As time goes by, I am seeing more and more individuals struggling with student loan debt. It seems that my observation jives with the overall statistics.
In addition, from the conversations I am having with clients, it seems that student loan collectors are being more aggressive in their tactics. These collectors know that the borrower has no way out.
Now, with Federal loans, there may be relief available to you in the way of forbearance, deferment and/or income based repayment plans.
With private student loans, not so much.
Most borrowers end up with private loans as there are lending limits on Federal loans. It seems that these private loans are the most financially damaging.
While not always feasible, settlement is sometimes a viable option for private student loans. I was recently able to settle two private loans for two satisfied clients and cut their student loan debt in half.
As I have discussed previously, chapter 13 bankruptcy can be used to essentially “defer” student loan payments for the length of the bankruptcy plan.
The banks don’t like this.
Filing chapter 13 bankruptcy takes the ball out of the lender’s hands and puts it into yours. They must accept the payment terms of the chapter 13 plan.
While interest does still accrue on student loans in chapter 13 bankruptcy, no lender wants to wait 5 years for what they are entitled to today.
My clients had initially retained me to file chapter 13 bankruptcy. Using this as leverage, I contacted the banks and entered into negotiations.
On the two loans I settled, I was able to work out a 35% settlement on one and a 40% settlement on the other.
For debts that are not dischargeable in bankruptcy, these deals were almost too good to pass up, and my clients did not.
With any debt settlement, including student loan settlement, there are some important considerations to keep in mind.
The most important thing to understand is the tax implication of debt settlement. Forgiveness of debt is taxed as income.
If you settle a $50,000 debt for $20,000, that $30,000 savings is considered income and taxed as such. You now have a tax obligation to the Government.
With student loan settlement, this is not a terrible thing. I have found that the Government, unlike private student loan lenders, will be more willing to work out a payment arrangement with you.
Another consideration is cash.
Most student loan lenders will want a “lump sum” payment to settle an account. This is especially true if you are looking to settle your accounts for 50% or less.
Many people do not have that kind of money lying around and have to borrow from a family member, friend or even a co-signer.
The student loan dilemma is starting to spiral. If you are struggling with private student loans, consider debt settlement and consider using a bankruptcy attorney to add some muscle.
Image courtesty of Images_of_Money (Flickr).