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It's interesting that people have so much fear about their credit report. For example, if you file bankruptcy, you can get a new car loan in a year, you can buy a house in a couple of years, you can get a credit card the next day… If the number-one issue is to fix your credit, then what you should do is abandon all your other life priorities and make sure you make the minimum monthly payment on your student loans for the rest of your life.
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When you get in that situation, what I always say to people is write your 80-year-old self a letter now and let yourself know what kind of dog food you like to eat—because you're going to be broke.
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It depends on what kind of private student loans you have. There is so much misinformation out there about the dischargeability of private student loans and bankruptcy. Some of them are instantly dischargeable now, especially if you went to a trade school, a vocational school, or a school that was not titled or accredited. Those are not protected in bankruptcy. When you have a lot of student loans that were taken out where a percentage went to paying for things that were not qualified educational expenses—things that weren't tuition, or books, or school expenses—all of that debt is dischargeable on bankruptcy.The next strategy, if you can't afford anything—we're talking about private student loans—is to default. Defaulting certainly has some serious consequences—like it can show up on your credit report, you could be sued—but if you can't afford it, you can't afford it. I've had so many people who have wanted to kill themselves, leave the country, or become escorts to make their student loan payments. Defaulting is by far better than any of that stuff. If you default, which means you are 90 days or more delinquent on your debt, you will find that the student loan lenders will proactively offer you either settlements, or—oftentimes—more favorable payment terms.What I'm seeing now is Sallie Mae is offering people a 50 percent reduction on their student loan debt if they can afford to pay it in one to three payments after they default. Not everybody has access to those kinds of resources, but if you could repay $70,000 in student loans for $35,000, and not incur any more interest, it might be worth borrowing the money.
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Well, if you look at the compound interest on $70,000 in 20 years, versus a $35,000 loan that you pay over five years, the math just works out.What are your thoughts on deciding between paying your private student loans or saving for retirement if you can afford one but not both? Is it smarter to default and use that money to save for retirement, or smarter to just use that money to pay off the loan?
Money problems are really made of two components: math and emotion. The emotional component is it's smarter to continue to pay on the student loans and avoid collections and negative items on our credit report—and emotionally that immediately feels better.The other problem is that according to behavioral economics, people are more likely to put more weight on decisions that are right in front of them than in the future. The reality is, it's going to be better in the long run for yourself and society to be able to save money for retirement now so you won't have to rely on public benefits or retire broke in the future.Half of Americans over the age of 50 have no money saved for retirement. The argument that it is more moral, or better, for someone to repay their debt now than to think about the future is an interesting one, because if you don't think about the future now and you retire broke, who is going to pay to support you?Follow Allie Conti on Twitter.