The Student Loan Ranger often receives reader questions, and occasionally, we take the opportunity to share some of the issues commonly faced by borrowers.
Here’s an example of a question we recently received about the implications of paying off student loans.
Q: Our daughter-in-law has a defaulted loan currently with a collection agency from DOE. We are going to be paying off the loan in full at a reduced amount suggested by the collection agency. Is there a great need to worry about future issues with any monies the collection agency has forgiven? After making this payment, I don’t want to have to worry about future tax offsets or garnishments from the agency for my daughter-in-law.
Making arrangements to resolve your student loan debt by settling for less than the full amount of the balance is among the many possibilities for dealing with loans that are in default status. There are always two sides to every coin, which means that there are risks and rewards when deciding to negotiate a settlement with the collection agency managing your account. There are limits to what can be negotiated, but once you reach an agreement the success of the negotiation depends on your ability to make payments according to the revised terms.
Of all the outcomes you hope to avoid, taxes on the settled amount are not escapable if the forgiven portion of the debt is $600 or more. It will be reported to the Internal Revenue Service as income to you and you will receive a Form 1099-C, or Cancellation of Debt form, from the collection agency as confirmation.
If you feel that you are unable to pay the amount due in taxes, there is still hope for an affordable solution in the form of installments. The IRS allows taxpayers to make installment payments with interest instead of paying in one lump sum. If any form of payment is too much of a burden, you can complete the IRS insolvency worksheet to see if you can avoid the obligation to pay the taxes owed.
In general, record keeping is important, no matter how you repay your student loans. It is recommended that you keep all statements and records of communication until the debt is paid off or settled in full.
Regarding any further obligation to pay the forgiven amount of the student loan debt, you shouldn’t have much to worry about if the arrangements have been confirmed in writing with the collection agency and a receipt of final payment is provided for your records. The final receipt should clearly indicate that the obligation to repay the loan has ended.
Official confirmation of payment will also protect you in case you have to dispute how the accounts are reported to the credit bureau.
Make copies of the confirmation document and plan to keep it for the rest of your life. You might think that’s an extreme recommendation, but your documents are insurance for times when servicers and lenders may experience issues with accurate record keeping.
Making a final student loan payment is an important milestone, so it is important to pay close attention to every detail to ensure you don’t miss a step. Apart from special circumstances where you may have negotiated a settlement, and if paying your servicer online, look for the loan payoff calculator in the payment section of the website. After entering the date you wish to make your payment, you will be shown the amount you will have to pay at that time. It’s wise to add about 8-10 days to the payout date if you plan to send a check by mail.
You will want to check your credit reports about 90 days after you pay off the accounts to confirm that they are being reported accurately. You can visit annualcreditreport.com and access your Equifax, Experian and TransUnion credit reports for free. If there is a problem, you can dispute the errors by providing copies of the documentation to the credit bureau that is posting the incorrect information.
Once you have completed all of these steps, you can and should celebrate your accomplishment. Having student loan debt out of the way can make it easier to grow personal savings, save for the purchase of a home, pay off other forms of debt and have more to spend on the things you enjoy.
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