Can it be irresponsible to repay a student loan?

Question

In a previous question, I asked if I was responsible for my wife's student loan.

The conclusion after reading the answer and checking with other sources is that I am not, in fact, responsible. However, my wife is, and because we file our taxes as "Married Filing Jointly" (there are a lot of weird discriminating things in the tax code that seem to penalize MFS and we can barely afford to file jointly much less MFS!) the IRS could withold our tax refund and apply it to the student loan. However, my witholdings are currently set up so that I will have no refund or perhaps owe a slight amount at the end of the year.

After several years of being in deferral it is no longer possible to continue deferring the loan, and payments are being required, the first one starting at the end of this month. Because we file jointly my income is also being considered with regards to how much she is being required to pay, and because of this she is not getting any break on the amount required.

We already have a budget set up which is intended to help pay down our existing debts (credit cards are maxed), and this has severely impacted things as we basically had to cut out about 25% of our spending. We are using two checking accounts, one for payments which are automatic and have to be paid, such as mortgage, insurance, car payments, utilities, etc. which I am responsible for and the remainder goes to my wife's account to pay for everything else which includes food, medical (co-pays, etc.), car and home maintenance and repairs, kid's expenses, etc.

However, my wife has decided that she is not willing to default on her student loan, which is nice, but... the only way she can make the payment (and this is with the graduated payment that starts out low now and more than doubles by the end of the 30 year term) is by spending 25% of her entire, already stretched budget for the month making this payment.

Is this responsible, or are there any arguments I can make that she should not do this? We have no emergency fund or savings, our credit card is maxed, and we are already having to defer maintenance items on our house. We are having looking at other options and trying to bring more income online such as part time / second jobs / getting her deadbeat ex to start paying support again (which wouldn't cover it but would help a little), but her options are reduced due to basically working full time at home (kids, homemaking etc.) and mine are limited by the fact that I'm basically already working full-time at a mentally demanding high paying job.

EDIT for specific numbers: Using round numbers. Student loan: $135,000, Household income=my income=$80,000/yr, Total Household debt (excluding student loan)=$210,000, 2 kids.

Answer 1

This isn't going to be a popular answer, but I want to walk you through the numbers of your situation because I don't see any easy choices, though it's important to see why to know what can be done.

Based on your answer, you have a total of $345,000 of debt. At just 4.5% APR, that's approximately $15,525 of interest a year, or $1,293.75 of interest a month. That's assuming a fairly low interest rate, though in your situation you may be on the lower (or higher end). In addition, I am going to assume that you receive all of your income back and pay no taxes because with all the liabilities, being the sole breadwinner, and having two kids, I'm not sure how much of your money is gone to the US. So that's $6666.67 a month, after the 4.5% interest APR of debts are paid monthly, $5372.92 remaining. More than likely the debt payments are higher because some is going to principal. Also, if I'm reading all this right, your debt-to-income ratio is 4.31.

From all of this, you have a couple of difficult choices - and I am going to leave out divorce/legal options here and stick with basic financial options:

1. Increase your income by taking another job, or your spouse working. As you mentioned, at least a third of this debt is hers (student loan) and maybe more. Her not working is hurting both of you financially. If you can, work another job. All extra income goes to the highest interest debt first and you should start here because you don't have the room to do the "emotionally-tough" interest first that some advocate - you need all the extra cash you can get. This is to increase cashflow from freeing up income that's being used to service debt.

2. A sometimes-debatable choice on these forums, but it needs to be said - this debt is shrinking your cashflow and if any of it is high interest debt (over 20%), then you need to put all extra resources to get that eliminated as quickly as possible. In this case, if you normally put away 15% to a 401k and you get a 4% match, you should put 11% of that to the high interest debt, and only do the 4%. I realize that retirement is needed, but high interest debt is exactly that - it's draining your cashflow and limiting your options. I list this as a second option to one because increasing income is the first priority.

3. Get rid of the credit cards as far as usage is concerned. Pay them off and end them for good. You don't want the temptation of using them again or falling back on them in an emergency. You know what I do when I get into an emergency? I work an extra job, and every minute of it sucks, but it beats paying the bank interest.

4. This is not legal/divorce advice but you and your partner need to get on the same page. The reason I asked the other questions I did in the other questions is that I sense (intuition) that you and her aren't on the same page. You almost seemed surprised at her debt and those are discussions people should have before they marry (sadly, most don't). Why should you make all the difficult sacrifices and she not make any? That isn't fair to you - you're a person too and relationships are give and take for both. You two are a team and that's important.

5. As for not paying off the debt now, student loans add back interest you don't pay to the principal. That means that over time, you end up paying more. If this doesn't sound bad, then go for it. If this sounds bad, don't do it. So this answers your question as it relates to student loans; as for other debt, bankruptcy is a possibility, but falls into the legal realm.

Answer 2

It can be irresponsible to pay off your debts now, you should always pay them off eventually though. You should set a very high bar, however, in determining that. You must take care of your families needs (food, shelter, transportation, clothing, utilities). Now comes the high bar, you shouldn't see the inside of a restaurant until these debts are paid off unless you are bussing tables. You should not be driving a BMW or other fancy car. In fact, if you have a car payment, and can cancel it by selling the car, you should do that. Then use the profits to pay cash for something. If you can get by on a bike, sell one of the cars and use the bike. That is what I mean by a high bar. Cancel the cable/satellite, internet, piano lessons, etc.

I'd recommend Dave Ramsey's Baby Steps. You can get his Total Money Makeover book for very cheap used (try thrift stores too). Also, find out who plays his radio show in your area and listen to it.

Only after you have decreased the lifestyle so much that it really cannot be decreased any more, picked up an extra job delivering pizza or bussing tables, sold every nonessential item in the house (TV, cat, dog, etc), can you really determine if paying off the student loans now is irresponsible. And it would only be irresponsible if you cannot take care of your families needs after doing all that.

Finally, there is some very disconcerting behavior (beyond the debt) going on here. You and your wife are a team. This is not "my wife's debt" this is "our debt". It is not "my income", it is "our income". Unless you two tackle this as a team, you will never make progress. The two of you should be sitting down at least once a week, documenting exactly what you are spending you money on, looking for ways to cut in order to pay the debts down faster.

Answer 3

It seems like the two statements "I have a high paying job" and "we are drowning in debt" are in conflict with each other. You may want to see a debt councilor that can help you organize your budget, develop a pay back strategy, and potentially consolidate your loan into a single lower interest loan. Caution though: there are some pretty shady people out there so you want to make sure you got a reputable one with good credentials. See the article Choosing a Credit Counselor

To answer the direct question: it is always responsible to pay back your loans. You took other people's money with the promise to pay it back and you should keep this promise within the terms of the originating agreement. You can and should certainly try to optimize the payback within these terms though. That's were an expert can help. You want to pay off high interest debts first and work your way down. Perhaps you an take out a second mortgage on the house use the money to pay off the student loans and credit cards and then pay off the mortgage at a much lower interest rate.

Answer 4

I think in every state or almost every state in the U.S., a husband and wife are considered a single economic unit. There is not "her debt" and "my debt", just "our debt".

In any case, suppose that there was some legal principle by which you could say it is not your debt. What then? Unless you intend to divorce her and let her hang out to dry, how would this fact help you? As a family, you still have to deal with the debt. So let's just forget the "not my debt" thinking.

Student loans generally cannot be discharged even by bankruptcy. (If they could, most students have little income and few assets the day they graduate, and so they could just declare bankruptcy immediately and few student loans would ever be repaid.) In any case, you have a moral obligation to repay your debts, even if there might be some way to beat the system. Surely in the end, your character is worth more than your money.

You have a lot of debt, but it doesn't sound impossible to repay at this point. Hard, but a long way from impossible. My income is a little more than yours, not all that much more, and I'm paying $1400 per month toward my kids' college tuition. Is it a struggle? Yes. Is it impossible? Certainly not.

What are your total debt payments? What are your other expenses? Add them up and see where your money is going. As mikeazo says, cut out all non-essentials. When you are deeply in debt, you do NOT need to eat out. You do not need a fancy car. You do not need a new big-screen TV. You do not need the latest designer clothes. Etc.

Look at your recurring expenses. How much are you paying on rent or mortgage? Consider moving to someplace cheaper. (I don't know where you live so I can't say what a reasonable minimum is.) How much are you paying on heating and air conditioning? Maybe you could learn to wear sweaters and turn the thermostat down a few degrees. Etc.

I understand that the average American family makes about $50,000 per year. If you could cut your expenses to just what the average family spends, that would leave you $30,000 per year to pay off debts. (Minus taxes, but than the $50k family pays taxes too.)

Yes, it will seem tough. But if you're an American, odds are that you are living better than about 90% of the people in the world, even if you cut back to what you consider the absolute minimum. I had a period in my life when I had some debts and extraordinary expenses and I was feeling really broke and sorry for myself. And when I got through it and looked back, I realized that through it all, I always had a roof over my head, I had plenty to eat, I had air conditioning and cable TV and Internet access and a car that ran. I had more luxuries than most people in the world dream of. My problem was really that I couldn't afford to buy new toys, but had to be content with the toys I already had. My point being: Just knuckle down, cut expenses, and you can make it. It will seem hard, but if you're making $80k per year, you can do it. There are plenty of people here in America who would gladly take your debt payments if they could also take your income.