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Talk to lender before letting debt go to a collector

Sally Herigstad

Dear To Her Credit,
I have a Sallie Mae private loan that I'm four payments behind on. I've been receiving calls and have not answered them, simply because I can't pay the $230 a month they want.

Now they say they will be sending the loan to a third-party agency. How long can that take? Does the third-party collector immediately take us to court?

My husband and I were thinking it would be better to just let it go to collections and deal with them, hoping they would accept a lower payment. Is that a good idea? -- Tabitha

Dear Tabitha,
I often see people take an all-or-nothing approach to bill-paying. They miss one payment, or they decide the payment is too large, so they quit paying altogether and avoid all contact with the company or person to whom they owe money.

Ignoring debts or waiting for them to go to collections, however, only makes things worse as collection charges and interest are added to your account.

In addition, "letting it go" because you can't pay the full amount will damage your credit history. At the four-month mark, your loans are already in default. According to Mark Kantrowitz, Senior VP and Publisher, Edvisors.com, private student loans are considered to be in default after 120 days of nonpayment, which is about four months.

Besides not paying your debt, stopping communication with the lender is the next big mistake. Kantrowitz says, "Always talk with the lender before you default. Ignoring the debt won't make it go away."

If you can get up the courage to talk to the lender, you may find that the situation is not as impossible as you think. If you can't pay because one or both of you are unemployed or have other reasons for your financial difficulty, the lender needs to know. "Lenders have several options for borrowers who are struggling, such as a forbearance or partial forbearance," says Kantrowitz. "A forbearance temporarily suspends the repayment obligation for a few months while the borrower gets back on her feet. A partial forbearance is similar, but involves the borrower making interest-only payments so that the debt does not grow larger."

If you are granted a temporary forbearance, the loan will grow larger while the forbearance is in place. That's because interest continues to accrue. However, collection activity will temporarily be stopped, giving you a chance to get back on your feet financially.

You don't say if anyone cosigned on the loans. If your parents or anyone else cosigned on your student loans, the lender will probably have already contacted them to seek repayment. Kantrowitz says, "Sometimes lenders will clear the default status and make other accommodations if the consigners agree to make the payments through auto-debit."

While you are working something out with the student loan lender, you also need to look out for your own rights. Federal law prohibits certain collection tactics, such as telling third parties about your debts, calling you at work if you tell them not to, or calling at odd hours. It's best to find out about your rights under the Fair Debt Collection Practices Act before collection efforts even get to that stage. If the collectors try anything they shouldn't, you'll be able to call them on it and cite the act to stop any harassment. Even if collectors never cross the line, you'll feel better knowing where that line is, and that you have a right not to be unlawfully harassed.

If you use the act to stop harassing phone calls, according to Kantrowitz, you'll still owe the debt, of course. The lender will still be able to contact you to inform you about actions they are taking, such as filing a lawsuit against you.

The longer you wait, the harder debt becomes to pay. Pick up the phone, or write a letter, and start communicating with your student loan lender today.

See related: How bad can it get after loan default?