My Federal Student Loan Balance Went Way Up While I Was in Jail

Question:

Dear Steve,

I was incarcerated for 20 years. During this time, my student loans were declared unrecoverable and were transferred to the IRS as a capital gain. At least that is what they informed me. All but one. for some reason this $2700 loan was not included and has grown to 5700 with 20 years of interest.

I am out now and would like to continue my education, but this one defaulted loan is keeping me from getting help from the dept of education. I have no problem with paying the principal. But the years of interest…. seems kinda predatory to me

The dept of education is unwilling to negotiate a settlement, even though they see the unfairness of letting a loan accrue interest for 20 years while I was incarcerated. I will gladly pay the principal, I took the loan after all. but I feel there should be some negotiating room on the interest.

Do you have any suggestions on who could help me fix this? The dept knows they have me at a disadvantage.

Grayson

Answer:

Dear Grayson,

It sounds like you had private student loans that were deemed uncollectible and written off by the original lender. That would have resulted in a 1099 form being filed with the IRS and you would have been responsible for income tax on the forgiven debt if you were not insolvent.

The federal loan situation is a different matter. Federal loans do not have a time limit and if you are not making payments then they will continue to grow the balance.

The bummer here is if someone had told you a long time ago about getting on an Income-Driven Repayment plan your payment in prison would be $0 a month and prevent the loan from going into default and getting hit with additional fees.

At this point, you need to get your federal student loans on a rehabilitation plan. This is only available once in a lifetime. Once your loan is rehabilitated using this information or attempt to roll the loan into a new Direct Loan.

For more information, click here.

There is no interest negotiation on federal student loans. Unless you take action to resolve this using the advice given above, you will probably have any future Social Security garnished for the debt.

Sincerly,

You are not alone. I’m here to help. There is no need to suffer in silence. We can get through this. Tomorrow can be better than today. Don’t give up.

Damon Day - Pro Debt Coach