10. Pay for College Without Going Broke

A college degree is quickly becoming what a high school diploma once was: the minimum requirement for a decent job and a reasonably prosperous economic future. Some kind of post-secondary education is all but essential these days if you want to even stay in the middle class.

But spiraling college costs and loose lending practices are burdening too many students with far more debt than they can comfortably repay. Students and their parents need to make sure they’re buying an education they can actually afford.

We owe $132,000 on our house and have no other debt. We pay off our one credit card in full monthly. He puts the maximum into his 401(k). We have two sons, ages 5 and 8.

Should we use the money to pay down our mortgage? I’m not interested in saving for college. We will be retiring about the time the kids are ready for college, and we plan to have them take out student loans.

A: If you can save for college, you probably should. Financial aid formulas expect that high-earning families like yours will have put away money for college, whether or not you actually have. Your children’s financial aid package largely will be determined by your income, so not saving could really penalize them.

Besides, college costs show few signs of moderating. Your older child might face a bill of $160,000 for an in-state public college or $300,000 or more for a private or selective public college. The cost for your younger child will be even higher. If they borrow the entire cost, they’re likely to remain financially disadvantaged for years. Students who overdose on loans often can’t save enough for retirement and delay starting families and buying homes because of their debt. Anything you save for them could reduce that terrible burden.

You also might want to rethink the idea of retiring when they start college. Even if your husband has been maxing out his retirement fund, it’s unlikely he’ll have saved enough by age 52 to last the rest of your lives, particularly if you have to start paying for health insurance on your own. (Medicare isn’t typically available until you’re 65.)

You didn’t mention savings. Most people should have an emergency fund equal to three months’ expenses, but families with just one earner typically should shoot for six or even nine months’ worth.

In any event, you almost certainly have better things to do with your money than pay down low-rate, potentially tax-deductible debt such as a mortgage.

A better approach might be to divide your inheritance into thirds, investing a third into an emergency fund, a third into your boys’ educations, and a third into retirement funds. A visit to a fee-only financial planner could help you sort through your options and clarify your goals.

A: You’re actually asking two questions. The first is what vehicle to use for college savings, and the second is how to get a decent return on your money.

Let’s take the latter question first. Bank savings accounts or certificates of deposit are fine if your kids are headed off to college in a year or two, but these low-risk investments won’t give you much growth on your money. In fact, you’ll almost certainly lose buying power over time when you consider inflation. If your money is in a taxable account, you’ll lose that much more.

Many parents opt to take more risk to accumulate more funds. If college is ten years or more in the future, investing at least some of the money in stocks or stock funds makes sense.

The vehicle you use is also important. If you expect to get financial aid, you’d be better off avoiding custodial accounts such as Uniform Transfers to Minors Act (UTMA) or Uniform Gift to Minors Act (UGMA) accounts. These were popular accounts years ago when tax rates were higher, but they count heavily against you in financial aid formulas.

Many families find 529 college savings plans to be the best choice. These state-run accounts allow your contributions to grow tax-free for college and are treated favorably in financial aid calculations. These plans typically offer a choice of investment options, including age-weighted funds that start out more heavily invested in stocks but that ratchet back exposure to risk as college draws closer.

These plans offer flexibility as well. If one child doesn’t go to college or doesn’t use all the money set aside for him, you can transfer the money in his account to his brother or other close relative (including you, the parents) for higher education expenses. You also can withdraw the money at any time, although you’ll pay income taxes plus a 10% federal penalty on any earnings.

For more information, visit SavingForCollege.com.

A: Withdrawals from a 529 plan are trickier than many people think. They’re tax-free only to the extent that you pay qualified higher education expenses in the same calendar year that you take the distribution—and that other tax breaks aren’t used.

Qualified expenses include tuition, fees, books, supplies, equipment, and additional expenses for “special needs” beneficiaries. Qualified expenses do not include insurance, sports or other activity fees, transportation costs, or the purchase of a computer, unless the school requires it.

If you pull out too much, you have to pay income tax and a 10% federal penalty on the earnings portion of the excess withdrawal. (For example, if your account totaled $10,000, and $6,000 was earnings while $4,000 represented your original contributions, you would pay the penalty on 60% of any excess withdrawals.)

You might get hit another way, too. If you were planning to use an education tax credit, such as the Hope or Lifetime Learning credit, you would have to deduct from your qualified expenses the amount used to generate the credit. Let’s say you used $5,000 in tuition expenses to generate a $1,000 Lifetime Learning credit. That $5,000 would have to be deducted from your qualified expenses total, which would further reduce the amount of your 529 withdrawal that’s tax-free. You wouldn’t have to pay the penalty on the excess withdrawal created by the tax credit adjustment, but you would have to pay income tax on any earnings.

Now the good news: You are allowed to prepay next year’s costs to help boost your qualified expenses total. If it’s been less than 60 days since the withdrawal, you also are allowed to roll the excess distribution over into a new 529 account.

Fortunately, you discovered the problem before the end of the year. If you’d learned about the problem only when you started preparing your tax return next spring, as many people do, it would be too late and you would be stuck with the extra tax and penalty.

A: You can, but why would you want to? The big benefit to a 529 plan is that your returns can grow tax-free. That’s a boon for parents in higher tax brackets contributing for young children, since their money has years to grow and they can put at least some of their cash into riskier assets, such as stocks.

If you need the money within two years, though, it should be in a cash account that won’t earn much. (The average money market fund pays less than .5% right now.) You wouldn’t be getting any real growth, so the tax benefit of a 529 plan is minuscule. What you would get are restrictions on how you use the money and possible complications for your tax returns. If you want to use education tax credits, for example, you won’t be able to apply those on expenses you’ve paid with a 529 withdrawal.

A simple FDIC-insured savings account—perhaps at an online bank that pays around 1%—is probably the better way to go.

Mom Stole College Fund. What to Do?

Q: What recourse would my 21-year-old nephew have if his mother embezzled his college fund? His parents set up the fund when he was a child.

A: If your nephew wants to try to sue his mother or file a criminal complaint against her, he should talk to an attorney about his options. Money that’s placed in a trust or custodial account for a child’s benefit is no longer the parent’s to take, although too many parents don’t understand this and grab at an easy source of funds when money gets tight.

In the more likely case that he doesn’t want to take formal action against his mother, he could simply ask her to return the money she took. His chances of success may not be great—people who steal from their kids may not be eager to make amends—but he likely stands no chance if he doesn’t ask.

Did Grandma Divert the College Fund?

Q: When my cousin and I were children more than 20 years ago, my grandparents opened a college savings account for each of us. I have no idea what kind of account this was or where it was located. My grandfather passed away a few years later. While I was in high school, my grandmother informed me that the investments had not done well and she was closing the accounts. I received a check for $500 at high school graduation that was supposed to be the balance of the account. I assumed my cousin had received the same until she recently posted on a social networking site that she was thankful her grandmother had started a college fund when she was young, since it covered the entire cost of her education. I am furious at my grandmother and now believe both accounts were cashed out and given to my cousin. Without knowing anything about the accounts, except that one was intended for me, is there anyway to find out what actually happened to the money? And would I have legal recourse to try to recoup the money, since my grandfather had intended it for me?

A: Your cousin has at least two grandmothers. Have you considered the possibility she wasn’t referring to the one you share? If your cousin left no doubt in her post, you still can’t do much. If your grandparents opened custodial accounts, such as Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) accounts, then legally the money was yours and shouldn’t have been transferred to your cousin, if that’s actually what happened. But your grandparents simply may have opened accounts in their own names that they informally earmarked for college educations. In that case, they could have done anything they wanted with the money.

Even if you had records proving that the money was yours and was wrongfully transferred, the idea of taking legal action against a family member should give you some pause. Since you have no such records, you’re pretty much at a dead end. You can ask your grandmother about this, or simply let the matter rest as one of the mysteries of family life and move on with your own.

Don’t Overdose on Debt for a Child’s Education

Q: I have an 18-year-old daughter who wants to attend a private, out-of-state school. I don’t have any money saved for her education and do not make enough to cover the cost of this college. What are my options? She’s an A student and is planning to go to medical school.

A: You need to have the conversation you probably should have initiated a few years ago, before she started the college application process. She must understand that what she wants and what you can afford to provide for her may be two very different things.

Start by applying for financial aid at the colleges that have accepted her (let’s hope she applied to more than one). The estimated family contribution calculator at FinAid.org and the net price calculators available on every college Web site can give you a rough idea of what you’ll be expected to pay, but the actual package you’re offered can vary somewhat, depending on how much the school wants your daughter to attend. You may want to invest in some books to help you understand the process, such as the Princeton Review’s Paying for College Without Going Broke, 2012 Edition and education expert Lynn O’Shaughnessy’s workbook Shrinking the Cost of College (FT Press, 2012), available at www.thecollegesolution.com.

When you have the financial aid offers, you can see which schools may be within your grasp and which are too expensive. Some schools encourage students and their parents to borrow heavily to attend, but that can lead to financial disaster—particularly since she has so many years of schooling ahead. Your daughter should try to limit her borrowing for her undergraduate education to what’s available through the federal student loan program (typically, $31,000 total) and avoid private student loans, which have fewer consumer protections.

As a parent, you can borrow through the federal PLUS program, but it’s easy to go overboard. The PLUS program will lend you up to the full cost of your daughter’s education, but the loan payments could be overwhelming and could prevent you from retiring. Student loan debt is almost impossible to discharge in bankruptcy, so be cautious about taking it on.

Your daughter should be able to cobble together an affordable education if she’s flexible about where she gets her undergraduate degree. Beyond that, she should know that the military and the National Health Service Corps pay for medical school in exchange for several years of service.

“Free Money” May Not Make School Affordable

Q: I have some important questions regarding my son, who is going to be attending a private university next year. He is going to be a student athlete (he golfs), which does not help very much financially. We’re shocked at the cost and do not have enough saved. We were counting on selling our home and downsizing to pay for his education, but we got caught up in the real estate downturn. We need some help and advice on how we can get access to the free money that I know is out there. We also have two other boys, 13 and 6. We will start immediately saving for their college.

A: The “free money” you know is out there may not be the answer to your problems. Yes, there are scholarships your boy might get to help pay for his education. But if he receives any financial aid from the university, those scholarships may reduce the amount he gets in grants, another form of financial aid that doesn’t have to be paid back. On the other hand, if he doesn’t get any grants, the scholarships could reduce the amount of loans he’d otherwise need to take out. He can start his search for scholarships at FastWeb.com.

You definitely should apply for financial aid from the university, if you haven’t already. Then take a hard look at what this education is going to cost you. You may not be able to afford it. If you would have to stint on your retirement or your son would have to borrow more than the federal student loan limits ($5,500 for his freshman year), you probably need to look for other alternatives.

One option is for your son to live at home and attend a two-year college to get some of his requirements out of the way. Another is an in-state school or one with a golf team that wants him badly enough to offer a better merit-based package of aid.

What you don’t want to do is bankrupt yourself or consign either yourself or your son to huge student loan debts. No education is worth a lifetime of debt, particularly when other options are available (and you have two other kids to educate).

It’s Too Late to Borrow for Child’s College Education

Q: I’m facing the end of child support and need to finance my son’s college education, plus I have some home maintenance costs looming. Should I get a home equity loan or line of credit (assuming I can qualify) to pay off these pressures, or should I raid my retirement fund? I am 60, make about $80,000 a year and have no debt besides the mortgage and a car loan, but I have only about $100,000 in retirement accounts. (I had to wipe out my savings once before in a two-year spell of unemployment.)

A: There’s no polite way to put this: You’re too old and too inadequately prepared for retirement to be paying for your child’s college education.

It isn’t a good idea to raid retirement funds prematurely, in any case, but certainly not when you have so little saved. Borrowing to pay for school would make sense only if you were adequately prepared for retirement and had plenty of time before then to pay off the loan.

Even if you plan to work into your 70s, life may interfere. More than 40% of retirees interviewed by the Employee Benefit Research Institute say they had to quit work before they wanted to, typically because of layoffs, poor health, or the need to take care of a family member.

You must focus on building up your retirement fund as much as possible while you still can. That means your child needs to figure out how to pay for college on his own. Many students save money by attending a community college for two years while living at home and then switch to a four-year public institution to finish their degrees. Your son may qualify for scholarships or grants; if not, federal student loans can help him pay the bills without sinking too far into debt.

You really shouldn’t be borrowing for home maintenance costs, either. Ideally, you would have set aside money from your current income for these costs. If the repairs are pressing, however, you can pay for them with a low-cost home equity line of credit and then repay the loan as quickly as possible.

Finding a Way to Pay for School

Q: What are some good possible resources for loans and other financing to pay for school? I am going back to school to try for my degree, and I am pretty strapped for cash, even though I work full time. Any suggestions would be appreciated.

A: Don’t go back to school to try for a degree. Go to get one. A college education is economically useless if you don’t get that sheepskin.

The financial aid education site FinAid.org is a great resource. You’ll find an estimated family contribution calculator that predicts how much you’ll be expected to pay for your education and how much financial aid you can expect. You also can learn about federal student loans, which are available to just about everyone and have reasonable, fixed rates and numerous consumer protections, including income-based repayment plans. Try to avoid private student loans, which have variable rates and few of those protections.

Is It Too Late to Go Back to School?

Q: I’m 64 and have a Master’s degree in education, but I can’t find a job. Is it too late to go back to school? I was thinking of majoring in occupational therapy.

A: It’s never too late to go back to school—but it is possible to spend too much doing so.

The good news is that occupational therapy is a fast-growing field with many job opportunities. The bad news is that you typically need a Master’s degree to be an occupational therapist, and Master’s programs (as you know) aren’t cheap.

Plus, your age is a factor to consider. Getting hired after 50 is tough, regardless of your field.

So instead of investing a ton of money in a master’s program—or, worse yet, borrowing to fund this education—consider becoming an occupational therapy assistant. This field is relatively high paying and usually requires an associate’s degree, which you can get at a low-cost community college.

Before you begin, though, research the job opportunities in your area to make sure demand is high enough that your age will be less of a factor.

“Dream School” Can Turn into a Nightmare

Q: I have been accepted to my dream school. However, the school isn’t giving me much aid. I am expected to pay $50,000 a year, or a total of $200,000, if I get through college in four years. Although that is a huge amount of debt to carry, I think a cosmopolitan city would provide useful networks for me as a business major. What is your opinion on this?

A: As a business major, you’ll be doing plenty of cost-benefit analyses. Do one now, before you chain yourself to a lifetime of debt.

The general rule of thumb is not to borrow more for an education than you expect to make your first year out of school. A basic business degree is highly unlikely to land you a $200,000-a-year job. What’s more likely is that you’ll need an MBA to vault into the high-paying leagues, a degree that will require further borrowing.

Understand that massive student-loan debt will have repercussions for the rest of your life. Since bankruptcy doesn’t erase this debt, you’ll be saddled with huge payments that could prevent you from buying a home and saving adequately for retirement.

What makes more sense is tweaking your dream a bit to get an education you can afford. And here’s the good news: Students accepted to elite schools tend to do well in life regardless of the institution they actually wind up attending, according to research by economists Alan Krueger of Princeton University and Stacy Dale of the Mellon Foundation.

So choosing a less expensive education doesn’t mean diminishing your prospects. Saying goodbye to your dream school will be sad, but far sadder is throwing away the rest of your financial life with too much debt.

Is a “Dream School” Worth Any Price?

Q: This is regarding your advice to the would-be business major who was accepted at her dream college but who wasn’t offered much financial aid. I was dismayed that you suggested trading down without even knowing which college accepted her. If she got into an Ivy League school, she would be crazy to give up the opportunity. If she is capable, she will be earning millions over a 40-year career. The $200,000 cost of her school would be a drop in the bucket compared with that. The top-tier schools provide more opportunities for both graduate school and career advancement. It’s all about option value, and these schools provide the greatest upside.

A: You may be overestimating the value of an Ivy League education. You’re certainly underestimating the risk of shouldering $200,000 in loans for an undergraduate degree.

If she stuck with her dream school, our student would quickly exhaust the low, fixed-rate federal student loans available to her. The maximum she could borrow under federal student loan programs would be $31,000. That means she would need to turn to private student loans, which tend to have variable rates that currently average around 12% and have no caps.

Using private student loans to finance an education is equivalent to using credit cards—except, unlike credit card debt, bankruptcy generally doesn’t erase student loan debt.

A wiser course for this business major might be to find a more affordable undergraduate education and then seek out a brand-name MBA program. The return on that investment probably would be high enough to justify the cost.

Ivy League Tuition Waiver Doesn’t Apply to Our “Dream School” Applicant

Q: You recently mentioned a study by Alan Krueger of Princeton University and Stacy Dale of the Mellon Foundation. You correctly state the main result of this study without reporting an important secondary finding that contradicts your advice. Yes, Krueger and Dale found that students who were accepted at a highly selective college but chose to go elsewhere did just as well in life as those who went to a highly selective college.

But they also reported an important exception: students from lower-income families whose earnings were substantially greater if they went to the highly selective college. Since students from lower-income families are precisely the students most likely to need loans to attend college, it follows that, for them, taking out loans to attend a highly selective college is a good investment.

Do you think Supreme Court Justices Clarence Thomas or Sonia Sotomayor would be where they are now if they hadn’t accepted the financial and academic challenge of attending highly selective colleges?

A: You make a good point about the study, but it doesn’t fit this particular case. The person who wrote asking for advice had been accepted to her “dream school” but faced the prospect of borrowing to pay for most of her school expenses. That indicates either that she was not from an economically disadvantaged background or that it wasn’t an Ivy League school that accepted her, or both.

Many Ivy League schools now waive tuition entirely for low-income students and provide substantial aid even for families in the upper middle class. Many provide enough in grants to minimize the need for loans, particularly the pricey private loans that she would have to tap once she exhausted low-rate federal loans.

So my advice remains the same. Instead of borrowing $200,000 to pay for an undergraduate business degree, with the likely prospect of borrowing more to get her MBA, she would be better off pursuing an affordable undergraduate education and then borrowing to attend a “dream” graduate school. Sacrificing to attend college is one thing. Lashing yourself to a lifetime of expensive debt is quite another.

Next, consider a perspective from a scholar who wished he hadn’t.

Tiny Salary, Big Debt

Q: I’m starting to think that I made a huge mistake when it came to my choice for an education, but I was accepted to my dream school and couldn’t pass up the opportunity to attend. As of now, I have a degree from a top-rated university, as well as a Master’s degree and about $115,000 of debt. I’m making only about $27,000 a year and must remain in my job for the next two years. I am paying more than one-third of my monthly income toward these loans and don’t know how I am going to survive with this amount of debt. I really hope I don’t come to regret my schooling decision and all the hard work I put into it. Right now, though, I have nothing to show for my effort other than a piece of paper. What’s your advice?

A: Unless your income will shoot dramatically higher in the next few years, the amount of debt you incurred was insane.

Generally, you shouldn’t borrow more for school than you expect to make in your first year out of college. The exceptions might be professions that pay little at first but quickly jump into the high six figures. For example, doctors in residency and lawyers working for a few years in the public defender’s office don’t make much, but once in private practice, they usually can command much bigger salaries. But the amount you borrow should still not exceed what you can realistically expect to earn. If you have to take on much more debt than that, then you really can’t afford the education you’re buying, “dream school” or not.

You’ve saddled yourself with debt that will inhibit or even prevent you from pursuing other important goals, like buying a house or saving for retirement. You’ve dramatically increased the chances that you’ll fall further into debt just trying to live day-to-day, since so much of your income is going toward these loans.

This is not a burden that you can escape, either. Lenders are allowed to pursue this debt virtually to the grave: The U.S. Supreme Court recently ruled that student lenders could garnish the disability check of a senior citizen for unpaid loans.

You might be able to put a small dent in the amount you owe with a loan forgiveness program, which typically pays part of your debt in exchange for activities like teaching in an inner-city school or enlisting in the armed forces. You can explore the details at a financial aid information site like FinAid.org.

But the real solution to your problem is pretty basic: You’re going to have to find a way to earn a lot more money. You didn’t explain why you have to keep your current job for two years, but if you really can’t move on, you should spend the time readying yourself for the highest-paid profession for which your degrees qualify you. This might not be your dream job, but it could save you from the nightmare of excessive debt.

Degree from For-Profit School Leads to Big Debt

Q: I’m going to owe nearly $40,000 in student loans when I graduate in the spring with an associate’s degree in political science, with paralegal studies as my major. I’m attending an online university. Is this debt worth it, and is the school I’m attending credible enough for employment? I’m very worried.

A: You should be. You’ve borrowed a small fortune to get a two-year degree that would have cost about $5,000 at your local community college. For-profit institutions, like the one you’ve chosen, are coming under increased criticism for using taxpayer-subsidized loan programs to boost their revenue while not always providing valuable or high-quality educations to their students.

The Government Accountability Office was concerned enough about reports of deception that it sent undercover investigators to 15 for-profit colleges and discovered that all 15 misled potential students about their programs’ cost, quality, and duration. Recruiters at four of the colleges encouraged the investigators to lie on their financial aid forms. (Most for-profits depend heavily on federal aid in the form of grants and low-interest student loans.)

The GAO study was followed by a report from the U.S. Department of Education, which found that nearly two-thirds of the students who borrowed to attend for-profit schools weren’t repaying their federal loans. By contrast, the repayment rate for private nonprofit schools’ borrowers was 56%, and 54% of those who borrowed to attend public schools were in repayment mode.

You might want to talk to your local junior college to see whether any of your credits will transfer and whether you might be able to finish up your education for less. If not, lean on your school’s placement office to help you find a job. You’re graduating into a tough economy with an overpriced degree of unproven value, so you’re going to need all the help you can get.

How to Make Headway on Student Loans

Q: I owe $75,000 in student loans. It took me seven years to graduate from college due to a car accident during my second year. I am now 30 and doing all I can, working 12 to 14 hours a day, but I’m not making any headway. Most, if not all, of my loans have gone to collections. I get the phone calls, sometimes up to 30 a day. I need some advice on how to handle all of this. It is so overwhelming. Is it possible to consolidate all of this? Make one monthly payment to one entity?

A: You can consolidate your federal student debt into one loan and stretch out the repayment term, which could make the debt easier to pay. You may also qualify for the income-based repayment option. Most borrowers in the income-based plan have payments that are less than 10% of their gross incomes, says Mark Kantrowitz, editor of FinAid.org and author of Secrets to Winning a Scholarship (CreateSpace, 2011). After 25 years of payments, you would qualify for forgiveness of any remaining balance. The payment period is shortened to ten years if you’re in a public service job.

Private student debt isn’t nearly as flexible. You typically can’t consolidate private student loans, and lenders offer fewer repayment options—and no forgiveness.

If you have both types of debt, you may be able to make some progress on repayment by consolidating your federal loans and paying the minimum possible on those so that you can throw every available dollar at your private loans.

If you have only private debt, you need to negotiate directly with your lenders to see what options are available for more affordable repayment plans. It’s important to do this as soon as possible, since if your delinquency drags on for nine months, your loans will be considered in default. That can have serious consequences for your credit history and your finances.

The National Consumer Law Center’s Student Loan Borrower Assistance Project has a lot of information and resources for student borrowers, including information about loan rehabilitation and negotiations with lenders. You can also talk to the Default Resolution Group at the U.S. Department of Education by calling (800) 621-3115.

Is Graduate School Worth Borrowing For?

Q: As a student, I was not aware of finances as much as I should have been and borrowed too much. I have about $60,000 in student loan debt plus an $11,000 car loan. I am contemplating going back to school because the job I really want, as a counselor, requires that I have a Master’s degree. My friends say I’d be crazy to go into that field because the pay isn’t that high and I would most likely incur more debt. I am hoping to get scholarships and grants or pay out of pocket as I go. I currently pay all my bills and am really tight with spending. I want to take this leap without destroying my financial future. Any advice?

A: If you check the U.S. Department of Labor Statistics, which tracks pay for various occupations, you’ll see that the median wage for counselors depends on their specialty (vocational counselors get paid more than rehab counselors, for example), but the median wage tends to be in the range of $30,000 to $50,000. Expect your starting salary to be somewhat lower.

You didn’t say how much you earn now, but it’s unlikely this new field would give you enough of a pay bump to justify taking on more debt. That doesn’t mean you can’t go back to school, but you’ll need to do so without loans. You can apply for financial aid, but expect stiff competition for grants and scholarships—most aid comes in the form of loans. Your best bet may be to attend a public college, perhaps at night so you can keep your day job. For more on attending college without loans, read Zac Bissonnette’s Debt-Free U: How I Paid for an Outstanding College Education Without Loans, Scholarships or Mooching Off My Parents (Portfolio Trade, 2010).

Wrestling with Student Loan Debt? Know Your Forgiveness Options

Q: I went to a very expensive art school at 17, and I totally funded my education with loans. I take full responsibility for what I owe, but because I had to defer payments a number of times throughout the years, I now owe about $73,000. I don’t know how I will ever get out from under this debt.

I am a 38-year-old mom at this point with two small kids, and I am saving for their education. Programs exist to help young, single people, but there is nothing for people like me, and it is frustrating. Why aren’t there any services to help older people who want to pay but need help because we have other financial responsibilities at this point?

A: By “programs to help young, single people,” you’re probably referring to the various forgiveness programs that reduce or erase federal student loan debt when the borrower teaches in inner-city schools, serves in the military, or volunteers for the Peace Corps, among other options.

But Congress recently created new possibilities for federal student loan forgiveness. People in public service jobs—teachers, police officers, fire-fighters, social workers, and others—can have their remaining debt erased after ten years of on-time payments. Even people who don’t work in public service can get forgiveness after 25 years. The people most likely to benefit from these programs are those with low incomes and high debt who opt for income-based repayment plans.

If you have private rather than federal student loans, forgiveness is not an option and your choices for affordable loan plans are fewer.

Either way, you can’t afford to continue ignoring this debt. Student lenders have strong powers to collect. They can attach your wages, seize your tax refunds, and even go after future Social Security payments.

You must figure out a way to deal with this debt, even if it means saving less or not saving at all for your children’s educations.

Student Loans in Collections? Here’s Where to Find Help

Q: I’m in default on my student loans. I don’t know how many there are, I don’t know who owns them, and I don’t know how to start paying them off. I’ve had a debt-collection agency threaten to cut my throat and to hurt me in other physical ways if I didn’t pay.

I’ve talked to the Department of Education, which doesn’t seem to know who owns the loans because the secondary lenders have since turned over all the debt to collection agencies.

I’d like to begin repaying my loans, but I have no idea who to pay and I certainly don’t want to pay the company that threatened me with violence.

This is killing my credit. What to do?

A: At the very least, you should complain to the Federal Trade Commission about this rogue collector. The Fair Debt Collection Practices Act forbids any kind of harassment, including physical threats.

You can use the resources at FinAid.org’s Lost Lender to try to track down your lenders. The FinAid Web site recommends two services to find loans, both based on the National Student Loan Data System, says Mark Kantrowitz, the site’s founder. Another possible source of help, Kantrowitz says, is the financial aid office at your college.

If you have any federal loans, you can dig them out of default by making nine out of ten consecutive on-time voluntary payments, Kantrowitz says. Then you’ll be able to consolidate them into the Direct Loan program. This will also remove the default from your credit history. After you consolidate those loans, Kantrowitz suggests switching them to an income-based repayment if you can’t afford to pay the full amount due under standard repayment.

If you run into a wall, in either finding your loans or working out repayment, contact the Federal Student Aid Ombudsman or call (877) 557-2575.

If you have any private student loans, contact the lenders directly about working out a repayment plan, Kantrowitz says. Repayment options for private loans are more limited than those for federal loans.

Settling Student Loan Debt: Tough but Possible

Q: I currently have a consolidated student loan with the federal Direct Loan program at an 8.25% fixed rate. I initially borrowed $50,000 18 years ago, but the balance due has ballooned to almost $155,000 over the years.

I have annually applied for and been granted a forbearance from Direct Loans, so my account is currently in good standing. I’ve recently had some good fortune and will be coming into a substantial amount of money that would allow me to pay off the entire balance due in one payment.

Given the circumstances, is it possible for me to approach Direct Loans with the possibility of paying off the entire balance due at a reduced rate since I’m willing to pay it all up front? For instance, I could offer them $100,000 if they’ll forgive the remaining balance of $55,000.

A: In most cases, the U.S. Department of Education won’t negotiate with borrowers over the amount they owe on federal student loans, says student loan expert Mark Kantrowitz, founder of FinAid.org.

That’s because the department has extraordinary powers to force you to pay. The debt can’t be discharged in bankruptcy, and the department can intercept tax refunds, garnish your wages, and take a portion of many government benefits, including Social Security checks, if you default.

There also is no statute of limitations on student loan debt, which means there’s no time limit on how long the government can take to sue borrowers who default. The feds can wait for years until borrowers’ circumstances improve and then go after them.

Given its arsenal, the government can take a tough stance, Kantrowitz says. But he has heard that the department sometimes will agree to forgive a portion of accrued interest and fees if the remaining balance will be paid off in full.

What you need to find out is how much the Direct Loan program paid for your loan, Kantrowitz says, since the government will never accept less than what it cost to acquire a loan.

You’ll need to use the National Student Loan Data system or your own records to determine what your balance was when you consolidated your loans into the Direct Loan program. That is the amount the department paid to acquire the loans from your original lender.

Kantrowitz recommends offering to split the difference between that figure and your current balance. Whatever the department counteroffers, accept it. “That’s a reasonable approach that is fair to both the borrower and the taxpayers,” Kantrowitz says, “providing the taxpayers with some compensation for the cost of the funds over the years.”

Don’t spend the rest of your windfall, however. If the government does forgive a portion of the debt, the amount forgiven is considered taxable income to you.

Student Loan Settlement Won’t Be Cheap

Q: I was disappointed with your answer to the person who wanted to settle student loan debt for less than what he owed, even though he had a windfall that would allow him to pay the balance in full. This person presumably benefited from the education that these loans provided and now could afford to pay them back. Why did you offer advice that would allow him to avoid that responsibility?

A: As you’ll recall, the writer originally borrowed $50,000 in federal student loans almost two decades previously but had received an annual forbearance ever since. Forbearance indicates the writer suffers some kind of ongoing, demonstrable hardship such as poor health, partial disability, or inadequate income.

The unpaid balance had swelled to $155,000 because of interest and fees. Although the windfall would allow him to pay the debt in full, it wasn’t clear whether the problem that caused the need for the forbearance had disappeared. If not, then conserving some of the windfall might be a prudent option.

Some people believe that paying the full balance of any debt is a sacred obligation, no matter how much damage such an action may do to a person’s financial future. Others think that past and future obligations must be weighed against each other.

In any case, the writer isn’t going to be able to settle the debt for pennies on the dollar, as he might be able to do with other bills, such as credit card debt. Settling student loan debt is tough because the Department of Education has many tools to force borrowers to pay. At best, the department might be willing to forgive some of the accumulated interest and fees.