Student Loan Series: Part 3

Photo by Jon Elswick—AP via TIME Magazine

At the rate she is going, Taylor Bauer thought she would literally never pay off her student loans. A former teacher in the Berkeley County School District who is now teaching in Mexico City, Bauer has been making income-based payments for five years. The federal student loan program offers an array of payment plans, including this one pegged to a borrower’s discretionary income.

The payments on these loans increase as income rises, but in the meantime, Bauer is $40,000 in debt at age 33 and still unable to pay more than the interest on the loans. Unless her income rises dramatically, she thought, she would never make headway on the principal.

“This has prevented me from buying a house, saving substantial amounts or even being able to afford an apartment by myself,” she says.

An Oft-told Story
Taylor Bauer is like many students entering college, and then graduate school, who borrow for school and give little heed to future debt. She worked multiple jobs through both undergrad and grad school, but received little guidance from the schools on how all that debt would affect her life. She remembers having to read something online when she applied, but couldn’t say what.

Plus, she says, she needed money for her education, “so I am pretty sure it could have said you will have to give us your first born and I still would have said okay.”

There is good news for people in this position: the balance is forgiven after 20 years, irrespective of how much is paid. So Taylor Bauer could be free from student loan debt in just 15 years. She just didn’t know it.

Paul Paz y Mino would have loved that. A 49-year-old father of two who has always worked for non-profits, he first began paying off his loans upon graduation with his master’s degree in 1994. “I’ve still got a few grand left,” he laughs. “Silly do-gooder!”

Borrowing Advice From Experts
Financial advisors warn their clients against borrowing more for school than they expect to earn in their first year of work. Debt-income ratios above one-to-one cause financial hardship, they say.

They recommend instead finding less expensive schools, buying used textbooks, working while in school to offset costs, finding low-cost housing while in school and making the scholarship application process a full-time job prior to matriculating.

Doing It Right
Jason and Lindsay Sakran did everything right when racking up $170,000 in student loans. Jason earned his masters at College of Charleston and Lindsay at American University in Washington, D.C. He says the extra schooling helped boost their income by paving the way to good-paying jobs at the Charleston County School District and SPAWAR respectively.

The Sakrans borrowed less than they earn in a year and have consolidated their debt into a single low-interest loan. They worked all during school and even got a little help from parents. When it came to repayment time, they considered all the alternatives.

But there is a complication: Jason is co-owner of Bon Banh Mi Southeast Asian kitchen downtown and in Mt. Pleasant. Starting that business added substantially to the debt burden.

“It causes extreme psychic pain in terms of disposable income and saving for kids’ college,” he said. But he considers his family fortunate because they have the ability to pay off the student loans responsibly while the business turns a profit.

The Sakrans are proof that large loans are not necessarily paralyzing financially. But you have to do your homework and understand what paying the loans will mean.