Dear Steve,
Not long after graduating I become unemployed (and thereafter underemployed). I couldn't come close to making the payments that Sallie Mae wanted on my $50,000 total of private loans.
I ended up sending about $100 every month just to demonstrate good faith. They allowed this to continue for several months. Eventually they referred to the loan to GC Services and I was offered a number of settlement offers.
At the time, I had no access to large lump sums of money so I was forced into accepting the lowest monthly payment plan. The interest rate was also reduced to 0.001%. I have been paying faithfully (about $400/month) to GC Services for over three years now.
I received a call the other day from GC Services offering me a settlement for $13,500 on my remaining balance of $40,000+. I countered with $10,500 and we came to a tentative agreement at $10,910. When/if I pay this, my debt is gone. This matter will be officially settled.
However, it just seems to good to be true; they are throwing away $30,000+...Loan companies aren't known for their generosity.
I know currently my credit report shows that I am "making payments but in default" and according to GC Services this arrangement will show the debt as "settled for less than the principle".
Default and settlement are both bad for a credit report but I figure if it's going to have a blemish on it, I might as well save over $30,000 in the meantime. Is this the right call? Am I missing something here?
JD
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Dear JD,
I'm seeing more settlement offers being made on private student loans so on that front you are not missing anything.
There are a couple of key issues to know and consider here.
Before you do anything, get the offer in writing. I've just seen too many times where the "settlement payment" is made only to have the collector say there was never a deal.
If you have the offer in writing then make the payment via some traceable means. We don't want them saying they got the payment late and the deal is no good any more.
Any damage to your credit report can be dealt with and you can wind up with even better credit. See this free guide.
The credit report should actually reflect the current history, the settlement amount paid and the forgiven debt written off as a bad debt. It will be reported for seven years from the date you first went delinquent for the last time.
If you are not insolvent, meaning your liabilities exceed your assets, then the amount of debt forgiven may be taxed as if you earned that as income. It's an important consideration when planning the overall cost of closing out this issue.
If you are insolvent then there would be no tax due if you file this form with your next tax return.
So on face value it looks like they made you an offer you can afford and it could close the door on all of this and set you up for a better financial future.
If you were looking for logic, good luck on that. Companies make these decisions based on policy and process guidelines so something triggered the offer and acceptance. Who knows exactly why. I've seen creditors reject offers to settle and accept 50% less than the first offer on the same day. Crazy stuff just happens.
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