If I Go Back to School Will That Create a Problem With My Defaulted Private Student Loan?


Dear Steve,

I have a defaulted “signature” loan which I believe is a private student loan in the amount of $49,500, the principal amount is $23,600. I have received offers to settle the debt, paying much less.

The last one was $3,546, however, it is still more money than I have to pay them. I’ve made sure to not contact them or respond to any notices in order to avoid reactivating the debt.

I have around $36,000 in Federal student loans, they are currently in forbearance.

I currently work for a University that pays employee tuition 100% so I have no need to take any more student loans. I am concerned about starting classes though.

The University reports each student to NSLDS regularly so loans are in-school deferment, which doesn’t matter in regards to my federal loans, however, I am not sure about the defaulted private loans.

If I start school again will the reporting of the in-school deferment activate the private loans in default?

I appreciate your help with this question.

Thank you!



Dear Andrea,

It sounds like that problem loan was maybe a tuition loan directly from the school you went to. I’d need more specific information on who owns the loan to give you a clearer answer.

The good news is the federal loans you will take out will not be impacted by the old “private” loan. Only federal loans are reported to NSLDS so it might be that your current employer and school will ask you to take out federal loans for your education but then pay or reimburse you to pay off those loans.

I’d feel more comfortable if you had more information on what the details of the arrangement actually are. It’s unclear at the moment.

Now the federal loans in forbearance are a waste. You should get those into a new Direct Consolidation Loan and enrolled in an Income-Drive Repayment (IDR) Plan.

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Income Driven Repayment Plan Features REPAYE, PAYE, IBR, ICR
Click image to make larger.

Forbearance only blows up what you owe without any benefit. At least in an IDR you get a low payment with a potential for future forgiveness. But IDRs have downsides as well.

The offer to settle the old loan for such a small amount is a gift. But keep in mind that if you are not insolvent, debts more than worth, then you may owe income tax on the amount of the old loan that is forgiven.

If you do decide to take advantage of the offer you need to make sure you get the offer in writing, pay it by some traceable means, and never lose that settlement letter.

If you wanted to get some specific advice on what to do to make sure it all works out fine, talk to my friend Damon Day.


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Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
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