Ask The Money Coach

Posts Tagged ‘college debt’

What debt collectors can and can’t do sometimes depends on the laws of your own state, as well as the types of debts in question. For example, debt collectors can’t legally do anything to you (such as sue you in court or get a judgment against you) once the statute of limitations has expired on a credit card debt. But with student loans, there is no statue of limitations, so bill collectors can pursue you forever over those debts. I assume your debt fits into the latter category, since you said your $750 bill was with a college.

Federal law prohibits debt collectors from charging you any thing above the amount you actually owe, unless that’s permitted by the laws of your own state or the terms of your original agreement with your creditor. You said you signed no such contract with your creditor. Double-check the fine print of any agreement or paperwork you have. There are often clauses that give creditors or bill collectors the right to impose additional “collection” costs on borrowers. The federal Fair Debt Collection Practices Act is the national law that governs bill collectors. This law is enforced by the Federal Trade Commission, so if you have any complaints about a debt collector, reach out to the FTC (www.ftc.gov).

Also, although there is no federal requirement that collection agents be licensed or registered, many states to require this. Check the laws in your state and see if they require debt collection agencies to be licensed or bonded. A good place to start is this document from the PrivacyRights.org. If your state isn’t on the list, contact your state Attorney General via the National Association of Attorneys General (www.naag.org). Ask for the collection agency to show you in writing that it’s licensed and put everything else in writing too, as opposed to just calling you on the phone and demanding payment.

Since you are now working as a police officer, your best option may be to investigate whether you will qualify for student loan forgiveness. This is granted to certain individuals who work in public service fields. To be specific, look into the debt-forgiveness provisions of the College Cost Reduction and Access Act, which became effective July 1, 2008. Its purpose is to help eliminate the student loan burden of public services employees, ranging from school teachers and social workers to fire fighters and police officers like yourself.

I don’t know many key facts about your situation, like whether or not you had federal loans or private loans, the exact total of all your college loans, and how long you may have been paying on them in the past. Nor do I have any idea about your income and expenses, or how long ago it was that you filed for bankruptcy protection. So it’s hard for me to give you more individualized guidance. In any event, you can get additional information and advice about your
loans online from the federal government at: www.studentaid.ed.gov. Also, even though Sallie Mae appears to have told you that you can’t consolidate, I wouldn’t rely solely on their word. To find out if you are eligible for a federal direct consolidation loan (which would also help you qualify for loan forgiveness) call the Department of Education at 800-557-7392 or visit their loan consolidation page at: www.loanconsolidation.ed.gov.

The government doesn’t automatically pay off student loans. However, there is a Federal Student Loan Repayment Program, administered via the Office of Personnel Management (http://www.OPM.gov) that can pay off up to $60,000 worth of federal student loans for people who work for various federal agencies. To learn more about this program, read these two posts:

http://askthemoneycoach.com/2009/04/tip-3-seven-smart-ways-to-pay-off-student-loans-fast-%E2%80%94-get-uncle-sam-to-pay-it/

http://askthemoneycoach.com/2010/02/where-do-i-find-the-government-agencies-that-pay-your-student-loans-i-read-your-article-about-this-but-do-i-have-to-literally-job-hunt-and-ask-if-a-government-agency-participates-in-this-program/

You may also qualify for loan forgiveness, or loan cancellation, based on working in a service industry, teaching or performing community service. See all the qualifying reasons you can get a student loan cancellation, and the reasons you can’t, by reading this post: http://askthemoneycoach.com/2009/09/school-loan-cancellation/

Yes, since you work for the government, it may be possible for the government to pay your student loan via the Federal Student Loan Repayment Program. Read all about it in these two posts:

http://askthemoneycoach.com/2009/04/tip-3-seven-smart-ways-to-pay-off-student-loans-fast-%E2%80%94-get-uncle-sam-to-pay-it/

http://askthemoneycoach.com/2010/02/where-do-i-find-the-government-agencies-that-pay-your-student-loans-i-read-your-article-about-this-but-do-i-have-to-literally-job-hunt-and-ask-if-a-government-agency-participates-in-this-program/

Frankly, I wasn’t aware that student loan companies or loan servicers were willing at all to “negotiate” lump sum settlements for student loan debts. Frankly, why do they have to, considering the power they wield over debtors? They can report your deliquency to the credit bureaus, they can garnish your wages, they can take tax refund checks, and student loans have no statute of limitations, meaning that creditors can chase you down for this debt until you retire. And even then, they can snatch any pension or social security check you might get. On top of all this, you can’t even wipe out student loans in bankruptcy court. With all this leverage, I’m shocked that some company has entertained the idea of a lump sum settlement.

To be honest, I don’t think you should do a “settlement” because of the many drawbacks to settling a debt. In a nutshell, when you settle a debt, your credit takes a hit, because the obligation gets reported as a settlement or partial payment. Any reporting to the credit bureau that shows you didn’t pay as agreed will lower your credit score. And isn’t that one of the benefits you’re getting from going through loan rehabilitation? Rehabbing a student loan wipes your negative credit history out in terms of past due student loans that were reported to the credit bureaus. Settlements will put some black marks back on your credit records.

Additionally, when you negotiate a settlement with any financial company or government agency, they send you a 1099-C. This reports the amount of debt canceled or forgiven. That “forgiven” amount is considered gross income and is taxable by the government. So if you do get a settlement for, say, $40,000 on that $80,000 in student loan debt, the other $40,000 that is purportedly wiped out in the settlement agreement is taxable at your ordinary income tax rate.  If you’re in the 25% rate, that means you’ll be stuck with a $10,000 tax bill.

Finally, I’m just suspect about this whole deal. What recourse would you have if you fork over tens of thousands of dollars to a company and then they say “Sorry, but we never had a deal.” You can reduce this risk, of course, by getting an agreement in writing upfront. But my point is that the student loan company, or collection agency, could probably rightfully show a judge (if it got that far) that you did, in fact, owe $80,000. There’s certainly no law that
requires them to reduce or settle your debt.  Then you’d be on the hook for the remaining balance — even after thinking you had a properly agreed-upon “settlement” deal.

I think a better strategy, especially since you have supportive parents, is to let your parents help you make a hefty lump sum payment, but to bite the bullet and pay the $80,000 that you owe. Let’s say you pay $40,000 in a lump sum. All of that money should go toward your principal balance. That will knock out a huge amount of interest charges – more than $15,000 in interest, according to the financial calculator at www.FinAid.org. Visit that site and play around a bit with various loan repayment options. At first glance, it may sound foolish to pay $80,000 when you think you can possibly pay $40,000. But look at it this way: that $40,000 lump sum settlement will really be $55,000, when you factor in taxes. Now take a look at the hit to your credit for the next seven years.

In my opinion it’s worth it to pay the other $25,000 to preserve your credit. If you can keep a good credit rating, you’ll probably save way more than that “extra” $25,000 if you have to get other loans, like a mortgage, credit cards, auto loan or other student loans.