Will card debt scare off student loan lenders?
To Her Credit
Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for CreditCards.com, and also writes regularly for MSN Money, Interest.com and Bankrate.com, and has guested on Martha Steward Radio and other programs. See her website SallyHerigstad.com
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Dear To Her Credit,
My 30-year-old former foster daughter is broke and has
$6,000 in credit card debt. She is thinking about signing up with one of those
rip-off debt consolidation agencies. She has no assets and no job.
What should she do? She wants to go back to school, and she
is afraid if she just defaults, she won't get a student loan. -- Laura
"Just defaulting" -- not paying bills and leaving
them unresolved -- is never a good idea.
The credit card companies will keep trying to collect. She will
get calls and letters with increasing frequency, and eventually the companies
may sue to collect from her. When she does get a job, they can garnish her wages. Her credit score will be trashed, and she'll be at least 37 before the
unpaid debts drop off her credit history (seven years from the date of last
A debt of $6,000 is not insurmountable if a person has a
steady income. In fact, it's below the national average credit card debt
balance for people who have consumer debt. With no income or assets, however,
it doesn't matter if she owes $60 or $60,000. She still can't pay.
You're right that many debt consolidation agencies are a rip-off.
Even if she found a reputable company, however, I don't think consolidation
would work for her. Debt consolidation works by creating one loan at
a lower interest rate to pay off all a person's consumer debts. The borrower
then makes one payment on the new loan, instead of juggling half a dozen or
more debts at different banks. However, with no income, she won't be able to
make payments on the new loan, either.
Two other options for when a person can't pay a debt are
debt settlement and bankruptcy. To successfully negotiate a debt settlement,
your daughter would need some cash to settle with. Cross that off the list of
possibilities, at least for now.
Even filing for bankruptcy requires money to pay the lawyer
and court fees. In addition, $6,000 is not nearly a large enough debt, in my
opinion, to warrant bankruptcy. The upfront fees, the damage to her credit and
the hassle far outweigh the benefits of getting out of a debt of that size.
She might consider asking the credit card companies for a
hardship plan if she is temporarily out of work. They may agree to reduced or
suspended payments for a time. Whether or not they agree to a hardship plan,
it's always better to stay in contact with the credit card companies than to
just ignore them. Debts ignored don't go away. They grow -- fast!
What your daughter needs in the short term is a source of
income. No doubt she is looking for a job already. I would urge her to not give
up, and to expand her search as much as possible. She'll need to work, even if
she goes to school. Many people keep applying for jobs similar to their last
job. If that's not working, she should apply in different fields or even in
different locations. Services such as landscaping and housecleaning are always in
demand. Where I live, cleaning services charge $25 per hour, and many are so
busy they're not taking new clients. It's almost always possible to find some kind of
For the long term, going back to school is a fabulous idea. Deborah
McNaughton, president of Professional Credit Counselors, advises against applying right off for a private loan
application, even if her credit is bad. "A federal loan should be the first
place a student should apply," she says. "This type of student loan
does not have the same criteria as a private lender. The qualification criteria rarely involve a
credit check and federal loans offer low interest rates. A federal loan bases
the eligibility of the student by income history, family income, current
education level and date of expected graduation."
Your daughter should complete the Federal Aid application
Her chances of getting a private student loan are already
affected if she is behind on her credit card payments. McNaughton says,
"If a private loan application is being made through a private bank, a
negative credit report can affect your chances of getting the loan. A private
lender will have similar criteria for qualifying for a student loan as a credit
card company or mortgage company."
She could ask someone to co-sign on a student loan with her.
If you are considering helping by co-signing, however, I urge you to be
cautious. Don't co-sign for any amount you can't afford to pay. I regularly get
letters from people who co-signed on loans, apparently not realizing that they're
obligated to pay if the other party doesn't. And borrowers who need co-signers
are unfortunately all too likely to leave those co-signers to pay the bill.
See related: Student loan co-signer on the hook for delinquency, 9 things you must know about debt consolidation
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Published: May 24, 2013