Talked to Financial Counselor. He told me to stop paying my loans. Wha??
August 2, 2016 12:13 PM   Subscribe

My debt situation is in the $117,000 range. I'm 25. I make $2,000 a month. I missed payments for the first time last month. Called a financial counselor for possible help. He told me to stop paying my student loan bills. Is that really a good idea? This sounds awful... Also - Any financial advice would be MEGA helpful.

Here's the sitch:

Student Loans: $99, 682
Car Loan: $8,080
Credit Card #1: $6,324 (maxed out)
Credit Card #2: $2,629 (maxed out)

And because I was dumb and forgot to return a stack of books:

Los Angeles Public Library: $168

I'm 25. I make $2,000 per month, after taxes. I don't (due in part to the grace of god and one EXTREMELY supportive S/O) pay rent or utilities.

I missed my credit card payments and one of my student loan bills for the first time ever last month.

That was enough of a "Wake up, Stupid!" moment to ya, know, wake Stupid up.

So, I tried calling a Financial Counselor. (He has an almost perfect score on yelp, going back to 2011.)

And he started telling me that I should stop paying my Student Loans and my credit card bill and only worry about my car payment because "that's the only thing they can take from you," and then he started talking about how, at most, the government can only take 15% of my paycheck if I go into wage garnishment on my Student Loan payments.

This seems like TERRIBLE advice.

Is this terrible advice?

My financial literacy is crap (obviously), and I've already started addressing some of the behavioral issues behind my spending habits.

So, I guess my question is...

Is this guy legit?

And if not, where do I start looking for this kind of help?? Everything I read seems fishy and I get worried that I'm going to take bad advice and ruin the situation even more.

(I do have the financial goal of being able to help pay rent and I am putting part of my paycheck into a 401K...)
posted by Deeleybopper to Work & Money (23 answers total) 5 users marked this as a favorite
"I am putting part of my paycheck into a 401K..."

If you weren't doing this, could you pay your bills?

Is that 2K you earn gross or net?

What are your total monthly expenses ($$ amount)?
posted by HuronBob at 12:17 PM on August 2, 2016 [1 favorite]

Just as a heads up, the LA library system sometimes has fine-forgiveness periods. The last one was in the first couple weeks of February this past year. I would keep a lookout for that happening again (some library systems do this annually, there's nothing stating that the library system in LA will be doing it with regularity). I would setup a google alert to check on some of they key terms around that.
posted by furnace.heart at 12:21 PM on August 2, 2016 [6 favorites]

You might want to consult with the personal finance subreddit, which is a pretty decent community oriented around issues like you're facing.

That said - what the financial counselor is recommending to you seems shady on the face of it, but you do appear to be pretty darn close to being forced to declare bankruptcy if you don't drastically increase your income. At that point, being able to hold on to your car (if if you're above water on it, selling it and getting a cheaper one) is probably in your best interest if you live in an area without great public transit.

>I am putting part of my paycheck into a 401K

Stop. Now. There's almost certainly no way any interest you're earning on the 401k outpaces the rate at which your credit card debt is growing due to interest on your balance, even with a generous employer match. You would likely be way better off stashing that cash in an 'emergency' fund that would let you avoid total financial ruin due to somewhat likely unexpected expenses, then applying any other funds towards paying down your debt.
posted by BrandonW at 12:21 PM on August 2, 2016 [25 favorites]

It's bad advice if he didn't first suss out with you your options for repayment plans. It's technically true the government can't come and sell your car and other personal property to repay the loan, but it's terrible advice because you don't want to be anywhere near wage garnishments or having debt collectors come and call you. You want to resolve and work out the payments before you get anywhere near collections.

Assuming these are all federal loans, your first step should be to review this page and figure out what plans you think you're eligible and would work for you in terms of your monthly payments (i.e. IBR, PAYE, REPAYE might all be good options to help make your payments more manageable).

At that point, you call your loan servicer to work through a change in repayment plan. In some circumstances, depending on how much you make monthly your payments could drop to $0. This is almost certainly better than simply stopping and paying your bills - you're getting permission to do so, which is an important difference.

That isn't to say you shouldn't try to make payments as your loan will still exist and interest will accrue, but it will give you some breathing room without having to worry about collections until you're able to make more money.
posted by Karaage at 12:23 PM on August 2, 2016 [4 favorites]

Student loans are usually not dischargable with bankruptcy, so even if you go that route you will still have that debt. Call your student loan company now and talk to a counselor about your options. You can sign up for an income-contingent plan or claim a financial hardship forebearance. DO NOT just stop paying them.
posted by jesourie at 12:25 PM on August 2, 2016 [3 favorites]

Response by poster: @HuronBob - 2K is my net, after taxes/401k/etc.

My total bill schedule comes to $1,500 per month, and then I have around $500 for gas/food/life.

I've been able to make it work thus far by magically avoiding major unplanned expenses, but my car needed a repair last month and that's what put me into "ohshitwait I screwed up" land.

I'm already on IBR payment plans with Navient, which is good because I'm not paying as much per month, but also fucking terrible because my interest is growing and I'm not doing anything about it.

I will check up on the reddit that was suggested.

Is seeking financial counseling from a professional even a good idea?
posted by Deeleybopper at 12:31 PM on August 2, 2016

This is somewhat tangential, but since you brought it up, your library debt is not something you should worry about. A lot of that is probably replacement cost of books, which, if you return them, will be wiped out. Before you return them, talk to a librarian. They're generally willing to waive the overdue fees as long as they can get the books back. So no overdue fees = $0 and replacement cost = $0, your library debt is $0. And if you don't still have the books, see if they'll let you replace them with equivalents. You can then buy copies from Amazon marketplace for like $0.50 each, much less than the replacement cost.
posted by kevinbelt at 12:43 PM on August 2, 2016 [11 favorites]

If the financial counselor is not a fiduciary, they have no legal obligation to actually look out for your best interests. Many of them are worse than useless.

"Just stop paying" is terrible advice because interest and penalties will mount and your credit rating will be ruined.

Start with picking up the book "How to get out of debt, stay out of debt and live prosperously." Consider going to Debtor's Anonymous. Also, put books like "The Tightwad Gazette" and "How to survive without a salary" on a gift wish list.

Your next step should be looking into either bankruptcy or some means to increase your income and reduce your costs. If you are effectively living on $500/month, even a few extra dollars a month will make a meaningful difference in your quality of life. Rewards programs, clipping coupons, recycling, and doing a bit of freelance work on the side to get even $20-$50/month more will be a step in the right direction.
posted by Michele in California at 12:43 PM on August 2, 2016 [3 favorites]

It would be helpful for folks here if you gave a clearer breakdown of:
- Monthly minimum payments on each of your debts.
- Monthly payments on each of your recurring bills (utilities, rent, etc)
- Spending estimates on food
- Spending estimates on "fun" and other non-essentials.
- How much you're putting into 401k.
- Whether you have any other liquid savings set aside.

At that point, with the assistance of things like Debt Snowball calculator folks can break down for you a budget and payment schedule that you can, if you're disciplined, try to stick to.
posted by Karaage at 12:50 PM on August 2, 2016 [2 favorites]

If you're in an income-driven repayment program for your student loans, at the end of your 20- or 25-year term, your outstanding balance will be forgiven. Now this may be a problem at that point because the forgiven loan may be treated as taxable income (though I suspect this will be changed by the time you get there), but it really is a problem for then, not for now, considering your other problems. Stopping paying them will wreck your credit, end up jacking up the debt with fees and penalties, and guarantee years of misery. Also note that, if you are in default, the federal government can and will intercept your federal tax refund as well as other cash payments that might flow through them. Stay away from this guy. He's a scammer who will pull you into a deep hole.

I'm sure the remaining $16K of debt feels like a huge burden given your salary, but it's not the end of the world. I agree with the people who say that at your salary, even earning a few extra bucks at the margin will help a lot, but, honestly, I think this is where you look for a crappy part-time job to make a dent in your debt, understanding that while it will be unpleasant to work it on top of your regular job, it doesn't have to be forever. I also agree with the people who say that, unfortunately, right now putting money into your 401(k) is causing you to go backwards, but I would suggest that rather than immediately switching it all to repayment, that you put the first few hundred into an online savings account. Right now, with two maxed-out cards, you have zero margin for error. You don't need an emergency that will cause you to open a new card (and possibly end up having to pay extra-high rates for cash advances). Building a small emergency fund will help you deal with issues like last month's without opening a new card, which you should under almost any circumstances not do. Once you've done that, redirect the 401(k) money to your cards.

Finally, I hope to God you are being immensely supportive to your SO. I mean, taking on the lion's share of cooking/cleaning/emotional support. Both as a matter of fairness and as a matter of being awfully dependent on the relationship continuing in order to keep going financially.
posted by praemunire at 12:57 PM on August 2, 2016 [7 favorites]

At 99,000 student loan debt, your monthly interest should accrue in the 5 to 600 range monthly (assuming you have PLUS loans), which if you don't pay rent/utilities, I would hope is doable -- agree with Karaage, can you break down your bills you're talking about? What other stuff is getting paid?

if it helps -- I have 97k in student loans, for reference, at 7.65% interest, and the same size credit card debt as you. My minimum payment on the credit card debt is about $300/month. My car payment now is $250/month.

Just to add one more voice to the choir, from somebody else with big loans -- that guy talking about the garnishing 15% of your wages, well, that will screw the shit out of you, and going into default on student loans causes big problems in life (example, I'm in healthcare, if you default on federal loans you can easily lose your license to practice, as an example) and looks pretty bad as far as credit scores, etc. Don't default on student loans.

Call your servicer - how long have you been on your current income based plan? Since there's more than one now, I switched from one income-based plan to another, and it cut my monthly payment from 1400 to 700. Call them today!

Anyway, this is what I do -- I don't contribute to the 401k (403b in my case) or my HSA (my employer deposits $50/month into that and I work on not getting sick). You don't pay rent or utilities, so I would focus on the credit card debt, since that spirals out of control really fast (and once you pay off card #2, you will feel much better, and it's probably the most manageable goal right now).

What are your withholdings on your W2? You might check to make sure that you're not getting too much taken out of your check month-to-month. It feels good to get a refund check every year, but I prefer having more money monthly and not getting much of a refund, that also has helped my budget.
posted by circle_b at 1:02 PM on August 2, 2016 [1 favorite]

Can you get a second job? I got out of a lot of debt by cutting back on almost everything and asking for extra hours at my job.

Nthing holding on the 401k for now. I would contact the student loan people and ask about deferment, income based repayment - I'd let them know you want to work with them.
posted by getawaysticks at 1:11 PM on August 2, 2016 [3 favorites]

No advice except congratulations on recognizing your situation. That is a hard and painful thing but necessary to building a better financial future. So good work and hang in there!
posted by Bella Donna at 1:29 PM on August 2, 2016 [4 favorites]

Is seeking financial counseling from a professional even a good idea? Yes.

But I'm not sure what you're asking here. Are you suggesting that your advisor is performing "unprofessionally" because some of the advice seems incomplete or wrong; or are you suggesting that your advisor is literally not a professional, that he's an unaccredited person or amateur -- like a help line or a blog or something?

You say you "called" him. That makes it sound like a really superficial relationship -- was it really just one phone call? Financial planning is really a longer process than that.

Good financial advice can take a huge load off your mind. You may have to wait until you can afford the fees an advisor will charge, but it's a move that may be helpful to you in the future.
posted by JimN2TAW at 1:51 PM on August 2, 2016

"Just stop paying" is legitimate, but not very good advice. The root of this advice is the theory that if you stop talking to and paying your creditors, they will become more motivated to accept a settlement offer at some point. This is not untrue, but it does involve completely trashing your credit and lighting lots of bridges on fire in the hopes of saving a few bucks. It's not generally wise, especially when you actually have the means to start attacking your debt.

More to the point, you do not need financial advice. You need a budget, and a plan to pay your debt. These things are completely within your grasp. It will be hard, but it's absolutely something you can do. Reddit's /r/personalfinance is full of resources to help you come up with the budget and plan that you need.
posted by so fucking future at 2:05 PM on August 2, 2016 [4 favorites]

if you stop talking to and paying your creditors, they will become more motivated to accept a settlement offer at some point. This is not untrue

It's untrue for federal student loans (the vast majority of OP's debts). They can wait forever. Even into retirement--they can garnish Social Security payments, which a private creditor can't do. Unlike private student loans, there is no statute of limitations for default on federal student loans. They could literally sue you fifty years after default if they wanted to. They usually don't, because they can already suck up every extra dime you have through administrative garnishment (that is, they don't even have to obtain a judgment in court, as a private lender would) and tax and other benefit intercepts. But they could. Given this and the existence of income-driven repayment plans, which are effectively themselves settlements, just income-contingent ones, and which require you not to be in default to enter, not paying your federal loans is one of the dumbest things you can do. About the only people I could recommend it to are people leaving the country forever and people who know they will be dead in six months.
posted by praemunire at 2:24 PM on August 2, 2016 [4 favorites]

Since your school loans will not be cleared by bankruptcy, you would be very foolish to declare over $16,000.

You need to immediately stop paying into your 401K and instead pay into an Emergency Fund. The EF is what shields you from unexpected costs like the car repairs.
posted by DarlingBri at 3:16 PM on August 2, 2016 [2 favorites]

Are you considering bankruptcy? If so, go find a bankruptcy lawyer and find out if the advice being given in this thread re: abandoning your 401k contributions is advisable or not in your state.
posted by slateyness at 3:38 PM on August 2, 2016 [1 favorite]

His thinking may be that creditors are more willing to deal with you when they are afraid they won't get your money. My student loan payments were more than I could afford, and I kept calling Sallie Mae about it, but when I was near-current all they did was tell me "We can't discuss a forbearance until you've brought your account up-to-day with a payment of $1200," or whatever. I said, "Well, I can't do that," and let it roll another 60 days or so.

Then I called them, and they were like, "OK, if you can pay us $50 per loan this coming month—so, $150—we can bring your loans current and we'll report it to the credit agencies that way. And then as of the first of next month, we can offer you this plan where we lower all your interest rates to 2% and then if you make three monthly payments of $168 each we can put you into this graduated-payment program..."

It just makes me wonder if that's what the advisor you spoke to had in mind.

I expect to be able to pay off my student loans fairly easily beginning in another couple of years, as my balance isn't actually all that high, so the reduction now isn't a death knell for ever being free of the debt. And hey, maybe student loan reform will happen in the meantime.

After a major financial catastrophe a number of years ago (and about 4 years after we should have), my partner and I entered into one of those debt-management programs where they negotiate with your creditors for lower interest (and, in some cases, lower payoff balances), and then you pay the program every paycheck and they pay the creditors. We're less than two years into the program, and it's been really great. The payments are still a heck of a chunk of our income, but they're less than they used to be and it's amazing how much we've paid down our debts. There are other programs out there, but our credit union recommended Greenpath and we've been very happy with it.
posted by not that girl at 3:48 PM on August 2, 2016 [1 favorite]

Then I called them, and they were like, "OK, if you can pay us $50 per loan this coming month—so, $150—we can bring your loans current and we'll report it to the credit agencies that way. And then as of the first of next month, we can offer you this plan where we lower all your interest rates to 2% and then if you make three monthly payments of $168 each we can put you into this graduated-payment program..."

It's a complicated set of programs, and the servicers are terrible at their practically-one-job of explaining a person's situation to them, so I'm not trying to disparage your understanding here, but what you describe can't have been primarily federal student loans, as opposed to private student loans. SLM/Navient doesn't have the discretion to lower interest rates on federal loans (and, if you weren't already in default, which requires nine months' non-payment, you wouldn't need to make those three payments to go into a graduated repayment option; if you were, you'd have had to go through some form of loan rehab, which takes nine months if you're not going into an IDR plan). I believe OP's loans are federal. It does get trickier when it comes to private loans, where there is, in theory, some room for negotiation.

(If I'm wrong and your loans are primarily federal, just FYI, I would look into switching to whatever IDR plan you're eligible for, if you're eligible for one. Graduated repayment just means you end up paying more interest over the course of the loans. IDR will ordinarily charge you less and forgive any remaining balance at the end of the term. If your income is low enough to qualify, you're most likely better off in IDR.)
posted by praemunire at 5:24 PM on August 2, 2016

It may be worth considering working in the public sector to get your loans forgiven with PSLF. But really if you're 25, get a second job.
posted by k8t at 8:41 PM on August 2, 2016 [1 favorite]

I'm a librarian, and I work in some of the poorest parts of my city, and I talk with a lot of people about billed items and large balances--let me just speak to the library part:

First, some good news. Most libraries do not report to credit bureaus, and most libraries will not send a bill this size to a collection agency.

Go to the library. If you still have the books, bring them. Ask to speak to the senior librarian (that appears to be how LAPL identifies their branch managers). Explain your situation, briefly, then tell them that you want to be able to use the library again, and ask an open-ended question like 'is there anything you can do to help?' Be contrite, be polite, emphasize you want to make this right (I didn't mean for that to rhyme).

They might waive some of the charges, or even all of the charges. They might offer some kind of payment plan or partial-payment arrangement. Worst-case scenario, they tell you there's nothing that they can do. If they say that, pay attention to how they say it. If it sounds like they're saying 'talk to my supervisor,' thank them for their time and ask for that person's contact information. If it sounds like they're saying 'it's not going to happen,' just thank them for their time.
posted by box at 6:00 AM on August 3, 2016 [2 favorites]

DO NOT stop paying your student loans. That's terrible, terrible advice.

Also, understand that after 20-25 years of payments, your remaining loan balance will be forgiven. You will have to pay income taxes on the forgiven amount when that happens, which could be substantial. To avoid, this, you can pay more than your IBR payment to just pay them off in 20-25 years (depending on the plan you're on) or just plan for the tax bubble, and save for it with the money you would otherwise be paying on your loans.

IBR is 15% of your income over the poverty line, so 15% wage garnishment will actually cost you more, you'll likely get interest and fees tacked on and there is no time limit or forgiveness. If you stop paying now, you could literally pay garnishment until you die.

Not sure about the financial advice piece, but two simple things:
1. Pay your student loans.
2. Stop spending money. If it's not for survival, don't buy it.
posted by cnc at 4:51 PM on August 3, 2016

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