Ask Jean Thursday: A Defaulting Dilemma - Jean Chatzky - Making money make sense
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Ask Jean Thursday: A Defaulting Dilemma

iStock_000010843083XSmallI am the co-signer on my daughter’s student loans that she has defaulted on.  It has gone to the collection agencies and they are demanding that I pay them $68,000 right now.  I don’t have that kind of money.  What can I do? Do I have any options?

– 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.”

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