company isn’t going to come over and repossess your brain. Remember what a student loan is- an unsecured debt. If you stop paying, all they can do is report you to a credit bureau and call you every now and then. All the Credit Bureau folks do is lower your credit score. Well, if your income has dropped so much you can’t make your student loan payments, you don’t need credit anyway. By the time you’re in a position to buy a house (hopefully the only thing you need credit for in the future), you’ll have fixed your credit. Paying an extra $15K a year in interest so you can go back to IBR payments “just in case” seems pretty foolish to me. IBR/PAYE/REPAYE forgiveness, which is taxable, isn’t an attractive option either. That means you’ll be dragging your debt out for 20-25 years. No, thank you.

    IBR: Income-Based Repayment Plan
    PAYE: Pay As You Earn Repayment Plan
    REPAYE: Revised Pay As You Earn Repayment Plan
  5. Get Intense! Even dragging loans out for 10 years would be depressing to me. I started my career in healthcare in 2010. I started as a Critical Care Respiratory Therapist and am now a Internal Medicine PA. Not only have my student loans from respiratory school been gone for years,I don’t have any student loans from both my undergraduate and graduate degrees.  

    My mortgage is nearly paid off, I started a college fund for my son years ago, and am well on my way saving for retirement. Correct me if I’m wrong, but isn’t THIS what you want BEFORE you retire? Or would you prefer to still be screwing around with student loan payments? Do yourself a favor and get rid of those loans in 5 years or less.

    Will it mean hard work? Absolutely.
    Will it require serious lifestyle sacrifice compared to your income and peers? For sure.
    Will it be worth it? Hell yes.

    Here’s what it looks like:
Income:$100K
Taxes: $25K
Debt repayment: $45K
Living expenses: $30K

$30K doesn’t go very far in California; it does outside of California though. Either way, you can make this work and probably even save a little for retirement out of that. But the key is figuring out a way to be throwing $45K a year at the loans. That means that you’re not making $1,354 a month payments. It means you’re making $3,750 a month payments. You can do it! Think of how nice it will be to have an extra $45K in income! That can be yours in just under 7 years, but you’ve got to choose now.

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