4 steps to settling privately funded student loans
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Dear Opening Credits,
I have defaulted on some private education loans totaling $52,000. I would like to know how I can repay them within my means. Are there any laws that allow me to pay what I can afford, and how do I go about them? Collection agencies own them right now. Thanks -- William
I would like you to repay those loans, too. Owing that much money can't be much fun. I hope you received a great education and landed a job with a decent income out of the deal, though.
As you may be aware, there are some similarities between federally guaranteed student loans and their privately funded cousins. For example:
- Keep them both in good standing and all is well.
- If you don't pay when you should and allow them to slide into default, you're looking at an expensive and troublesome situation.
- Until you pay, you're pretty much stuck with them. Way back in 1998, the U.S. Bankruptcy Code made government student loans virtually nondischargeable. In 2005, that rule was extended to include private student loans.
Of course, there are a few key differences. Most significantly, with private loans, there are fewer regulations to help defaulted borrowers get back on track. The entity holding them -- in your case, a collection agency -- is not legally obligated to accept a reasonable and affordable student loan payment plan.
It would be different if you had a default on a good old Stafford loan and you'd be allowed to pay what you can, according to your income and expenses. After 10 or so consistent payments under that arrangement, your loan would be automatically rehabilitated. Instead, William, you have to work out something with the agency that is collecting your private loans and negotiate an arrangement that you both can live with. Here's what I'd like you to do:
- Determine how much you can pay. Review your budget, eliminate excess expenditures and figure out how much you can apply to the debt. Be logical. You owe $52,000 (assuming you can't reduce the balance, which I'll address below), and $10 per month isn't going to cut it with anybody. You don't want to stretch your loan out for too long either. Ten years is a good goal. If you're currently being charged an APR of 15 percent, you'd have to send $838 per month to be in the clear in a decade. Not doable now? Offer at least a few hundred dollars.
- Contact the collection agency. Those notices you've likely gotten in the mail about your delinquent debt should include a number to call. Well, pick up the phone and start talking. What do they want? The money. If you have some cash to offer, you may request a lump-sum settlement or ask them to at least reduce the fees and financing charges that have surely been tacked on. If you can't pay it all at once, you'll have to deal with the remaining sum. Present your payment plan. If they don't think it's enough, explain that you've completed a budget and that is all you have after reducing your spending to dinners of rice and beans. Still, it can help to offer a bit more, but never -- ever! -- promise what you can't deliver.
- Send your first payment, then keep it up. Along with a letter explaining your intentions on how you will repay the debt, include a money order or cashier's check in the amount you agreed upon. After that, send at least that much every month.
- Repackage the loan. After a couple of years, you may be able to sell the loan to a bank that will give you a better rate. If the collection agency reports your payments to the credit bureaus, your credit report will improve. Look around and ask banks and credit unions what types of loans and terms they are offering. The less you pay in interest, the more of your money will go toward the balance. That means you'll pay that debt down a lot faster.
Finally, if you ever decide to return to school, it's best to avoid private loans unless you absolutely need them to achieve your academic dreams. They only exist to supplement the funds you can get via federal loans, scholarships, grants and work-study programs.
See related: Your first budget in 3 easy steps, Cure your defaulted student loan in six steps, A comprehensive guide to the Credit CARD Act, Kids, want help paying off debts? Ask Dad first, 10 ways students can build good credit, Don't worry if resold student loan clutters up credit report, Study: Undergrads relying on credit at record levels
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