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Originally Posted by tk13
I'm by no means an expert (welcome to ChiefsPlanet), but from what I understand, doing this will do a lot of damage to her credit score. It's supposedly easier to do with private loans than a federal loan, so it may depend on who you're working with.
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I know, with credit cards, you want to maintain some percentage of debt being used as long as it stays under 30% of your total available credit. However, federal student loans are a whole other ball of wax. As someone else stated, they are not subject to discharge under bankruptcy, so there's probably little reason for them to want to lessen the amount you owe them significantly, because they'll lose all of the collectible interest. For this reason, defaulting on these loans is not worth it because it will do nothing but damage your credit rating.
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It's also my understanding that if any of your debt is actually forgiven, it becomes taxable income that will ding you next year on your return. But I'd be happy for someone with more tax knowledge than me to correct me on that. Either way I'd make sure to ask someone the tax implications if you actually pulled it off.
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If you settle for less than you owe, you will receive a 1099 for the amount that was forgiven that you must claim as income. I'm not a tax expert, but I know this from past experience.