Q. I want to help my goddaughter pay down some of her substantial student loans (and the interest that has accrued over more than a decade). I am guessing the Department of Education, like most lenders, would welcome the certainty of payment today of some fraction of the full amount, rather than wait years to get some or all of it paid – with the real risk of default.
Two questions:
1) Who would be in a position to establish a fair present value payback? Does the DoE have a repayment tsar?
2) Would the difference between the face amount of the loans and whatever they are settled for be considered income to her? There would be no point in saddling her with one debt to the federal government (payable next April) in order to satisfy a debt to a different branch of the government that is only required to be paid over many years.
– Jon
A. This is such a generous and kind gesture. But, alas, the U.S. The Department of Education does not provide a discount for prepayment for borrowers who are current on their loans, says Mark Kantrowitz, a student loan expert and author of "How to Appeal for More College Financial Aid."
"The only option is to have the prepayment applied to the current balance (principal plus any accrued but unpaid interest) on the loans," Kantrowitz says.
There is an exception if you settle debt that has been in default for a long time, Kantrowitz notes.
"Strategic default is ineffective, as the settlement will always be more than the loan balance at the time the loan went into default," he adds.
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