4 ways to handle overdue student debt

Dear Debt Adviser,
I’m currently paying a debt that was owed to my school, but it went to a collections agency. I agreed to make the payments to pay off the debt. The problem comes when I try to negotiate to lower the monthly payment. I’m paying roughly $398 per month. Whenever I ask to lower the payment, they tell me if I lower the payment it will go into collections. I don’t get that. If I’m paying it, regardless of the amount, why would it go into collections? Isn’t it already in collections? Then I’m told that this is to keep the debt from showing up on my credit report. I thought it is already on my report. Help, please, and thank you.
— Shana

Dear Shana,
Most schools don’t offer a class in paying off student loans, but maybe they should. You have a lot of company among newly minted graduates who are struggling with student loan payments.

There are a couple of things that may be going on behind the collection jargon. When you fell behind, the school may have sent the bill to a collections agency to find you and get the payments going again. Then they may have taken the bill back from the agency and are handling the payments themselves. This saves money for the school. Some schools don’t report private loans to the credit bureaus because it costs money to do so, and they are basically cheap (or at least frugal) and don’t consider themselves to be in the credit granting business. The outside collection agency may well report to the bureau because they want to use a negative credit report as leverage in collecting debts.

4 ways to handle overdue student debt:
  • Call the school’s top management and ask for a hardship program.
  • Rebudget to increase income or reduce expenses.
  • Try to consolidate or extend your loans.
  • Apply for an installment loan at your bank or credit union that might give you a lower monthly payment.

I would imagine that what is happening when you ask for a lower payment is the new payment falls below the guidelines — a formula for repayment within a certain number of months — for repayment to the school. If you lowered your payment, you would no longer meet the requirements and would therefore be sent back out to “collections,” meaning to an outside collection agency not affiliated with the school.

Here’s a suggestion: Contact the school’s head of finance and tell them you have a hardship. Explain why you can’t make the payment and ask for details of their hardship program. All schools have some form of program, if only to keep their prosperous alumni with kids in your situation from revoking their gifts to the school. If you have any federal student loans, you should also look into consolidating them with the school loan and then opting for extended payments.

In the end, as long as you have a student loan, the school has you over a barrel. In any confrontation, they will win. With the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, student loan debt can no longer be dismissed in a bankruptcy except in very rare circumstances. In other words, this debt is likely to follow you until it is paid. Given that fact, I would recommend that you do what is necessary to make your $398 per month payment until the debt is paid.

I wouldn’t be much of an adviser if I didn’t recommend that you revisit your budget to see if you can decrease your expenses or increase your income. A second job might be the quickest way to alleviate the debt problem. If you believe you could secure a second or part-time job and use the majority of the money earned to keep up with your debt with the school until your primary job income increases enough to accommodate the payment, it would be a move in the right direction. Keep in mind that either way that you tackle the situation, you will have to make some sacrifices.

One other option is to see if you can qualify for an installment loan at your bank or credit union. They may have a loan that will give you lower monthly payments allowing you to pay off the student loan and rebuild your credit with a new performing loan.

In any scenario, the debt isn’t going to simply go away. You’re better off doing what you need to now to pay it off.

Good luck!

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