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Saturday, September 27, 2008

Losing Track of Student Loans Can Wreak Havoc On Your Personal Finances

While having a big family is a wonderful blessing in and of itself, it’s especially rewarding during tax season. Don’t get me wrong; I value my family infinitely more than a tax refund, but it feels good to know that my commitment to my marriage and children is recognized by our government when tax time rolls around. We had twins last year, so when my husband and I realized that we would get a Child Tax Credit for both of them, we thought that was pretty nice. After deductions, we expected a return in the thousands, so we were happy campers.

During that same time, however, we were dealing with a frustrating issue that did not put smiles on our faces at all. Somehow, when I consolidated my federal student loans, one of them was not included. I didn’t understand how it could have happened, considering how informed the consolidation company was. Loan consolidators do all of the hard work for you - they call you out of the blue, offering to make your life easier by combining your student loans with a great interest rate and anything else you need, including forbearances. As they are explaining everything to you at the speed of light, they list all of your outstanding loans and help you to understand why making one easy monthly payment would ease your anxieties about student loan debt. They’re right; it does. So, I agreed with them and consolidated my loans. They reviewed the information with me again, reading back the information on each smaller loan that would be merged together into the big loan. So, I thought everything was taken care of.

And then we found the one that got away.

Actually, the one that got away found us; once the creditor discovered I had moved and gotten married, they politely called to let me know that I owed them money for a small student loan. It took a while to figure out what happened, but when we did, my heart sank. I was so young and I took out so many small loans while I was in school that I hadn’t been keeping track of them properly. So, when the consolidators did not have their facts and figures right, I should have been able to correct them, but I wasn‘t. I ended up with a defaulted loan because it went unpaid and unnoticed for quite some time. As many young Americans know, having a student loan in default is guaranteed to bring a lot of unwanted phone calls, anxiety, and grief that we did not want. One artist was so encumbered by Sallie Mae that he wrote a song about it:



So, we did everything we had to do to bring that loan back to current status, although it didn't happen until around the time we filed our taxes for the year. Thinking that everything was settled, we filed and waited, only to learn that the creditor had not reported the updated status of the loan, so our entire federal refund would be garnished to settle the debt.

Needless to say, that knocked the wind out of my sail.

Lots of people depend on their federal tax returns each year to cover large expenses or to revive their personal finances. However, outstanding student loans, if they are not current or at least in forbearance, can cause your federal income tax refund to be garnished. Although what we lost was actually enough to pay off the debt and would release us from it, we couldn‘t help but feel blindsided. Our tax preparer told us that we could have appealed the situation, considering that the return was garnished unnecessarily. We decided to just let it go. Although we mourned the loss of our beloved tax return, debt freedom, much like family, is simply too great a commitment to take lightly.

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Thursday, August 21, 2008

The Unforeseen Consequences of Keeping a Card in "Good Standing"

A few months ago, I called Capital One as part of my rounds when I tried to make arrangements with all the credit card companies I could no longer afford to pay. I started missing payments earlier in the year, after a surgery kept me out of work for a month. My wife and I are teachers, and summers are usually the lean months, which leaves us spending most of the year trying to catch up on our debt instead of getting ahead of it. That one month was like the pebble that started the avalanche, and soon I was missing or late with payments on most of my credit cards, instead of letting one slip so I could catch up on the others.

I had financial trouble the year before, which I fixed for the most part, except for my interest rates, which had jumped to insane and unreasonable levels. When I had to choose between paying the mortgage on my house or making payments on several credit cards I hadn't been able to use in years, I chose to let them slide. My interest rates were already terrible at 37.17% for the Bank of America card, 25.83% for First USA, and a variable rate with Capital One that never went lower than 21%. I had a Best Buy card floating around as well, but the last time I'd gone to their website, they refused to take my payment and sent me to a customer service number, clearly part of some brilliant scheme to get me to pay by denying me access to my usual method of payment.

The rates were already out of control, how much worse could they possibly get? And how exactly did they think that I could pay twice my normal payment if I couldn't pay the regular payment the month before? Maybe if I spent a few months trying to catch up on my overdue utilities, I could put together enough money to tackle one of the ever-expanding minimum payments and start fresh.

Even as I was missing these payments, I still made an effort to pay Capital One on time. It was my oldest credit card, with my largest balance, and like so many Americans with debt problems, I made the mistake of treating the highest balance as the highest priority. Here's what I received from Capital One in return: while all the credit card companies I had been unable to pay were willing to place me in programs that would accept lower payments, offer lower rates, or even just cut out the ridiculously high late payment fees, Capital One wouldn't.

By paying them when all of my other cards were getting late or no payments at all, I kept them in good standing. That was, apparently, a mistake. I was informed that they could not possibly put me in their program because my account was in good standing. They would only do that if I missed several payments.

I asked to speak with a supervisor, and the supervisor confirmed that even though I was trying to avoid damaging my credit by making arrangements, they could not make arrangements with me as long as my account was in "good standing." "Okay, so what you're saying to me is that the only way you'll be able to put me in a program is if I stop making payments for a while and destroy my credit with you?" The supervisor hedged a little, but he basically agreed. They only offer the program to people who haven't paid.

So I took his advice and stopped making payments. I put the money toward payments I negotiated with the other credit card companies, who were very understanding about my situation. It's been about 90 days now and I've finally fallen from Capital One's good graces. They sent me a letter urging me to call them and make arrangements so that my credit won't be further damaged. Imagine that.

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