The Power of Negotiation and Options in Student Loan Repayment – Lessons from a Reader’s Experience


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One of my favorite things about blogging about personal finance is that once couple of weeks, I’ll receive a question from a blog reader asking how I would handle a certain situation in personal finance or about what other options he or she might have but has not yet thought of.

I really enjoy this real life interaction because it allows me to use the knowledge base I’ve accumulated over the past 3-5 years to help regular folks optimize their situations. In addition, it exposes me to accounts of how some of the PF topics and theories discussed in the blogosphere actually work out in real life. Sometimes, the theory falls far from the application, and sometimes, it is spot on correct. It all really just depends!

Shown below is a student loan repayment situation faced by a reader that recently contacted me asking about any options they may have overlooked prior to their discussion with a collection agency handling their loans:

Thanks so much for letting me contact you about this huge struggle my husband, and by proxy myself, is going through. 

He went to Lehigh Valley College, a now CLOSED school, for 1.5 years back in 2002/2003. He took out around 4 Sallie Mae loans and one federal loan for a total of around $40,000. The interest rates on the Sallie Mae loans were higher than most credit cards. He didn’t find a job right away out of school, and when he did finally find a job, it paid next to nothing. He couldn’t afford the payments they were demanding, so he just ignored them… and ignore them he did.  

The federal loan is now paid because they garnished his wages and tax return for 2 years. The issue now involves the 4 Sallie Mae loans, which had been turned over to Allied Interstate (a collection agency) after he had defaulted. He made a deal with Allied to pay $375 a month for something like 13 years at an interest rate of essentially 0%. The total still to pay down at this point is to about $62,000 (down from $70,000 originally).  

He is making about $42k a year with his job, which does thankfully include health insurance. He does not have any other significant debt aside from the student loans, and we do have an emergency fund. 

Allied stopped taking the $375 per month loan payments in October because they started demanding higher payments. We contacted a lawyer at the beginning of November because they broke their agreement. We won the law suit. Now, the issue is that Allied sold the loan to another collection agency after we won the suit. So, we are going to have to go through all o the negotiations again. Since he took out 4 loans through Sallie, the new agency (NES) is referring to them as 4 loans rather than one loan as Allied did. 

The $375 that we were paying with Allied was do-able. However, since he hasn’t had a payment taken out since the end of October, I told him to save the money he’d pay because NES probably will want a nice down payment. But, I think he’s spent it. He is a spender, I am not so much anymore. Like I said, I want to get it paid off, and the more he pays each month, the shorter the term of the payment. But I don’t know if he follows my logic on that. He just doesn’t want to change his lifestyle and current spending habits.  


I cannot find ANYONE to help me. He signed for these loans, but under false pretenses. Every sort of loan payment help or loan forgiveness refers to federal loans. Seriously, I have done so much Googling on the subject and I am at a loss. I don’t know where to turn. If he deserves some sort of help with this issue, I want to be sure he gets it. 


Listed below were my preliminary thoughts on the situation:
From what I am hearing, it sounds like the debt collection agency and Sallie Mae are really actually trying to work with you all already to get it paid off, first by reducing the interest rate, and then also offering to consolidate things (which sometimes, but not always, can be a good idea). I would first just double check what interest rate they will be charging going forward to make sure it is favorable, but that is one thing that would definitely be negotiable for you all. 
Having established that, the next thing I would think about is what the current monthly payment will be with this new collection company and define whether or not it is do-able with his income?
To be honest, if he is making $42k per year in his job, and just has one debt to pay off (the low interest student loan debt – no credit cards), $375 per month sounds like a fairly realistic amount (although painful). I think the real issue that needs to be addressed is his behavior, first from the side of actually realizing that he needs to send in payments for his debts (i.e. they aren’t going to magically disappear if he ignores them), and second, getting control of his spending.

If I were you, I would sit down with him PRIOR to the call with the company and talk through his income/expenses to determine what is a feasible amount to be paying. They might be willing to give you an economic hardship deferral for other REAL obligations (such as utilities, low income, credit card debt), but not for the fact that money is low because he is overspending each month on consumer items.

So, once you talk to the new collection company, determine what the new amount is you’ll be paying. Then, think about why it is or is not do-able to meet? Remember: it is to his benefit to pay down his debt sooner rather than later, provided that it economically feasible.
If there is a good reason why it is not do-able, there can be other options to look in to such as an economic hardship deferral (which another reader I recently helped with student loan debt qualified for because his income was below $40k per year), although that may be harder to qualify for given his good income level and lack of other debts. 

Listed below is an update from the reader after the call to the collection agency:

We called NES today. They are consolidating the 4 loans into one, and they agreed to a down payment of $800 today, $700 by the 31st, and $400 each month thereafter. They are doing a matching pay program, so every dollar he pays, Sallie Mae matches it. We are down from 13 YEARS to 6 YEARS!!! He’ll have to pay taxes on what Sallie matches.

So this is pretty much amazing. Of course, he didn’t save everything that the company should have been taking out since October and we’ll have to take some from my savings to pay the down payment, but it’s a relief regardless. He just has to remember to always have the money there because if even one payment gets bounced the agreement is void and we’ll have to pay the entirety of the loan without any help from Sallie Mae. 

I have found a few websites to help him with the saving, including Smarter Bucks. Have you used this site? I am also going to help him get set up on Mint, like I am, so he can really look and see where his money goes each month. He’ll have $100 a week to spend as he wishes, whether it’s going out with friends or on electronics or whatever, so I hope he listens to my advice and is willing to learn how to budget. 

I will think of this as a blessing in disguise. Thank you for your help.

As you can see by reading the update from the reader after her and her husband’s call to the debt collection agency handling their student loans, they seem to have landed a pretty nice repayment deal! In fact, it actually appears that Sallie Mae genuinely does want to help them pay off the loan.

Key Lessons to Learn from This Situation – Options and Negotiating in Student Loan Repayment

According to much of the personal finance theory I’ve read the past few years, student loan debt is generally regarded as “not-that-bad” because 1) a college degree gives you a good return on investment by allowing you to attain a rewarding career, 2) it generally has a lower interest rate than consumer debt, and 3) it is generally much more flexible with the terms of repayment than other debts such as credit cards.

While the first two points listed above are fairly straight forward and clear to see for most people, the 3rd point is the aspect I’ve discovered people with student loan debt are actually the most interested in. Essentially, they want to know what their options are and what is acceptable to negotiate in regards to student loan debt.

Because of this inherent interest that people have in what options they have regarding student loan debt repayment, I thought it would be useful to review some of the lessons that can be gleamed from the reader’s experience above:

  • Lesson/Option # 1 – The interest rate of your student loans is definitely negotiable. 
    • The readers above negotiated the rate they were paying down to almost zero (~0.01%).
  • Lesson/Option # 2 – Look in to whether or not a student loan forgiveness program applies to your specific loan.
    • This was not applicable to the reader’s student loan. However, if you are going in to a career as a teacher, doctor, and other forms of public service, it is very possible to be eligible for loan forgiveness (especially if you have a federal student loan). At the very least, it is worth asking! 
  • Lesson/Option # 3 – Ask if your student loan provider offers matching for your loan repayments. 
    • This was a pretty sweet deal that the reader was eligible for (I didn’t know before now that matching of student loan payments even existing!). However, it’s hard to pass up free money such as this, so at the very least, it’s worth asking your student loan provider if this is available. 
  • Lesson/Option # 4 – Consider whether or not you would qualify for economic hardship deferral. 
    • Essentially, economic hardship deferral means that you can get your student loan payments reduced for a certain time period if your current income is low or you have a very high debt to income ratio. 
    • This is definitely a powerful option to consider if you meet the qualification(s). Again, at the very least, it’s worth having the discussion with your provider to ask. 
    • When you call, make sure to have all of your records handy, including your current income, debts, and all set expenses such as rent and utilities. 
  • Lesson # 5 – If you start to have trouble making the required and/or minimum payment on your student loan, inform your provider immediately. Do not ignore your loan! 
    • As we saw in this story with the reader above, by just going silent and ignoring his student loans, they did not go away – a default occurred and the loan was sent to a collection agency. On top of that, the reader’s credit score was likely also negatively impacted.
    • Instead, it is better for both parties to stay in communication and determine how best to work out the situation. 
  • Lesson # 6 – If you are having trouble affording loan repayments, isolate the real root cause.
    • In the case of the reader described above, they were having trouble with repaying their student loan. 
    • However, in talking through the details, the root cause/problem was not in fact an overall shortage of money. It was 1) making sure to acknowledge that the student loan needs to be paid in the first place, and 2) getting handle of spending levels to free up the necessary cash. 

How about you all? Are you currently working on repaying student loan debt?

If so, have you discovered any “hidden” options or negotiation points along the way that you wish you knew at the start of the process?

Have you made any mistakes along the way as well?

Share your experiences by commenting below!

    ***Photo courtesy of http://www.flickr.com/photos/justinstravels/4955154459/sizes/l/in/photostream/

    Comments

    1. Mary Kaplan says:

      As you noted, there are numerous lessons to be learned from the reader’s problem. Thanks for summarizing it so well! I had student loans, and I consolidated mine and spread them out over a longer period with accelerating amounts as the years went by. The thinking was that early on my income would be lower so the payments should be lower. As the career progressed, hopefully the salary would increase making the larger payments doable later on. Happy to say it all worked out fine, but I was sure glad to make that last payment nearly 20 years later!!!

      • Thanks for sharing Mary! Were you able to negotiate a pretty low interest rate during repayment?
        My recent post You Don't Know What You Don't Know – A First-Hand Account of the State of Personal Finance Education

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