Ignorance of debt is not bliss

DEAR BRUCE: I received a student loan in 1993 for about $10,000, which I paid for about two years. My monthly payment was $50, debited from my checking account. Then it stopped. They kept selling the loan to different organizations. I avoided dealing with it until now. It's showing that I owe about $50,000, and it's on my credit report. How do I resolve this matter? I do not owe that much. How can I come to some kind of resolution and get it off my credit report? It's the only thing hindering my credit. I'm trying to get a home, and now the interest is much higher because of the student loan. It's a scary thing. I do not know what to do. — R.S., via e-mail

DEAR R.S.: About the only thing I know of that goes away, if ignored, is teeth. Other problems stay with you. They may go underground for a while, and that's what's happened here. The fact that you stopped paying or the loan was sold to different organizations in no way reduces your obligation. If, in fact, the loan was for $10,000 or less, the $50,000 balance now seems high, particularly since you say you paid off about $1,000 before the payments stopped.

You will have to meet this problem head-on, and that first entails contacting the current owner of this obligation, which may take some diligence on your part. The overwhelming likelihood is that the loan has been sold, and the principal can be negotiated. It is not going to go away by ignoring it. It is simply going to get worse. There should be enough information on your credit report to help you track down the current holder.

DEAR BRUCE: I have been reading your advice for some time, and I have a question. We have a home mortgage and a home-equity loan. Our house will be paid for in about four years; however, our home-equity loan won't be paid for another six to eight years. Which loan should be paid off first? We have increased our house payment by $100 a month. My husband says, as soon as we pay off the house, we can apply that money to the home-equity loan. Do you think this is the best way to handle the situation? We would like to buy (pay cash) our next house, as we are in our early 50s and we don't want another house note. — Y.Z., via e-mail

DEAR Y.Z.: You've given me a bit of information, but you've failed to tell me the most critical fact — the interest rates involved. If your home-equity loan is at a higher interest rate, which is very likely, that is the one you should pay off more quickly. Conversely, if the mortgage rate is the higher, that is the one. In my opinion, neither loan should be paid off more quickly. I suggest, at the very least, rather than paying off loans early, invest those monies in the marketplace. The overwhelming likelihood is that you are borrowing cheap money and, in effect, that is the return you are settling for when you pay it off early. You will continue to pay taxes on both of those loans, which creates a tax deduction reducing the net cost of the money. You should easily outperform the cost of that money. I believe you'd be far better off to get into a solid balanced portfolio of securities, particularly since as a couple you are still very young. When the time comes to buy your next house, assuming you will need some of the invested money to pay cash (which may not be a smart thing to do but nonetheless), you could always dispose of your equities.

DEAR BRUCE: I'm in school, and I'm unemployed. I had several individuals give me money to help me while I attend school. Some gifts were as large as $1,000. No one individual has given more than $11,000 in any one-year period. Do I have to claim this as income and pay taxes on it? For Christmas, I received a check for $2,000, and my income this year was $5,500. — D.M., via e-mail

DEAR D.M.: As you have noted, $11,000 is the max any one person can give any other individual in a year. Even if the gift exceeds that amount, the tax is payable by the donor, not by the receiver. In any event, nothing you have been involved with will trigger any tax liability for any individual in this game.

Send your questions to: Smart Money, P.O. Box 2095, Elfers, FL 34680. E-mail to: bruce@brucewilliams.com. Questions of general interest will be answered in future columns. Owing to the volume of mail, personal replies cannot be provided.

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