"Jumbo shrimp" sounds contradictory but can be quite enjoyable. "Jumbo debt"? Not so much, especially for students.
There's nothing inherently wrong with large student loans, and historically the default rate has been low on such loans. People who borrow large sums of money usually go for advanced degrees that translate into higher salaries. However, a February 2018 study by the Brookings Institution found that large-balance student loan borrowers have increased dramatically in recent years – and the typical profile for such borrowers has changed.
In 1992, only 2% of student loan borrowers owed over $50,000 upon leaving school. In 2014, that number rose to 17%. Just over half of total student loan debt is held by this small percentage of large-balance borrowers.
Default rates are low in this group (typically around 4%), but the consequences are large. Student loan borrowers with balances over $50,000 account for almost 30% of defaulted student loan dollars.
Large-balance borrowers aren't making much progress on repayment. The median borrower in this group from 2010 owes 5% more on their debt than they did after leaving school!
According to the Brookings study, the change in borrower demographics and the increase in deferments and forbearances are largely to blame. The share of large-balance borrowers attending for-profit schools – where the eventual salaries are less likely to cover borrowing costs – increased from 2% of borrowers entering repayment in 2000 to 15% in 2014.
If you are struggling to deal with a jumbo loan, these statistics don't surprise you. Your greater concern is how to get out of the mess you're in.
For borrowers with large balances and lower income levels – and no reasonable expectation of an income large enough to cover your debts – the options are limited. Deferment and forbearance may help in the short term, but they only delay the inevitable. Bankruptcy is not generally an option for student loans. A sound repayment strategy is the answer.
"If you're in a tough position income-wise, though, it can make sense to start by getting on income-based repayment if you qualify," said Miranda Marquit, a money expert with financial education website Student Loan Hero. "While it's not the best long-term strategy, it can at least help you get your feel under you and improve your cash flow while you work on your repayment strategy."
You'll need to reassess your budget, cutting spending to bare minimums and reducing other forms of debt. Create a monthly surplus and apply that to the student loan with the highest interest rate first. Make sure your student loan servicer is applying any extra payments per your wishes. If you want to reduce your interest payments and lower your debt, try the free Debt Optimizer by MoneyTips.
"You might actually have to call your servicer and specify that extra payments should go to principal," Marquit said. "Many servicers just apply to the next month's payment, including next month's interest. It's more effective if the entire amount of your extra payment is reducing your principal."
It's important to avoid credit card balances during the repayment period. You're going in the wrong direction if you're accumulating credit at 16% interest or higher to pay off a student loan with a single-digit rate.
If you have federal student loans, see if you qualify for income-based repayment plans or the Public Service Loan Forgiveness Program (PSLF). Both programs provide avenues for forgiveness of remaining debt after 25 years of payments – and in the case of PSLF, the forgiven amount isn't considered to be taxable income.
PSLF requires planning, since you must be working full-time for a qualified employer (government positions at any level along with certain non-profit jobs) and make ten years' worth of qualifying payments. If you find this path appealing, find a suitable job and apply now.
Refinancing may be an option, but only if you can secure a better rate – and if you are burdened with high student loan debts and are having trouble paying it off, the odds of qualifying for a lower rate than your student loan are grim.
"You need good credit and a solid income to qualify for many refinancing programs," Marquit said. "They can be a great tool, but you might not meet the criteria. Instead, it's important to carefully evaluate your education options before settling on school and then being aggressive in paying off debts when you finish."
Jumbo debt should only be incurred when you're likely to have a future jumbo income to pay it off. Make sure that you look at college as a value investment and not just a reason to avoid the real world for several years.