Get Out of Debt Guy

MBA With Student Loans And Debt Weighs Me Down

Posted May 23, 2013

WRAL Reader Question

Dear Get Out of Debt Guy,

-Finished MBA Program at Private Local College 1 year ago with 65k student loans

-Still a contractor with much lower pay than previous positions due to taking a new position at an RTP company as a contractor in hopes of getting a perm position

-Have private healthcare for myself and son (single parent) which is about 300/month and poor coverage-I end up with a large bill about 90% of the time after each doctor visit for small issues like colds, sinus infections, etc

Have less than 1k in retirement

36 years old single parent of one 9 year old

Own two townhomes-1 we live in and one I rent to tenants for a loss of around 400/month-cant sell due to the fact that it us underwater and i would need to bring about 13k to the closing at least to sell it

Owe about $3,200 on 2004 Honda

I am saddled with student loan debt (65k) and a townhome that i cannot sell due to it being underwater.

I am 36 years old with basically no retirement and no real healthcare benefits. I chose to go back to school 5 years ago before the job market tanked and take on the debt with the expectation that I could find a job that would allow me to easily or at least reasonably pay back the loans.

I recently consolidated the loans and the payment should be about 300/mo vs. the 700/mo that I would have paid otherwise. I wish to do the standard repayment plan but can't afford it so I am getting them put the loans into an IBR plan.

This will result in probably hundreds of thousands of interest dollars that I will pay. I have a second townhome that I rent out and cannot sell. I have tried to put it on the market for the past 5 years. Each time, I am told that it is underwater so I would have to pay the difference b/w what I owe (about 138k) and the most I could get at a sale (est. 125k). I will spare you the details on why it is underwater-besides the housing crisis. I would have this same issue if I try to refi it. The rate is currently 6.5%. The $400/mo loss that I take on each month is killing me on top of repairs, etc. I do use this to my advantage for tax purposes but the monthly drain is not worth it.

I apply for jobs daily-sometime 5 a day with thoughtful cover letters and customized resumes. I have my profiles updated on all of the career sites and I scour those as well as individual company sites like a mad woman.

I know I need more income but I just feel stuck. I even tried starting my own business with limited ability to fund start up costs.

I need to get some retirement going (a company match would help but I need a perm job first), I need company sponsered healthcare as I am getting older and I'm not so sure the new Obamacare will help more than hurt me because I make more income than would allow me any subsidy, and I need some way to pay this student loans off. (I borrowed 65k and 1 year after graduation, I now owe 73k, My 1st payment was just due in May)

Do I focus on those loans or retirement? I don't even know where to start.

I just need a better paying permanent job and that seems impossible to find.

So given the hand of cards I have been dealt, what should be priority?

I also would like to save some money toward my son's college which is impossible at this point. I dont know if I will even be able to retire myself.

Also, do you know of anyway to get rid of the baggage townhome without damaging my credit?

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Thank you so much for submitting your question. I can tell it took quite a bit of time to do that with the detail you gave me.

The obvious fact I think we everyone can agree on here is the debt of the past is forcing you into a corner.

It sure seems you are doing as much as you can to increase your income and the fact you put those loans into an IBR (Income Based Repayment) Program tells me they are subsidized loans.

Dealing with situations like this is not as clear cut as cut out cable or get a cheaper car. While saving some money each month is a good thing to do we have to focus on the bigger picture.

In your case you said your student loans are growing and they will exploded in interest on the IBR program. 

My opinion of the IBR approach has changed in the last year. While many look at the adjusted payment as a blessing in tough times, if it can be avoided, it should.

Here's why. As it stands right now if you make all the payments into the IBR program and at the end of 20 years the unpaid balance is forgiven and may be taxable at your then normal income tax rate. For people who are insolvent, they are only taxed for that amount they are solvent for. It gets a bit complicated so talk to a local tax adviser if you want details. Tell them to look at IRS Form 982.

Depending on how you do in the future, that could be a huge bill and the IBR program requires you to qualify based on your then current income so there might come a time you get a better job and kicked off the program. In that case your balance will be much higher than it is now.

The absolute best way to dispose of the student loans is going to be at the low regular interest rate on the regular ten year repayment plan. It will result in no future tax liability.

The next major issue is the lack of retirement. That is a huge problem. You can't turn back time so the longer we delay in getting you into a position to save, the less you will be able to save and magnify for retirement.

There is absolutely no dispute the longer assets are invested, the much better chance you have for a higher final balance.

Without being political, I think you need to forecast if you will be able to be dependent on Social Security alone for retirement or you want to supplement your retirement income. Will Social Security survive and be able to be your sole source of income?

Let's let the numbers speak for me.

If you could get in a position now to start with your $1,000 balance and save $250 a month until you retired at 75 and you invested in a stock index mutual fund that paid 10% you'd have about $1.5 million in retirement.

If you wait ten years to start you'll have about  half a million dollars. You will lose a million dollars just because you didn't start now. If you started in ten years and you wanted to reach the same $1.5 million you'd have to save $728 a month instead of $250.

And I would safely guess if you only have $1,000 in retirement, you have very little saved in an emergency fund to protect you and your precious 9 year old if you face an unexpected surprise.

Less than half of Americans say they can get their hands on $2,000 cash in 30 days in cash of an emergency. When you don't have cash saved, those unexpected life surprises wind up on credit which just sinks you further.

For me, I'm less worried about protecting your credit today than getting you pointed in the right direction for a safer financial future. Credit is actually fairly easy to rebuild if you know how. And I can show you how when that time comes. 

There are solutions for all sort of things here except for the one component of time. There is nothing we can do to stop time passing which will make it harder and harder to take action for a better financial future.

Just based on math and logic the clear path to a better financial future would be a financial reboot and legal second chance with a chapter 7 bankruptcy. In that case you could dispose of the homes, get a place to rent, get back on the regular student loan payment and start to save again, now.

With some effort to rebuild your credit you'd be back in shape in a year to buy a car and two to three years to buy a house. 

You can find a local bankruptcy attorney here. You should meet with them without the intention of filing bankruptcy, but to go and just learn what bankruptcy would mean for you. Don't make any decisions on the day of your appointment. Just listen and go home and let it all percolate.

Since you have an MBA, I'd like for you to ponder over what I've shared with you using your logical analytical skills you learned in school. And this article will help put things into context. You have to change your mindset. You have to think like a corporation and take the action that helps you and your child to be better prepared to face the future.

If you actually have extra money each month in your current situation and could start paying down your debt or saving, let me know. I just didn't read your situation like that. It reads more of a making it month-to-month scenario.

Please let me any everyone else here know what you decide to do by updating us in the comments. Everyone is here to help you.

Steve Rhode
WRAL Get Out of Debt Guy

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  • steverhode May 28, 2013

    If anyone is getting a big tax refund each year don't forget to adjust your withholdings so you get more in your check each payday and less in a big refund at the end of the year. keep your money in your pocket so you can use it each month when you need it most.

  • ljcs357 May 28, 2013

    Get a HARP Loan. Pay off that ridiculous car note (2004 Honda?..smh) with the savings or from your next income tax refund. Surely you had to make some connections while getting an MBA at Duke. Geez!

  • steverhode May 26, 2013

    @j46755 No sense wasting a perfectly good mistake, I always say. These "hitting the wall" episodes are often the teachable moment. The vast majority of people learn from the situation and less than 16% of people ever file bankruptcy again.

  • j46755 May 26, 2013

    I think the answer is clear: bankruptcy. Get Out of Debt Guy nailed it. I was more interested in the somewhat passive "victim" language, that this was "done unto" this person--an unavoidable circumstance. I do hope that this person's ordeal serves as a cautionary tale to those reading it.

  • steverhode May 25, 2013

    @j46755 Good advice. But what is your suggestion for what she should do now?

  • j46755 May 25, 2013

    I am sympathetic to the stress under which this person is under. However, "What do I do with the cards I've been dealt" seems erroneous. This person chose to take on a private-university, 65K MBA. I am a teacher, and I always advise my students to look at state universities first. That MBA could have cost a quarter or less of that amount. I earned my MA at a state university, paid out of pocket as I went, and was free and clear upon graduation. Debt is indentured servitude--no getting around it. Education is not a sure thing anymore.

  • steverhode May 24, 2013

    So what's your advice on what she should do now?

  • grimreaper May 24, 2013

    Sorry but your personal choice to take the loans...did you really need a 65k MBA?...sure does not sound like it got you anything...but debt...did you really think that you would magically become employed just because you had an MBA?...the same degree that thousands of others have...employed to where you could pay off 65k plus interest...really?...perhaps you did not think this through in your haste to take loans you "qualified" for...

About this Blog:

Steve Rhode has had careers in opthalmology, real estate and as the head of a nonprofit debt counseling firm. On his blog, he offers hard-won, free advice about getting out of debt, consolidation and making the right choices as you manage your money.