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Student loan debt outside of bankruptcy FAQ

Mory Brenner, Esq.

Q. I have the kinds of student loans that will not be discharged in a bankruptcy proceeding. What choices exist for me to deal with my student loan debt?

A. The first and easiest may be a consolidation of your student loans.

Q. What happens in a student loan consolidation?

A. All of your student loans, usually a large group of them, will be “consolidated” into one new loan.

Q. Why would this help over the way my student loans are set up now?

A. Almost all student loan consolidation plans will offer you one easy payment to one place as opposed the situation where there could be 10 or 20 payments at different times to different people. Even better, often these consolidation loans offer lower interest rates than your current rate.

Q. I heard credit card debt can be settled for pennies on the dollar. Can I do that with my student loan debt?

A. To a certain extent, but how that works and what you should expect for a student loan settlement is not at all like a credit card debt settlement.

Q. Should I start by contacting these places that say they can settle my debt?

A. While you can try to contact that type of firm, almost all of them specialize in settlement of credit card debt. Very few of these firms will entertain taking on a case to settle student loan debt.

Q. Who would settle a student loan case?

A. You could try to locate one of the rare debt settlement firms who would take the case or try a bankruptcy lawyer, but most people, even in the debt field, do not work on student loan cases.

Q. So am I really lost when it comes to my student loan debt?

A. No, just limited. On the other hand, if you know what can be done, and can meet the terms needed, student loan debt may even be a case where you could try a settlement offer yourself.

Q. So what can be expected in a student loan debt settlement?

A. If you had all of the money, and this is a big if, you could usually get the creditor to accept payment in full.

Q. Payment in full?! What kind of a settlement is that?

A. Not much in most cases but that is as good as it gets. By payment in full I mean the principal balance of the student loans. The part you can get settled or waived would be the collection fees and back interest. In instances where these loans have been delinquent for many years forgiving the back interest came add up to even more that the amount of the loans originally taken.

Q. Can you at least get a plan to pay that over time? The balance of those student loans represents a huge sum of money.

A. No, that is the trade off. You get your back interest, penalties and collection fees waived and in return you pay all of the principal balance of the loan off in a lump sum.

Q. That is as good as it gets?

A. Sometimes not even that good. Often, even when you can pay the balance in full you can only get a portion of the back interest and fees forgiven.

Q. I want to talk about those collection fees. I got a late notice and the next thing I know they say I owe $20,000 in collection fees. Iíve never even had a problem before or a call from these people. How can I owe them $20,000 when they have done nothing?

A. One of the special laws that has been put in place to help the Federal Government collect all the money they have loaned out to students involves allowing a collection fee of 25% of the balance of the loan to be added to the balance. This allows the government to give these cases to collection agencies and not have to give a portion of the monies recovered as a fee to the collection agencies, the way a credit card company would have to pay if the debt collection agency got money from the debtor to pay a delinquent credit card.

Q. So when they collect money I owe them money too?

A. No, according to the law they just get to tack on their fees so that their fees looks like they have become a part of the loan. You have to look very carefully to see what amounts are collection fees and what is your true loan balance.

Q. When do they get to add this fee? After a year? After a month of collection attempts?

A. While I don’t know that, I would say the law itself is clear on when a collection agency can tack on this special fee for a student loan collection. In every day practice, the accepted standard has become the instant they get the case they tack the fee right on before they do anything else.

Q. That’s crazy! They get to add 25% to my balance, and I owe it to them for doing nothing?

A. Yes. On the other hand, I find that if you have a decent plan for paying back your student loans and getting on track most of these collectors are more than happy to lower or eliminate the fee.

Q. So is this student loan collection fee owed or not?

A. Oh yes, it is owed, but most of the time they use it as a big shocking club to beat you into a plan they want you to enroll in, and then they waive some or all of it.

Q. What if I don’t have the all money and need time to pay?

A. You can always make arrangements to make payments over time. Just except a direct correlation between the length of time you want to take to complete the payoff of the student loans and the percentage of fees and back interest that will be waived.

Q. Should I just give up and file bankruptcy?

A. Not if student loans are your only problem. Most student loans may not be discharged in bankruptcy. You may read more about bankruptcy and student loans in its own FAQ.