Why Debt Negotiation May Not Help You With Student Loan Debts

Few things in life are more exciting than graduating from college. You get to toss your cap in the air, walk across a stage, get cheered, and someone hands you a diploma. You’ve survived four years of all-nighters, tough courses, and boring instructors. It’s a time that definitely calls for a celebration.

But then, three months later, things don’t seem so rosy. You’ll need to start paying back those student loans, and that can be a real burden. If you’re typical, you graduated owing $20,000, $30,000 or more. You’ll have 10 years to pay back the money and that means 10 long years of big monthly payments.

When debt negotiation can help

If you have private student loans or loans from a bank or an online lender, you may be able to negotiate them. But it won’t be easy. Your lender’s number one objective is to collect every dollar you owe. The first thing it may do is offer you a sort of timeout where you would not be required to make your payments for a period of time. Or, it may agree to temporarily reduce your payments. Unfortunately, all these things do is just sort of drop kicks your problem into the future.

If you want to settle the debt, you’ll have to make an airtight case. This means you’ll need to prove you’ve shrunk your budget as much as possible, and have eliminated all discretionary spending. You may have to provide the lender with your bank and credit card statements to verify your situation.

It will be a tough sell, but if you stick to your guns you may be able to negotiate a good settlement.

When debt negotiation can’t help

Federal student loans can’t be settled. It’s that simple. They can’t even be discharged in bankruptcy. Several ways exist to get them discharged or forgiven but never settled.

The good news is that options are available that could make repaying that money much less painful. When you graduated, you were automatically put on the standard or 10-year payment plan. This means your monthly payment will be 1/120th of your total debt, plus interest. But you don’t have to stay on that plan. Several other programs tie your payments directly to your discretionary income.

PAYE and REPAYE

The two most liberal of the federal payback programs are PAYE and RRPAYE.

PAYE or Pay As You Earn is for Direct Subsidized and Subsidized Loans, and Direct Plus Loans. It caps your maximum monthly payments at 10% of your discretionary income. Your payments would be recalculated each year based on your updated family size and Income. However, to be eligible for this program, you must be a new borrower on or after October 1, 2007. Plus, you must have received a disbursement from a Direct Loan on or after October 1, 2011.

REPAYE or Revised Pay As You Earn offers the same benefits as PAYE, with the payments capped at 10% of your discretionary income. The difference between it and PAYE is that anyone who got a direct loan is eligible for this plan.

Both of these programs would mean lower monthly payments at least initially. Before you sign up for either of them, think seriously about your future income. If you’ve chosen a career such as teaching or social work where your income will remain relatively stable, then one of these programs could make good sense. But if you’ve chosen one where you believe your income will increase substantially over the years, you might be better off choosing another option.

A third option

There is a third option that’s been gaining in popularity – a debt consolidation loan. It can be used to pay off both private loans and federal student loans. One of these loans could make sense if you have high-interest loans. The interest rate on this type of loans is at an almost all-time low. Getting one with a lower interest rate would mean lower monthly payments. You could also negotiate the term so you’d have the loan paid off either faster or slower – depending on your financial circumstances.

In summary

Don’t get discouraged about your student loan payments. As you have read, options exist that could make it much easier to repay the money. Get more information about the ones discussed here. It’s certain you’ll be able to find one that will make repaying those loans a lot easier and much less painful.

Should You Use Your Equity to Pay for Debt Settlement?

If you’re unfamiliar with debt settlement, it’s where you contact a lender, and offer to make a cash payment to settle the debt but for less than you owe. Suppose, for example, you owed $8000 on a credit card. You could contact the bank and offer to make a lump sum payment of, say, $4000 to settle the debt. If the bank accepts your offer, it will treat the debt as if it had been paid in full – at least so far as you’re concerned. Unfortunately, it won’t report it to the credit bureaus this way. It will report your debt as “settled,” “settlement,” “settled for less than full amount due,” or some similar wording.

The downside

While debt settlement has become a popular way to achieve debt relief, It does have one big downside. You must have the cash available to pay for any settlements you’re able to negotiate. Getting back to our example of settling a $8000 debt for $4000, you’d need to have the $4000 ready to send the lender in the form of a wire transfer or certified cashiers check. Needless to say, if you’re struggling with debt it’s unlikely you’ll have enough cash available to pay for that settlement.

Do you have equity in your home?

If you have equity in your home, you could use it to pay for your debt settlements. There are three ways to cash out equity. The first is to refinance the mortgage. Today’s mortgage rates are at nearly all-time lows, though they are expected to gradually rise over the next year. For example, Consumer Direct is currently offering 30-year fixed-rate mortgage loans with an APR as low as 3.875%. The online mortgage provider, GSF, has 30-year fixed-rate loans with an APR of 3.77%. And American Financing is offering 30-year fixed-rate refi loans with an APR of 4.250%.

If you don’t want to refinance your mortgage, you could get either a home equity loan or homeowner equity line of credit. FlagStar Bank now has a home equity loan with an introductory rate of 4.49% with a loan to value of 80% required. It’s also possible to get a home equity line of credit (HELOC) with an APR of 3.99% from PNC Bank or 4.0% from Alliant Credit Union.

Note: To be eligible for the interest rates quoted here, requires a credit score of 740 or better.

Do the math

Now, compare these interest rates with the interest rates on your debts. If most of your debt is credit card debt, you’re probably paying anywhere from 14% to 21%. Plus$4000, you’d’s compound interest. If you’re making just the minimum payments on your credit card debts, you’re actually paying interest on interest. As an example of this, if you owed a total of $10,000 on your credit cards at 17%, and made just the minimum payment each month of $242, It would take you five years and three months to pay off the $10,000. And it would cost you $15,147 in interest.

In comparison, a home equity loan for $10,000 with an interest rate of 7.5% would require a monthly payment of just $100 for 48 months. And it would cost you only $2,750.23 in interest. So, if you were to take out a home equity loan and use the $10,000 to pay off your credit card debts, you’d realize potential savings of nearly $13,000.

If you don’t own your home

Of course, if you don’t own your home, you lack equity. In this case, you might be able to get a debt consolidation loan and use the money in debt settlement. If you have at least a “good” credit score (above 700 points), you could get an unsecured loan with a term of five years at an 11.21% interest rate, which would mean a monthly payment of just $218.

Hire a debt settlement company

If you can’t get a personal loan, another good option is to hire a debt settlement company. There are two advantages to this. First, it eliminates the need to have the cash available to pay for your settlements. Second, it lets you avoid having to haggle with your lenders yourself. Of course, debt settlement companies do charge for their services. The best ones charge a percentage of the amount of debt being settled, which usually ranges from 15% to 25%. However, the reputable ones, like National Debt Relief, don’t actually collect their fees until they have settled all of your debts. This means if you were to become unhappy with your program at any time, for any reason, you could simply drop out, and it wouldn’t have cost you a cent.

In conclusion

If you owe $10,000 or more and have a sufficient amount of equity in your home, you should think seriously about cashing it out and using the money in debt settlement. This will save you money versus trying to pay off the debt yourself. Plus, if you use a debt settlement company, you could be debt free in as few as 24 to 48 months.

The 7 Most Frequently Asked Questions About Debt Settlement

We don’t have to be mind readers to guess you’re having a problem with debt. The fact you’re reading this article Is a definite clue. Of course, we have no way of knowing the size of your problem. You could be just a month or two behind on your bills, or you could be drowning in debt and looking for a life preserver. If you fall in the former category – if you’re just a few months behind on your bills – there are probably better solutions to your problem than debt settlement. For example, if your problem is credit card debts, your best solution might be to do a balance transfer to one of those cards that offer 0% interest for 12 or 18 months. Or your best answer might be a debt consolidation loan.

If you fall in the latter category and feel as if you’re drowning in debt then your best choice could be debt settlement.

1. What is debt settlement?

According to Wikipedia, “Debt settlement, also known as debt arbitration, debt negotiation or credit settlement, is an approach to debt reduction where the debtor and creditor agree on a reduced balance that will be regarded as payment in full.”

2. Why would a lender ever agree to settle a debt?

Lenders are never eager to settle debts, as their first choice is always to collect all you owe. Secured lenders, or those where you used an asset to get the loan (think mortgage), will rarely, if ever, negotiate. Credit card companies and banks will usually negotiate because these are unsecured loans. They have only two options if you default. They can either sue you or sell your debt to a collection agency. They’ll negotiate settlements if you can convince them that you’re in such bad shape financially, there’s just no way you’ll ever be able to pay off the full amount of the debt.

Another reason lenders will agree to negotiate is if you can offer to make a lump sum payment to settle the debt. Experienced customer service people at the credit card companies and banks do understand that getting half a loaf now is better than getting nothing or getting very little over a long time.

3. What does debt settlement cost?

If you choose DIY debt settlement your only cost will be your time. As you might guess, debt settlement companies are for-profit organizations. The best ones charge fees based on the amount of debt being settled. This typically ranges from 15% to 25%. The good ones don’t actually collect their fees until they have settled all of your debts. This is essentially a 100% satisfaction guarantee as if you became dissatisfied with your program for any reason, you could drop out, without it costing you a cent.

4. How long does debt settlement take?

If you negotiate your settlements, it could take a long time as you will need to save up enough money to pay off a debt, then save again to pay off a second debt, and so on. If you choose a debt settlement company, it will likely take from 24 to 48 months – depending on how much you owe.

5. Will debt settlement affect my credit score?

Unfortunately, it will have a bad effect on your credit score whether you choose DIY debt settlement or a debt settlement company. This is because you’re basically paying back less than you promised. Debt settlement will also make it more difficult for you to get credit in the future when lenders see that you had settled your debts, instead of paying them off in full.

6. How can I know a “good” debt settlement company from a scam?

Good debt settlement companies never contact you. In fact, if you’re contacted by a debt settlement company, you can just about bet it’s a scam. Reputable debt settlement companies never charge any fees upfront. And they will be very open about their fees, and how long It will take for them to settle your debts. Their contracts will be easy-to-read, and you’ll be able to easily contact them anytime you have questions or concerns. Good debt settlement companies have at least A ratings with the Better Business Bureau and are usually members of the American Fair Credit Council (AFCC)

7. Which is better, debt settlement or bankruptcy?

Debt settlement is the better option unless you’re so deep in debt that not even it could save you. The thing about bankruptcy is that it leaves a stain in your credit reports that will be there for 10 years. Bankruptcy will have a more serious impact on your credit score than debt settlement, and may even cause your insurance premiums to increase. You might be able to get new credit a few months after debt settlement but it will take years after a bankruptcy. Worst of all, the bankruptcy will stay in your personal file for the rest of your life. You could get turned down for a really good job 12 years from now when the prospective employer sees you’ve had a bankruptcy.

In summary

Debt settlement can be a very good option, but whether it’s the right one for you will depend on several factors such as how much you owe and your overall financial situation. You need to think carefully before choosing debt settlement because it’s nothing to be taken lightly. And be sure to check out the other options before choosing debt settlement.

How to be More Mindful When Working on Debt Settlement

Being mindful, or practicing mindfulness, is one of this year’s hottest topics – just behind our new president.

However, there seems to be a number of different definitions for mindfulness. One of the best is that of Leah Weiss, who teaches Leading with Mindfulness and Compassion at Stanford University’s Graduate School of Business. She says it can be viewed as “the intentional use of attention.”

Mindfulness, according to Weiss, has been used to treat anxiety, chronic pain, depression, and even OCD. But in this case, it’s important use is in debt settlement. This is because if you want to save as much money as possible for debt settlement, being mindful means making choices that will help you achieve your goals.

Build awareness

Carrie Schwab-Pomerantz says the best place to start is with what she calls a “financial cleansing.” This is where you focus on determining where your money goes. To do this, you will need to use money to cover all your everyday expenses for 30 days. You’ll undoubtedly find it harder and more painful to do this, instead of just pulling out the plastic. This should help you build mindfulness of your spending.

A second thing you need to do is delay purchases. No matter how badly you might want to buy that 50-inch HDTV, wait a few days, or even better, a week. You might then find it easier to resist the temptation. Or you might at least decide to put it off until you have the cash to pay for it.

Another way to be mindful is to make sure you purchase that HDTV from a company where you know it has a liberal return policy. Then, if you decide you made a mistake, you can fix it.

Finally, make a resolution to stay away from jewelry, electronics, and clothing stores where you might be tempted to make an impulse purchase.

Learn to pay attention

If you just pay attention to things, this can help you stop before buying something. You might try meditating for as little as five to ten minutes a day, which will mean focused breathing. This will actually affect those areas of your mind that control motion, attention, and habit. If you’re truly committed to the idea of eliminating money-wasting or mindless choices, this will build that area of your brain that helps you be more mindful.

Determine what you want

Another financial planner plasters the wall next to her refrigerator with photos that represent her goals. If your goal is a wonderful, one-week cruise, you might put snapshots of the boat and your destinations in your kitchen where you see them every day. This becomes a daily reminder of what brings you joy.

If you make your goals specific, you’re more likely to act on them. Be conscious of your spending. Try to imagine what your finances will look like 12 months from now. What changes could you make that you’d feel good about? For example, you could decide to turn a spending habit into a once-a-year treat, and then put the money you saved towards settling a debt.

Make your spending meaningful

Start tracking your spending to figure out what you value, and what you’re likely to regret. Write down what you buy then, 24 hours later, note how you now feel about it. Do the same thing three days and a week later. Did that purchase give you the satisfaction you had imagined? Are you really enjoying TV more because you now have an HDTV with a bigger screen? You should be able to see patterns emerge after a bit that will help you make better choices in the future — to save even more money for debt settlement.

Don’t get discouraged

It may take time for you to see real progress towards your goal of debt settlement. Remember that it takes a supertanker one day to turn just one degree. It takes 24 hours before it actually alters course. Don’t get discouraged if you don’t see immediate progress. Hang in there, and you’ll soon have enough money saved to begin settling your debts. It just takes time and mindfulness.

DIY Debt Settlement vs. Using a Debt Settlement Company

The Great Recession of 2007 left many people seriously underwater and facing financial disaster. Debt settlement turned out to be the equivalent of a life raft for a lot of these people. It’s not known how many people used debt settlement in the past nine years, but it’s known that thousands did, and in doing so saved millions of dollars, and averted bankruptcy.

The two options

If you’re seriously behind on your bills and can’t see any way to get caught up then debt settlement could be a good alternative.

The two types of debt settlement are DIY debt settlement and using a debt settlement company. In both cases, you would save money and get your debts paid off. So, the question is which of these options would be your best choice.

DIY debt settlement

This, as you can tell from its name, is where you settle debts yourself. It has several advantages. For one thing, some creditors may go easier on you and settle for less when they know they’re dealing with an individual and not a company.

Second, settling your debts yourself kind of forces you to organize and prioritize them, and face why it is you’re in so much debt.

You will save even more money when you settle your own debts since you will not be paying a debt settlement company.

You will be your only client

Debt settlement companies generally have hundreds of clients. When you handle the settlements yourself, you’re in complete control and are always your number one priority.

Using a debt settlement company means transferring a set amount of money each month to a trust account until all of your debts have been settled. In comparison, when you settle your own debts you have more flexibility. You get to decide which lender gets paid in what order and how much you will settle for.

The advantages of a debt settlement company

When all is said and done, most people choose to use a debt settlement company. There are several reasons for this. The biggest is that it eliminates the need to have the money available to pay for DIY debt settlements. The only way to successfully settle a debt is if you can make lump sum payments to your lenders to settle your debts. Let’s assume you owe $18,000. It’s possible you could settle those debts for 40% of your balances, but this means you’d need to have $7800 available to make the lump sum payments. And most people struggling with debt generally don’t have enough cash available for this.

There can be a lot of emotion involved if you’re negotiating with lenders yourself. In fact, negotiating with a lender can be a scary, as well as a long, drawn-out, experience. You may not be fast on your feet verbally or a good negotiator. When you choose to use a debt settlement company, it takes the burden of doing the negotiating off you. Plus, professional debt settlement counselors are generally able to negotiate better settlements than you could.

One set payment

As noted above, when you have a settlement company, you will not be required to make payments to your lenders. Instead, you would transfer a fixed amount of money each month to an FDIC-insured account that you manage. When enough money has accrued in your account, the settlement company will then begin negotiations with your lenders. The negotiations will continue until all of your debts are settled.

You won’t have to worry about anything

If you’re typical, you will have six debts to settle. If you figure several calls a day regarding each debt, you can see how quickly things could get crazy. You will need to take notes, remember the details of the offers you made, and the counter offers you received, and stay in contact with your lenders. All this goes away when you use a good debt settlement company. It will handle all these details for you, and keep you informed of how negotiations are going, so you will always know exactly where you stand. Your only job will be to sit back and relax, knowing your debt problems are in good hands.

It will cost you

Debt settlement companies are for-profits and charge for their services. Most charge a percent of the debt being settled. This can range from 15% to 25%. Going back to our example of $18,000 in debt, you might be charged $3600 (20%) by a debt settlement company. This might seem like a lot but if it’s able to settle those debts for 40% ($7200), You would still save money.

The net/net

As you have read, DIY debt settlement and using a settlement company each have their advantages and disadvantages. It’s important to weigh them to ensure you reach the decision that will be best for you. It may take some time and mental gymnastics to choose the right one, but it will be well worth the effort in the long run.