- Audrey, Illinois

Defaulting on a private student loan can have serious effects: legal action can be taken against you, your wages may be garnished and your credit score will likely take a hit.  “Just like federal education loans, private student loans are very difficult to discharge in bankruptcy,” adds Mark Kantrowitz, publisher of the websites FinAid.org and FastWeb.com.

My advice to you? Pick up the phone, call your lender and explain your situation. “If your financial situation is so destitute that there really isn’t any reasonable opportunity for you to repay the debt, you should be open with the lender about your financial circumstances.  That will demonstrate to the lender that there are no reasonable prospects for repaying the debt,” suggests Kantrowitz.

When you talk with your lender, communicate that you’re willing to work with them towards a repayment solution that works on both ends. Most repayment plans are monthly and will be about 1% of your current, outstanding debt. “The monthly payment should be at least the interest that is accruing, or you’ll be in repayment forever,” says Kantrowitz.  If managing a monthly payment is still too tough, try negotiating a reduction in your interest rate or a reduction on the limit on the number of payments that must be made before the loan is forgiven.

If you’d like to settle up for less than you owe, you’re going to need to be able to make a large payment in a lump sum.  “One approach is to use a home equity loan if you own a home to make the lump sum payment. This will undoubtedly yield a lower interest rate, but it does place your home at risk,” suggests Kantrowitz. He cautions that this is only worthwhile if you can afford to make the monthly home equity loan payments and if you are in fact settling for less than you owe.  

If you and the lender are able to come to an agreement on a repayment or settlement plan, be sure you get it in writing and have it reviewed by an attorney. “Definitely have an attorney review the settlement agreement to make sure that it really does settle all the debts and reports the settlement favorably on your credit history as a settlement or even paid in full,” says Kantrowitz.  

One final note: Don’t skip out on life’s essentials to pay off this particular debt. “Under no circumstances should you skip paying bills for basic living expenses in order to pay the student loan debt,” says Kantrowitz.   According to Kantrowitz, despite your defaulting, many of your benefits will still remain in tact.   “Government benefit programs, such as Social Security, SSI, veteran’s benefits, unemployment insurance and Temporary Assistance for Needy Families are all exempt from wage garnishment,” says Kantrowitz.  “A portion of weekly take-home pay is also protected from wage garnishment too.”

- Antonio, Pennsylvania

First off, congrats on taking the first steps towards paying down your debts. I think that with the information you’ll find in “Pay It Down!” and your dedication to cutting down on spending, you’re on the right track to financial freedom.

Let’s talk about where to put the $10 you’re saving every day. Ideally, you should be keeping it in a high-yielding savings or money market account. To find out which accounts have the best rates, visit Bankrate.com. There, you can search for the national or local banks with the best interest rates.

Once you think you’ve found the right account, do a little investigating. Start by reading the fine print. Do they charge extra fees? Do you have enough money to meet the minimum requirement for the initial deposit? Today, there are banks out there that require at least a $1,000 deposit to open a new account.

As you start to accumulate the money, you’re going to need to think about the way to best tackle your credit card debt. First, start by paying off your highest rate debts first—they’re the ones that are costing you the most. Lay your credit cards out on the table and make note of the interest rate you’re paying on each one. This will give you an idea of where you should be making your biggest effort.

Lastly, if you think you need a little more help in paying off your debts, I encourage you to take a look at my newest get-out-of-debt tool, Debt Diet Online. It’s a personalized program that uses behavior change science to guide you through your debt challenges. For more information on Debt Diet Online, click here.

But I also took it a step further, and developed an online program, Debt Diet Online, that launches today on this website.  

Let me give you a bit of history:  Several months ago, I met with Dr. Jim Prochaska, who founded a company called Pro-Change Behavior Systems. Jim explained to me that people go through different stages of readiness before they can change their behavior.  In fact, research shows that up to 80% of people are not ready to take action right away.  This is something I’ve seen again and again in my years of working with people and their money – if you’re not ready to make a change, that change is not going to stick.

So Debt Diet Online, developed in conjunction with the folks at Pro-Change, is different.  Whether you’re surrounded by bills and too overwhelmed to open them, or you’re already in the process of paying down your debt, this program will cater to your stage of change.   You’ll go through activities to help you find your $10 a day.  You’ll learn how to get the most out of that money.  And, once your debt is gone – or if you weren’t in debt to begin with – you’ll learn how to build up a healthy cash cushion so credit cards aren’t your only option in an emergency.

I hope you will take a look at the Debt Diet Online and sign up today!  And if you like it, you may also benefit from Pay it Down, which you can read more about here.

-Lisa, Alabama

Every year the NFCC assists over 3.2 million people who are struggling with their finances. For over 50 years, NFCC member agencies have offered free or low cost services (whether or not you’ll be charged for the help they provide depends on the member agency and the laws in your state) to those wanting to take control of their debt. The NFCC offers confidential help via phone (through their national toll-free hotline), online or in person.

Through credit counseling, the NFCC can help you to work towards paying more than the minimum amount on your bills. During a session, your counselor will address your credit issues and help you find ways to work towards solutions. “Adjusting the budget, decreasing spending and increasing income would be ways to find extra money to pay more than the minimum and get out of deep incredibly sooner,” says the NFCC’s Vice President of Communications Gail Cunningham.

If you’d like the NFCC to negotiate with creditors on your behalf, they can do that through a Debt Management Plan, or it’s commonly known, a DMP. A DMP is essentially a plan to help you tackle your debts. “After a thorough intake of all income, living expenses and debt obligations, if a Debt Management Plan is appropriate for the consumer, the counselor would contact each creditor and propose a new monthly payment,” says Cunningham.

A DMP will set up a payment schedule for you to repay what you owe. You’ll deposit funds with your credit counselor on a monthly basis. The counselor will then send those funds to your creditors. According to the NFCC, when you’re enrolled in a DMP it’s common for creditors to lower your interest rate and halt all late and over limit fees once the new payment has been accepted. “The goal is to allow the consumer to make all of his or her living expenses in full while still addressing debt reduction,” says Cunningham.

While the NFCC can help you figure out ways to pay more than the minimum and help you to craft a Debt Management Plan, helping you with your equity line debt isn’t something they can do directly. Typically, NFCC Member Agency counselors don’t deal with secured debt. The reasoning is they can’t lower the monthly payment on this type of debt. While they can’t deal with it directly, through a counseling session you’ll be able to discuss how you can cut expenses and work towards reducing your debts. “Even though the payment to that specific debt might not be lowered, the budget and other debts might be adjusted enough to allow the equity line of credit to be satisfied,” says Cunningham.

-Kelly, Oldsmar Florida

You’re right-using consumer credit counseling to manage your debts can potentially affect your credit score. What may surprise you, however, is the fact that when your score is calculated using the FICO scoring model, whether or not you’ve received counseling won’t affect your score. “Any notation on a consumer credit report indicating that the consumer is or has been involved in credit counseling is ignored by the FICO scoring model,” says CardRatings.com’s Curtis Arnold.

However, what you do with the advice you get from your consumer credit counselor is another matter. For example, if a counselor advises you to manage your debt or credit cards a certain way, and you follow through with that advice, it could potentially have a negative impact on your score.

One thing is for certain though; getting credit counseling will have much less of a negative impact on your credit than bankruptcy will. “The negative impact of credit counseling is fairly minimal, whereas a bankruptcy has HUGE negative implications. For example, according to Credit Counseling of Arkansas, your score can drop as much as 100 points if you file bankruptcy,” adds Arnold.

If you decide to move forward with credit counseling, a good way to start looking for help is through the National Foundation for Credit Counseling. The NFCC is a national, nonprofit network of counselors whose mission is to help you get out of debt. Through the NFCC, counseling is available by phone, online or by mail. The cost of counseling varies depending on the level of support you need and also on your state’s laws. Most of the time though, you can get counseling at no or low cost. To find a counselor near you visit the NFCC’s website by clicking here.

-Marissa, San Francisco, CA

You’re not alone. With everything that a goes along with college–the classes, the exams, the post-college job hunt–many students fail to pay attention to their loans until their caps have been thrown and the diploma is in their hands.

To get a handle on how much you borrowed and from where you borrowed, you’ll want to visit the National Student Loan Data System, which you mentioned in your question. NSLDS is the definitive resource for finding out about your federal loans. “The only caveat is if the school is a Direct Loan school they might not have finished reconciling their records with NSLDS,” warns FindAid.org’s Mark Kantrowitz. This could be the explanation for the complications you’re experiencing now. Private loans are another matter. You’ll need to get a list of the private lenders you borrowed from and call each to determine the loan amounts.

Once you’ve determined what portion of your loans are private and which are federal, it’s time to start looking at your options for repayment. If you’re doing any postdoctoral internships or residencies, income-based repayment may not be your best choice. “With that much debt and some private, she might need more repayment relief during the residency and internship than income-based repayment can provide,” advises Kantrowitz. Other options may include an economic hardship deferment or forbearance. FinAid’s Economic Hardship Deferment Calculator can help you determine if you’re eligible for deferment. To find out if you’re eligible for forbearance, you’ll need to check with your lender.

If you do decide to go the income-based repayment route, it may be best for you to consolidate your loans before you move forward. “With consolidation she’ll have one federal and one private loan instead of multiple opportunities to miss a payment,” says Kantrowitz. It’s important to note that your federal and private loans cannot be consolidated together, and only federal loans are eligible for income-based repayment.

Why does this interest me?  So many celebs of late have hit the financial skids — Lindsay Lohan, Lenny Dykstra, Stephen Baldwin — it reminds me of a finding in The Difference.  When I looked at factors that held people back from financial success stubbornness was one.  That is not difficult to understand.  If stubbornness defines you, then you’re not likely to conform to whatever task the man (or woman…or corporation) asks you to take on.  

The other, however, was more surprising, and it seems to apply in this case: Creativity. People who defined themselves as completely creative — not just very creative, or somewhat creative — but completely creative, were not likely to attain great wealth.  Why is that?  

David T. Robinson, finance scholar at Duke University and I mulled the research.  And here’s where we came out.  Sometimes very creative people seem to feel they are above all that.  Above all the minutia of bill-paying and record-keeping.  Above the tedious tasks like checkbook balancing that are necessary to get through life with ones credit score in tact.  They– not all but some of them —  think they should be given a free pass as if they’ve given their art to the world and the world should be grateful and not bug them above the little things.

We’ve all known people like this.  Creative types.  Who don’t get as far in life as perhaps we thought they would because they won’t deign to do the dues paying and sucking up that the rest of us did in our 20s and 30s.  I’m not suggesting Annie  (or Lindsay or any of the other truly talented individuals on the list of the financially fallen) do that.  Merely that they recognize that getting by financially is an item on the check-list of life in this day and age.  And if they want to be able to continue to create, it might be a good idea to hire someone to handle the mundanity of it all.

Personally, I know a few people who would jump at that kind of a job.

-Nancy, Texas

Once you’re out of the red and have all your cards paid off, closing the accounts isn’t the best route to take.

If you close the accounts, there are a number of things that could potentially happen make for less than perfect financial circumstances. For one, you’ll be forced to use cash, checks or debit for all of your purchases. “They’ll lose access to the capital, have to live a cash or debit lifestyle, which is not as good as people make it out to be,” says Credit.com’s John Ulzheimer. Also, depending on how you cancel your cards, your credit score may take a hit, which will make it harder to obtain credit in the future for loans or other high ticket items.

If you have the ability to pay off the $45,000 in debt that you owe, my guess is that you’ve learned your lesson about how to use and how to not use credit cards. Instead of canceling your cards, keep them active and use them sparingly. “Leave the cards open, use them occasionally and pay them in full each month,” suggests Ulzheimer. This will ensure that your credit score won’t take a hit, and you can continue to build your credit. Is having the cards in your sight too much of a temptation? Cut the cards up, but still leave them open to ensure that your credit score isn’t hurt by a cancellation