Breaking Free from Debt: A Risky but Rewarding Journey
My financial struggles finally came to a head when my student loans defaulted and were sent to collections. My credit score plummeted, and my financial future looked bleak. But I knew I had to take action.
Tackling Private Student Loans
I started by addressing my private student loan, which had stopped accruing interest after being sent to collections. I negotiated a repayment plan with the debt collector, agreeing to a two-and-a-half-year arrangement that fit my budget and goals. I made a small goodwill payment of $100 to show my commitment, and now I’m making regular payments.
Federal Student Loans: A Tougher Challenge
My federal student loans presented a bigger hurdle, with a balance of $21,354 and daily compounding interest. The debt collection agency offered me three options: settle for less than the full balance, establish a rehabilitation payment plan, or default and face the consequences. I chose to settle for 75% of the balance, paying $16,205 upfront. This decision came with risks, including a reported income of $5,149, which would be subject to taxation, and a negative impact on my credit score for at least seven years.
Taking Risks to Pay Off Debt
To come up with the settlement amount, I took some drastic measures. I cashed out my retirement account, knowing it would incur a 20% tax withholding and a 10% penalty tax. I also borrowed money from my mother, which was a difficult ask but necessary to make the payment. Finally, I voluntarily increased my tax withholdings to prepare for the additional taxes I’d owe in 2016.
Lessons Learned and Moving Forward
While I wouldn’t recommend my approach to others, I don’t regret the decisions I made. I’ve learned a great deal about personal finance since paying off my student loan, and I’m committed to making smarter choices going forward. I’ve adjusted my budget to accommodate the increased tax withholdings and plan to boost my retirement contributions in 2017. I’m proud to say that I’m in a better financial position than I was a year ago, and I’m determined to continue on this path towards financial freedom.
Leave a Reply