Dear Steve,
I have 5 student loans, currently totally about $48,000 after 6+ years of repayment. Two of them are private loans at only about $1,300 each, another private is at about $8,000, my only federal loan is at $11,000, and my bear of a loan is a private loan with Sallie Mae, currently at approximately $26,000 (original borrowed amount was $15,500. I have been able to pay consistently on all but the two larger loans.
I recently asked my uncle to help me pay off this debt so I could pay him and not struggle so much with the interest. He agreed to pay off the two larger loans for me and I could pay him back over the course of 10 years, which would greatly reduce my payments.
My $26,000 loan is at 13.125% interest and it's amortized so I basically make interest-only payments every month (when I can actually make the payment). I feel like I got seriously screwed when I took this loan out. I was 20 years old and had 2 years of credit history and was approved for a $15,500 student loan without a co-signer, at a rate of what they called "prime plus 9.8%". I just wanted to go to photography school, I didn't do the research and I have been paying for it ever since. Over the course of the last 6 years, I have put the loan into forbearance on numerous occasions because the payments were just too large and I couldn't afford them with my meager earnings. Of course, that interest gets compounded and then new interest accrues, hence how it's gotten so out of hand.
I have been conversing with Sallie Mae recently to try to reduce the largest loan's debt down to $20,000 to be paid off with my uncle's help. They seem like they might consider it, but I just want to know if this is a good idea. My credit is already pretty abysmal since I haven't kept up with the payments on this loan, so will it really affect it that much to settle the loan? It is not in default, I am currently 30-60 days delinquent on the payments and on the rare occasion it has gone out to 90 days. The payments are about $400/month and when I get behind, it's nearly impossible to catch up.
Should I attempt to settle it before it goes into default, or let it default so they would be more amenable to settling for a lower amount? Employees at Sallie Mae have admitted outright that they would be more amenable to a settlement if the account went into default. I recognize that it's corporate logic, but it's still ridiculous. I guess I would have to admit that I'm seeking the lowest amount possible to have to repay. I know I have to pay, but I just feel like I want to screw them back for what has transpired since 2005 when I initially took out the loan. I have been paying as much as I can over the last 6 years (repayment started in 2007), and the balance has done nothing but grow.
I also read somewhere on your site that the unpaid amount will be taxed. Is this true for every case, or is it up to the loan company on how they want to handle it?
How do I know if I'm insolvent? Because I'm pretty sure I am. I live in an apartment and the only assets I have are vehicles totaling about $20,000 max.
Also, how are these lending practices legal?! What is being done to prevent this from happening to students in the future? Surely the government can put some sort of cap on interest rates for student loans (even private ones). After all, we can't get out of it via bankruptcy, so the debt has to be repaid no matter what. It doesn't make sense to lend based on credit, as credit is irrelevant in a case where you are forced to repay the debt with no chance of write-off.
Nicolle
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Dear Nicolle,
Unfortunately it all sounds perfectly normal and typical.
Once you reach the age of 18 you are able to enter into a binding contract as an adult. While the student loans were made easily available it never absolved anyone of their liability for agreeing to the terms and accepting the money.
From what you describe there was an offer to extend the loan and an acceptance of the offer. It even sounds like the terms were fairly clear as well.
If you want to "blame" someone then you should look at your parents who should have helped you to do the math and see this was not going to make financial sense. Or how about the school that willingly helped you take the loans so they could pocket the money.
Yes, Sallie Mae does settle some times. There is no reason or logic when they do. If you default then you face either a future settlement offer or being sued and a wage garnishment. Defaulting is NOT a guarantee to a settlement.
Additionally, you will want to make sure your student loan does not allow for up to a 20% penalty when you default. That penalty can turn your $26,000 balance into a $31,200 balance.
It is clear you had your loans in forbearance or deferment at times as the missed payments only cause the balances to legally grow. Interest is still charged but it's just added to the balance. It's a prime reason I think those strategies should only be used selectively and for a very short period of time.
If you do manage to settle the debt it is true the amount of debt forgiven will be reported to the IRS and you would have to pay income tax on that amount above the point you become insolvent. It sounds like right now your liabilities exceed your assets so part of the tax liability might be sheltered. See more about this in this article.
Your statement that the debt cannot be dealt with in bankruptcy is actually not true. Many student loans are discharged in bankruptcy and even some Sallie Mae loans can be instantly eliminated depending on the school you went to. Read this article and this one.
If you want to help kids avoid the same mistakes, have them watch the following video before they apply for student loans.
I might not agree with Dave on a lot of things but on this I'm in total agreement.
Steve
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