debt cancellation

Cancel Student Loans to Save — and Receive an Interest-Free 120-Day Loan

Elizabeth Lang — Thu, 24 May 2012 09:48:16 +0000

Student loan debt is all over the news. There are concerns that student loans might be the next "bubble" and finger pointing by Congress, universities, and of course, students. There's a lot of blame to go around, but at the end of the day, you are the one who has to repay the debt. So, what's an easy way to have less debt?

Return money you don't need. In federal loan lingo, it's called "canceling" your loan. (See also: Student Loans: How to Make Post-College Decisions)

Buried deep in the Federal Loan documents, there's a provision that tells you, "before your loan money is disbursed, you may cancel all or part of your loan at any time by notifying your school."

But here's the better deal — "Within 120 days of the date your school disbursed your loan money (by crediting the loan money to your account at the school, by paying it directly to you, or both), you may return all or part of your loan to us."

So Why Would You Want to Return Part of Your Loan?

You want to return (aka cancel) your student loan because then you don't have to pay interest — even back interest that accrued since you took out the loan. Here's the official language:

You do not have to pay interest or the loan fee on the part of your loan that you return within 120 days of the date that part of your loan is disbursed. If you received an up-front interest rebate on your loan, the rebate does not apply to the part of your loan that you return. Your loan will be adjusted to eliminate any interest, loan fee, and rebate amount that applies to the amount of the loan that you return.

Any unsubsidized federal student loan starts accruing interest immediately, so the sooner you can pay back the money the better. And with Grad PLUS loan interest rates at 7.9% and origination fees of 4.0%, every $100 you return is saving you nearly $12 today (and more as the interest compounds). So when you get all interest accrued and fees paid returned to you, you've now got a 120-day interest-free loan.

Why You Would Need to Cancel Part of Your Loan

Now, I would never advocate taking out an interest-free loan for 120 days just for the sake of taking it. Instead, there are two really good reasons to cancel your loan.

1. You Took Out Too Much Money

One of the issues with student loans is that it's hard to figure out how large of a loan you need and easy to take out too much money. At the beginning of the school year when you make your loan elections, you might think you need $5,000 of spending money during the second semester, but by the time the loan gets dispersed in January, you realize you only need $3,000. Instead of blowing the extra $2,000 on clothes or rounds of drinks for your friends, do the responsible thing and cancel this money you don't need.

2. You Get Extra Money or Are Working During School

Many students (especially graduate students) work while going to school. So take part of your earnings for the first few months of each semester and use it return part of your loan money. Or perhaps you got lucky and receive an inheritance or some unexpected birthday cash. Instead of spending it all, cancel your loans and get your interest and fees back.

How to Cancel Your Loan

I've canceled multiple students loans because of earning more by working or taking out too much money in the first place. (One semester, my tuition dropped due to course load adjustments, so I was able to return a large part of a loan.) I've used the following two methods to cancel my loans.

1. Contact Your School's Financial Services Office

The easiest way to cancel your loan is to contact your school's financial services office and ask them to cancel all or part of your loan. If the money has only been disbursed to your student account (and not all the way to your personal checking account), the school can easily take the money back and return it to the government.

2. Contact the Direct Loan Servicing Center

If the loan has already been disbursed to your personal account from your school's student account, you'll most likely need to contact the Federal Direct Loan Servicing Center. My experience has been that they will tell you to send in the money to a payment address or "make a payment" online; then you'll have to follow up and tell them that they money was for a cancellation. I recommend calling them at 1-800-848-0979 and not emailing through myedaccount.com. Always use the term "cancellation" or "cancel." (I have had several experiences with email where the email reply has been that they made the adjustment, but the interest in my account still showed, resulting in me having to follow up multiple times. Calling has always resulted in the cancellation showing the first time.)

This student loan hack only works for federal loans and makes the most sense to use for unsubsidized loans where interest is accruing from day one. But it's a great way to lessen your debt burden after you finish school.

Have you ever canceled a loan within the 120-day period? What hacks have you used to lighten your student loan debt?

This article is from Elizabeth Lang of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Forgiven Debt Isn't Really Forgiven At All

Kate Luther — Tue, 22 Sep 2009 13:00:09 +0000

If you've been struggling with the rest of the economy, chances are you've been forced to rethink your financial priorities. And as a result, credit cards are often the first thing to go.

The good news is that once you get behind, many credit card companies will offer to "settle" your account, some for as much as just 40% of your original balance. And if you're looking at a large chunk of credit card debt, making it go away for 40% of its value sounds like a pretty good deal.

But before you write that check, there's a little detail you need to know: in many cases, credit card companies can report that unpaid amount to the IRS and – this is the kicker – you'll have to declare it as income.

Wait a minute, you're saying. We made a deal. I settled that account and I even have a letter from my credit card company saying it was "settled in full." I shouldn't have to pay anything else.

And to that extent, you're right... you don't have to pay anything else... at least not to the credit card company.

But using the same laws that allow the IRS to tax you on gifts and prizes, if the unpaid portion is more than $600, the IRS considers it to be income and that income is reported on a Cancellation of Debt Form 1099-C.

That means that while your debt with the credit card company has been satisfied, you may stil have to pay Uncle Sam for getting such a great deal.

For example, let's say you had a $2,000 debt that you settled for 40% or $800. Your unpaid balance – the amount the credit card company agreed to "forgive" – would then be $1200.

At the end of the year (or whenever they do their reporting), the credit card company would report that amount to the IRS as a "forgiven debt" and send you a 1099-C to file with your individual tax return.

Now, whether or not you'll actually pay taxes on that amount will of course, depend upon your individual situation and the amount of debt being forgiven.

For most, a $600 increase in income isn't going to make a big difference in your taxable income but a bump of several thousand dollars just might. And if you consider that the average household has just under $10,000 in credit card debt and access to almost $20,000, it's not hard to see where a generous "settlement" offer might be considered during hard times.

Fail to report this amount and you could set yourself up for an audit.

This rule does not apply to certain types of debts such as those resulting from VA benefits, qualified farm debt, debts canceled in bankruptcy. It also is not applicable to debts that have been charged off so if your credit card company has sold the debt to a collector and written it off as a "bad debt," they cannot report the debt as "forgiven" on a 1099-C.

So, what can you do?

While it's tempting to cut a deal with credit card companies, you may end up paying more than you bargained for. In addition, even though the credit card company notes that the account was "settled in full," that is not the same thing as "paid in full" and the difference will be noted on your credit report.

There are however, some alternatives. Most credit card companies would desperately prefer for you to get back on your feet and pay your bills so many are offering various payment programs to help you manage your debt while times are tough.

Also remember that a credit card company will hold your account for at least six months before writing it off so if you're only a few months behind, you may still be able to avoid the collection agencies.

Another option is to enlist the help of a consumer credit counseling agency. However, before you sign up, make sure the agency is reputable and be sure you understand how participating in the program will affect your credit.

It might take a little extra work on your part to get out from under your debt, but at least you won't have to pay Uncle Sam any more at the end of the year.

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This article is from Kate Luther of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: