It happens. Getting in over your head financially isn't that hard to do. Those credit cards and student loans have minimum payments due each month, on top of your mortgage or rent, your daily living expenses, and those unexpected needs that just keep coming out of nowhere.
Also known as debt settlement or debt relief, debt forgiveness programs are designed to help a consumer pay back their debt via monthly payments over a period of time, but at a lesser amount than the consumer incurred.
When pursuing a debt forgiveness option, you need to understand that your payback terms have been modified and you may be absolved of some of the debt that you had. In these situations, the settlement is reported to the credit bureaus with an indication that the account was either settled or settled in full for a lower balance. This sends a flag to the bureaus that you did not pay the agreed upon amount, and it will have a negative impact on your credit score, even if you made your payments on time.
This said, many people decide to go this route because they find it difficult to negotiate with credit card companies on their own.
Credit card debt forgiveness
One of the most common forms of debt included in a debt forgiveness settlement program comes from credit cards. Credit cards offer a unique kind of spending freedom that can be very addictive, and even small transactions can really add up over time, especially if you are making a lot of them. And there are several mistakes that credit card holders, especially first-time credit card holders make. A credit card is not free money; whatever you spend will need to be repaid, and if you are not paying the balance in full each month, you will also have to pay the applicable interest rate.
The best way to pay off your credit card debt is to pay more than your minimum monthly payment per month. While this applies to more than just credit cards, paying more than the monthly amount due each month will help you to pay off your debt faster and will help you to accrue less interest over time.
Also important is to ensure you never miss a credit card payment. With even one missed payment, or paying one day late, you will likely be subject to a late fee. These fees are often $15 or more depending on the late fee policy of your creditor. Additionally, you may be subject to higher interest rate going forward, and the late payment will likely be reported to the three credit bureaus, which will cause a negative hit to your credit rating.
So if you are in the situation that you can't make your minimum monthly payments, or worse, you can't make the payment at all, you may need to reach out to a debt consolidation or forgiveness counselor who will work with you on possible settlement programs.
Student loan debt forgiveness
Programs that work to forgive student loan debt have been around for quite some time. Often times, those who studied in the health care or education field can find job offers that include some sort of student loan repayment option as a form of compensation.
These offers often require you to move to a more remote setting where perhaps there is an underserved population in need of assistance. This can be a great way to grow your job experience and is often only required for a few years, allowing you to walk away with no student loan debt, or far less than what you had when you took the position. So, be sure to familiarize yourself with the Public Service Loan Forgiveness programs (PSLF) that can provide forgiveness to those who work in the public sector (government employees, missionary employees, school teachers and administrators, etc.)
But if the above is not an option for you and you are finding it difficult to pay your monthly student loan payment, then it might be time to look into a more formal student loan forgiveness program. This article from Student Loan Hero provides a plethora of options that you can explore if you have found yourself in this situation. And know that you are not alone. Many financial advisors would ascertain that student loan forgiveness is a good thing that should be explored further. This recent article from Yahoo! Finance shares the many benefits that graduates could experience if they received help with their student loan repayments. In general, the article indicates that graduates could realize the following:
- Reduction in overall indebtedness
- Increased mobility for job opportunities
- Increased consumption – meaning better ability to spend
- A decrease in likelihood to default on other credit or loan accounts
Make sure you understand the cons as well. This additional article from Student Loan Hero shares potential downsides to engaging in a formal debt forgiveness program.
Student debt forgiveness
If you are working in the public sector and the PSLF option is something you wish to explore further, you could find this a good use of your time. Just make sure you understand the requirements. According to Student Debt Relief, you need to make at least 120 payments to your loan while working in an eligible job before you can apply.
Teachers may also qualify for a student debt forgiveness program. Educators can receive a loan reduction of up to $17,500 which can make remaining loan debt much easier to pay off. And in some cases, this could actually pay off a loan balance altogether. There are other benefits too, so if you are a teacher who is still working to pay off your student loan, make sure you do your homework.
The truth is that student loans often keep recent graduates from being able to move on with their life for quite some time after graduation. Loan debts can get so heavy that many graduates end up moving back in with a family member for quite some time, often several years, after they are done with school. This article from CNBC shares that student loan debt is a key cause in the declines of home ownership over the last several years.
This article from The College Investor can be very useful for those considering their options, as it provides 80 unique options that graduates can pursue of they are exploring debt forgiveness.
As with any financial decision you make, it is important that you take the time to research your options, and to fully understand your living expenses and budget compared to your monthly income. If your debt to income ratio (the measurement of your monthly payments and expenses compared to your monthly income) is high, then it might be time to reach out for help. Generally, if your debt to income ratio is 35% - 40% or higher, you might be setting yourself up for financial hardship and you will find it more and more difficult to stay on top of your monthly payments and living expenses.
