Question:
Dear Steve,
I co-signed a private student loan for my wife from Wells Fargo for about $19K. We starting paying back on this in Sept 2014. We’ve never missed a payment or been late. We pay $267 a month.
Since that time we have paid almost $13K in payments but our principal is still $17.4K. I have tried reaching out to Wells Fargo to negotiate a settled amount or lower interest rate (it’s between 9-10%) but got back the response “it’s not fair to our other loan holders,” etc. I’m thinking of stopping payments for a few months as they have no reason to do this since they know I’m an on-time payer.
I understand it could hurt my credit. I have a few questions – 1. Should I do this, should I stop making payments to put some pressure on? 2. What type of credit score hit are we looking at?
Keith
Answer:
Dear Keith,
You ask a great question that requires some awareness and a crystal ball.
What you seem to be looking to do is strategically default on your student loans in an effort to get the private student loan into an internal process/department where they may be prepared to settle it.
I get the fact you feel you’ve paid so much on this loan already and feel like you have not made much progress. If your payments had been increased to say $500 a month then you would have paid off about an extra $11,200 of the debt.
The terms of the loan you agreed to are not designed to get you out of debt. Quite the opposite. They are designed to give the lender an acceptable level of risk while maximizing the income generated from the loan. As you noticed, you were not paying back much more than interest only.
There are some advantages to strategically defaulting on a private student loan. Read this for details.
But there are also real consequences. This can involve being sued, winding up with a big tax debt, and bruising your credit score.
You are caught in the middle right now. Wells Fargo has no incentive to settle a loan that is making minimum payments and generating profit with minimal risk. It’s a cash cow.
When you default you are not doing anything more than trying to move your loan from one department to another that has more options for people that are now demonstrating a risk of default. It’s just a game to get your account in front of the niche of collectors that have the authority to offer settlement terms.
When it comes to Wells Fargo private student loans and other private student loans, the bigger issue is if the student loan was for something protected or could it be discharged in bankruptcy?
As the cosigner, any actions and hits the borrower feels can come your way as well. The cosigner guarantees the full repayment of the loan if the borrower defaults.
If you asked me if a Wells Fargo private student loan could be settled for less, the answer is yes. However, there is so much getting to yes that if you do decide to pursue this path I would strongly advise you to work with an experienced debt coach who can evaluate your overall situation and give you specific advice on what Wells Fargo has been doing for people in similar situations.
Settlement offers from creditors like Wells Fargo is not a static event. Settlement policies ebb and flow by the time of the year, internal corporate policy, and state of the economy. There is no hard and fast rule so specific experience is important.
As far as the credit score hit you both will take, that is the least of the predictable issues. That depends on how far your loan will go delinquent and if they will proceed with legal action against you that could result in additional credit reporting items.
If you wanted to get the best possible outcome, without any concern for legal action or a tax liability from forgiven debt, pay the loan off by sending more each month to pay it down quickly. If you wanted to have the loan paid off in about two years, send $1,000 a month and you’ll be done with it sooner than that.
