Debt settlement programs helps you pay your debts, including medical bills and credit cards, for less than you owe creditors. This strategy can save you money in the short-term, but may have negative effect on your credit score, tax liability and your ability to secure new lines of credit. Debt settlement can also reduce your chances of securing federal financial aid and private student loans to attend college.
Federal Student Loans
The federal government doesn't include credit history or credit score in eligibility requirements for government financial aid and loans, such as Stafford and Perkins loans. This means you retain the ability to receive financial aid from the government to attend a qualified institution, even if you are on a debt consolidation or debt settlement program. Once exception is when you have an unsettled default on a federal student loan. You cannot receive federal student until you resolve the default by bringing the loan current.
Federal Need-Based Aid
The government determines eligibility for need-based aid programs, including Pell grants, based on your annual income and your expected family contribution to your education as determined by your federal application for financial aid, or FAFSA. Participating in a debt settlement program can have negative consequences for eligibility for federal need-based aid since you must claim all forgiven debt more than $600 as income on your federal tax return. This could push you out of eligibility for need-based aid if have a high amount of forgiven debt through a debt settlement program.
Private Student Loans
Unlike student loans from the federal government, private student loan agencies may use credit score and history as an integral component in determining your eligibility for aid. Debt settlement can lower your credit score because you essentially pay off a date for less than owe. This may lower your credit score below a lender's minimum requirement for extending you a private student loan. A debt settlement notation on your credit report remains for up to seven years from the date you settle the account.
Continuing Collection Calls
Participating in a debt settlement may not have a measurable affect on your ability to secure financial aid for school, but it may not sufficiently satisfy your creditors to prevent continued collection practices. Creditors may even attempt to sue you to collect debts even as you're attempting to negotiate your debt settlements. The company you choose to negotiate debt settlements for you may also charge you excessive fees for negotiation services, which can eat into money set aside to help you pay for your education.
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