Wife Defaulted on Student Loan

[BudE]

I recently found out that my wife defaulted on a Federal student loan. The current loan balance is about $40K. She did a good job of hiding this situation and I only found out about it when a letter arrived informing us that our federal income tax refund would be intercepted and applied towards the debt. (We filed jointly.) I work long hours and she’s been managing the household finances. She’s been unemployed for the past 2 years.

Now that the fireworks have died down, we need to figure out how to deal with this situation. I’m currently paying for two kids in college and can’t afford to take on her student loan too. If she at least gets a part time job and starts making regular payments will that prevent the loan holder from taking further actions? The mortgage on our home is in both of our names and we have a couple of joint bank accounts. A friend mentioned the loan holder could go after those assets and that has me worried.

Any advice out there?

[Frugal]

I would look into what the options are by calling the Department of Education and talking to the loan servicer. Then, I would go talk to a professional credit counselor, or perhaps just a general financial professional. It is hard to know what anyone should do in their individual situation, if you are not a professional. I do know sometimes on student loans they will negotiate repayment plans. Not sure if that applies to defaults, just people in trouble, generally.

[BudE]

Thanks for your advice. We spoke with an agent at Sallie Mae and they are mailing an overview letter with details on the current loan balance. Also spoke with a rep from the collection company that has started calling. A rather nasty individual who attempted to use some high pressure tactics to have my wife agree to some loan "rehabilitation" terms which are just unaffordable for us.

We're looking for a professional financial counselor to speak with about this situation but the choices are a bit overwhelming. Would it be better to speak with a credit/debt counseling service, a financial planning consultant or a lawyer that specializes in debt relief?

Thanks!

[SnoopyCool]

As far as the tax refund, I'd ammend my return and file an Injured Spouse form, so as to get back or keep your part of that refund.

[LittleMsMom]

BudE: I have a few questions to help me zero in on my advice.

First I am sorry you found out this way about the defaulted loan. It really is a tough thing to find out your spouse is not fully disclosing their finacial situation, even if it is because they don't fully know their finacial situation themselves.

Okay first, How long have you been married? The reason I ask is because I was wondering if this is your first tax return as a couple? SnoopyCool mentioned the Injured Spouse form for ammending your taxes. If you had debt repayment plans for your tax return money that is a way to atleast get some of the return back, but if you had not set plans the tax return garnish is a way to start paying it off sooner.

You said you are already paying on two kids in college. How are you paying for that? Are you getting loans? The reason I ask is because I will be mentioning a loan rolling option below.

Also above I asked how long you were married, if you have been only married a year or two I would sit down with your wife and go online and pull up both your credit reports to see if anything else is lingering out there before you meet with any credit counseler etc. So you both have a FULL picture of the debt problem.

I found myself in the same situation you find yourself. Long story short, I ended up taking out a NEW student loan (I was in college when I got married). I took the money I got from the NEW student loan and did a settlement in full offer. This reduced my now Ex-Husbands student loan interest rate from 36% to 4.25%.

In your case you stated you have kids you are paying for college for, so you might be able to do the same. Apply for a student loan or loans (plus loan etc) and then use money from the lower interest rate loan to pay off the much higher defaulted student loan rate. Then because you are no longer defaulted you will be treated by the new loan company more repectfully.

Good luck.

[BudE]

@ SnoopyCool – Yes, I’ve already filed an Injured Spouse form and I’m waiting to see how much of the refund I’ll get back. Actually I don’t mind if a portion is kept and applied to my wife’s loan balance.

@ LittleMsMom – We’ve been married for 22 years and have filed jointly every year. I’ve been planning for their college years for a long time and use money in 529 plans and savings to pay their college tuition/board. My plan was to get them through undergrad without any loans. If they pursue graduate studies they will finance it.

If I understand the rolling loan option you described, it would require that I take out student loan(s) in my name and use the money to pay off the balance of the student loan in my wife’s name. The interest rate differential would be favorable but with an additional loan to pay back it would impact my ability to contribute towards the kids college. Not sure if I’m willing to do that…

We obtained copies of our credit reports. Mine was spotless, my wife’s was a mess. I’m beginning to think our best option may be to try and work out some type of settlement at a percentage of the total amount owed on her loan.

Thanks,
BudE

[Hector]

In which state do you live? You are married for 22 years and if you are in a community property state, there is not point about talking her and him because everything is combined.

[BudE]

We live in New York which is not a community property state.

[snafu]

If you decide to see a credit counsellor, make sure it is government/state operation, not a for profit service who talk a great talk but are unable to deliver anything more than you can negotiate for yourself. I'd see a lawyer who specializes in debt negotiations, since students loans are not forgiveable even through bankruptcy.

[GrimJack]

As far as the tax refund, I'd ammend my return and file an Injured Spouse form, so as to get back or keep your part of that refund.

This is exactly what I was going to suggest. Go to the IRS.gov site and enter 8379 into the search box in the upper right hand corner; that will bring up a link to the form. The form is 'fillable' so you can fill it out before printing it. Check out this page for some information wrt Injured Spouse. Your situation sounds right for the form.

I answer phones for the IRS and sent people to the form all the time.