Dear Penny: Should I Take Out Life Insurance on My 47-Year-Old Mom?

Dear Penny,

My mother is 47 and has been increasingly paranoid about her death. She’s not sickly or in bad shape. She’s been getting better about managing her sudden diagnosis of diabetes. 

I think she’s doing well for her age. She works a full-time job and has little to no complaints. Personally, I think she’s just paranoid, but she’s been asking me serious questions about life insurance policies for herself. She wants me to buy a policy on her, but I’m not keen on purchasing a life insurance policy on my living mother whose death I’m not looking forward to. 

Nonetheless, she continues to ask me questions about her finances and what I (her 28-year-old daughter) think she should do about her bad credit, old debt from decades ago, and a past repossession. She asks me if her policies will go to that debt? Will her 401(k) go toward those debts? Or will it be safe for my sister and me? 

From what I know, she has purchased two life insurance policies and has listed me as her 401(k) beneficiary. I don’t know what I would do if she passed away suddenly, as I have a very small family that consists of just my sister and mother. (Her ex-husband/my father is estranged). I thought her accounts, 401(k), life insurance policies and debts would go into probate after she dies. 

She has many years ahead of her. I feel as though she is worried about debt collectors going after money she intends to leave my sister and me when she passes. What could she do to avoid that? What is good advice for her at someone her age? I want her to live a good life now with her grandchildren and not be so worried about the future when she’s gone.

-Concerned Daughter

Dear Concerned,

It’s normal that your mom is feeling more aware of her own mortality after a sudden diagnosis. It’s also normal that you, her loving daughter, don’t want to contemplate life without your mom.

Maybe your mom is going a bit overboard. Or perhaps it just appears that way to you if she’s avoided talking death and money until now. But estate planning is essential even for young and healthy people.

Your mom needn’t worry that debt collectors will come after you or your sister. Children generally aren’t responsible for their parents’ debts as long as they aren’t co-signers. Generally, their assets and liabilities become part of their estate, and creditor claims get sorted out in probate court. It sounds like these debts may be old enough that they’re past the statute of limitations, though. In that case, collectors couldn’t sue your mom over them or file a probate claim.

But not all assets go through probate. Assets like life insurance policies and retirement accounts, including 401(k)s, go directly to the beneficiary. If your mother has you and your sister listed as beneficiaries, the money goes directly to you both. Even if your mother died deeply indebted, creditors couldn’t touch that money.

My best advice for you, your mom and your sister is to have a deeply difficult conversation. Talk about what the impact would be in the awful scenario that your mother died tomorrow.

Clearly, her death would leave a huge void in your lives. But I’m assuming you and your sister are both self-supporting adults. If that’s correct, it sounds like this void wouldn’t be financial. As part of this conversation, you need to discuss what life insurance policies and other assets your mom has, along with any debts. You should also ask her whether she has a will and urge her to create one if she doesn’t.

If your mom already has two life insurance policies, she probably doesn’t need more life insurance. Instead, she needs to prepare for the likelihood that she’ll live for another four or five decades.

That means maintaining solid health insurance now. Though it’s quite expensive, she may also want to consider long-term care insurance when she’s in her late 50s or early 60s.

Your mom should also focus on saving as much as possible for retirement so she isn’t depending on you and your sister for support. Though she worries about her premature death, the risk is much greater that she’ll outlive whatever savings she does have.

Now would also be a good time for her to focus on improving her credit. If she can’t get a credit card due to a poor history, she could open a secured credit card by putting down a deposit and start rebuilding. Bad credit doesn’t matter much when you die, but it sure makes your living years harder.

Discussing your mom’s death will be scary for both of you. But I think addressing the worst-case scenarios will set your minds at ease. So talk through all the what-ifs, no matter how uncomfortable. Doing so will free you both up to enjoy what I hope are many years ahead.

Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. Send your tricky money questions to [email protected].

Related Posts




8 Alternatives to Debt Settlement for Debt Management and Relief

@media (max-width: 1200px) body .novashare-buttons.novashare-inline .novashare-button-icon width: 100%; .novashare-inline .novashare-button .novashare-button-block background: #000000; .novashare-inline .novashare-button .novashare-border border-color: #000000; .novashare-inline .novashare-button .novashare-inverse color: #000000;

Dig Deeper

Additional Resources

When you’re behind on all your bills and fending off daily calls from debt collectors, debt settlement starts to look like a pretty tempting prospect. If your creditors would agree to cancel your debts in exchange for one lump-sum payment, you think, all your troubles would be over.

But settling your debts can bring major problems of its own. Debt settlement is a long and arduous process. It causes serious damage to your credit score. It can leave you with a big bill for taxes on the canceled debt. And if you hire a debt settlement agency rather than negotiating with lenders yourself, it comes with high fees — up to 25% of your total debt.

In short, debt settlement is far from a magic cure for credit woes. Before you jump into this long and painful process, it’s worth considering other alternatives that could be faster, easier, or less harmful to your credit.

Alternatives to Debt Settlement

Debt settlement certainly isn’t the only way to get out from under the burden of overwhelming debt. In some cases, you can pay off debt on your own with careful planning. You can also try to negotiate a payment plan with your creditors. 

Motley Fool Stock Advisor recommendations have an average return of 618%. For $79 (or just $1.52 per week), join more than 1 million members and don’t miss their upcoming stock picks. 30 day money-back guarantee. Sign Up Now

A debt consolidation loan or balance transfer credit card can help make debt more manageable. If that isn’t enough, there are other debt relief options to consider, such as a debt management plan or loan forgiveness. And as a last resort, bankruptcy is always an option.

1. Make Your Own Payment Plan

When dealing with debt, your first, best option is to find a way to pay it in full. While many debt relief options hurt your credit, paying off debt improves it. And boosting your credit score helps you get favorable rates in future, so you’re less likely to get in over your head again.

There are many strategies for paying off debt. Sometimes, better budgeting can help you squeeze out enough money to make your monthly payments. Even if you only make minimum payments, it will keep you from falling further behind until your personal finances improve.

You can also turn to various sources of emergency cash. You can seek financial assistance to keep up with bills, borrow from family and friends, or raise cash through crowdfunding. If you just need a small sum, a pawn shop loan or paycheck advance can help you make ends meet.

2. Talk to Your Creditors

If you can’t figure out a way to keep up with all your debts on your own, try leveling with your creditors about your situation. Explain why you’re having trouble making payments and ask if they can help you out.

Most credit card companies have hardship programs for borrowers in financial difficulties. They can offer lower interest rates and waive fees to help you keep up with payments. Other types of lenders can offer repayment plans with smaller monthly payments over a longer period.

It’s in your creditors’ interest to make it easier for you to pay your debt. If you fall so far behind that you decide to declare bankruptcy, they could end up with nothing. Often, they’re willing to negotiate rather than take that risk.

3. Credit Counseling

If you have trouble working out your own debt payment plan, perhaps credit counseling can help. Credit counseling agencies are either for-profit or nonprofit companies that help individuals deal with debt for a fee.

A credit counselor can look over your financial situation and offer suggestions for handling it. For instance, they can help you draw up a new budget or make suggestions about which debt to focus on first. They can also let you know if you qualify for programs like student loan forbearance. And some counselors can call up your creditors and negotiate on your behalf.

If this isn’t enough, credit counselors can educate you about other debt relief options. They can help you choose between debt consolidation, debt settlement, a debt management plan, or bankruptcy. And they can help you with the paperwork for whichever option you choose.

4. Debt Management Plan

One of the main services credit counseling agencies offer is helping you set up a debt management plan (DMP). A DMP is a binding agreement to pay off your total debt within a specific period, typically three to five years. 

With a DMP, you make a single monthly payment to your credit counselor. The service then divides up the payment among your creditors. In addition, you pay an initial fee to the credit counselor to set up the DMP and a monthly fee to maintain it.

DMPs only work for unsecured debts, such as credit card debt and medical bills. You can’t use them to pay off mortgages, car loans, or federal student loans. A DMP doesn’t reduce the amount of debt you pay, but it can reduce the interest or fees you pay on it.

A DMP doesn’t directly harm your credit score the way debt settlement does. However, setting one up usually involves closing all your old credit card accounts. This hurts your score indirectly by reducing your available credit.

5. Debt Consolidation Loan

If you have several high-interest debts, a debt consolidation loan can help bring your monthly payments down to a manageable level. It works by rolling several existing debts into a single loan with a lower interest rate.

A debt consolidation loan doesn’t reduce the total amount you owe, but it can reduce the amount you pay each month. It also doesn’t have a negative effect on your credit like a debt settlement.

You can use a debt consolidation loan to pay off any kind of unsecured debt. This includes credit card debt, personal loans, medical debt, unsecured personal loans, and sometimes student loans. You can’t use it for secured debts such as a mortgage or car loan. 

Most debt consolidation loans are long-term, fixed rate loans. You can also use other types of loans to pay off existing debt, such as a home equity loan, a home equity line of credit, a 401(k) loan, or borrowing against your whole life insurance policy. But these options are less desirable because they put your assets at risk.

6. 0% Balance Transfer Cards

If you’re struggling with credit card debt, transferring the balance to a card with a lower interest rate can help. A balance transfer can’t reduce your debt, but it can make the interest on it more manageable.

The best card for this purpose, if you can get it, is a 0% balance transfer credit card. However, these cards are hard to get if you don’t have good credit. And they have other downsides, including:

  • Limited Transfer Amounts. The bank generally limits the amount of money you can transfer to a new 0% card. That means you can’t count on using them to consolidate all your existing debt.
  • Limited Introductory Periods. The 0% rate on these cards is only an introductory rate. Typically, it expires within 21 months, if not sooner. After that, you must start paying interest — often at a high rate — on any balance you still owe.
  • Balance Transfer Fees. When you transfer a balance to a 0% card, you generally pay a balance transfer fee of 3% to 5%. In some cases, this fee can amount to more than the interest you save by moving the balance.

7. Debt Forgiveness

Debt settlement isn’t the only way to have some or all of your debt canceled. Depending on what kind of debt you have, you may be able to take advantage of programs like:

  • Student Loan Forgiveness. Federal student loan forgiveness programs offer a way out of high student loan debt. However, most borrowers don’t qualify for these programs. Some programs depend on your income, while others depend on your profession.
  • PPP Loan Forgiveness. If you took out a Paycheck Protection Program (PPP) loan to keep your business running during the COVID-19 pandemic, you may qualify for PPP loan forgiveness. Visit the Small Business Administration website to see if you’re eligible.
  • Tax Debt Forgiveness. If you owe federal back taxes, you can attempt to make an offer in compromise on this debt. Like a debt settlement, this is a lump sum payment of an amount smaller than your total debt. But the IRS typically approves these requests only for people who are really broke, with next to no assets.

Currently, there are no loan forgiveness programs for mortgages. However, there are federal programs to help you refinance your mortgage to make it more affordable. These include the Freddie Mac Enhanced Relief Refinance and the Fannie Mae High LTV Refinance Option.

8. Bankruptcy

If your financial situation is dire, declaring bankruptcy might be your best option. It’s a faster process than debt settlement and can erase more of your debt. It’s also less hassle, as it doesn’t require you to negotiate with creditors or come up with cash for a lump-sum payment. And once you’ve filed for bankruptcy, debt collectors have to stop pestering you.

However, bankruptcy is also just about the worst thing that can happen to your credit score. It creates a black mark that stays on your credit report for up to 10 years as opposed to seven years for debt settlement. During this time, you may find it difficult to secure new credit and won’t qualify for the most favorable rates and terms.

There are two main types of consumer bankruptcy: Chapter 7 and Chapter 13. They’re known as liquidation and reorganization, respectively.

In a Chapter 7 bankruptcy, you must sell off your personal property to pay off debt. That can include real estate, jewelry, and works of art. However, you usually get to keep some of your home equity, your main car, and tools you use for work.

A Chapter 13 bankruptcy works more like a debt management plan. It allows you to keep your assets in exchange for paying off all or part of your debt over three to five years. This is slower than Chapter 7, but it only stays on your credit report for seven years.

Final Word

For some borrowers, debt settlement really is the best option. It can work well if you have only unsecured debt and are already several months behind on payments, but you also have — or can raise — the cash for a lump-sum payment. It also helps to have good negotiating skills.

But not that many borrowers are in this exact situation. If you’re not, start by taking a hard look at your own finances. Consider tough options like slashing monthly expenses, including big ones like rent, or seeking help from aid programs.

If you can’t see your way to a solution on your own, your next best option is to see a credit counselor. They can help you evaluate your budget to find savings you might not have considered. And if that doesn’t work, they can help you figure out which debt relief option is the best choice in your situation.

.kb-table-of-content-nav.kb-table-of-content-id_055987-a5 .kb-table-of-content-wrappadding:30px 30px 30px 30px;background-color:#f9fafa;border-color:#cacaca;border-width:1px 1px 1px 1px;.kb-table-of-content-nav.kb-table-of-content-id_055987-a5 .kb-table-of-contents-titlefont-size:14px;line-height:18px;letter-spacing:0.06px;font-family:-apple-system,BlinkMacSystemFont,”Segoe UI”,Roboto,Oxygen-Sans,Ubuntu,Cantarell,”Helvetica Neue”,sans-serif, “Apple Color Emoji”, “Segoe UI Emoji”, “Segoe UI Symbol”;font-weight:inherit;text-transform:uppercase;.kb-table-of-content-nav.kb-table-of-content-id_055987-a5 .kb-table-of-content-wrap .kb-table-of-content-listcolor:#001c29;font-size:14px;line-height:21px;letter-spacing:0.01px;font-family:-apple-system,BlinkMacSystemFont,”Segoe UI”,Roboto,Oxygen-Sans,Ubuntu,Cantarell,”Helvetica Neue”,sans-serif, “Apple Color Emoji”, “Segoe UI Emoji”, “Segoe UI Symbol”;font-weight:inherit;.kb-table-of-content-nav.kb-table-of-content-id_055987-a5 .kb-table-of-content-wrap .kb-table-of-content-list .kb-table-of-contents__entry:hovercolor:#16928d;.kb-table-of-content-nav.kb-table-of-content-id_055987-a5 .kb-table-of-content-list limargin-bottom:7px;.kb-table-of-content-nav.kb-table-of-content-id_055987-a5 .kb-table-of-content-list li .kb-table-of-contents-list-submargin-top:7px;.kb-table-of-content-nav.kb-table-of-content-id_055987-a5 .kb-toggle-icon-style-basiccircle .kb-table-of-contents-icon-trigger:after, .kb-table-of-content-nav.kb-table-of-content-id_055987-a5 .kb-toggle-icon-style-basiccircle .kb-table-of-contents-icon-trigger:before, .kb-table-of-content-nav.kb-table-of-content-id_055987-a5 .kb-toggle-icon-style-arrowcircle .kb-table-of-contents-icon-trigger:after, .kb-table-of-content-nav.kb-table-of-content-id_055987-a5 .kb-toggle-icon-style-arrowcircle .kb-table-of-contents-icon-trigger:before, .kb-table-of-content-nav.kb-table-of-content-id_055987-a5 .kb-toggle-icon-style-xclosecircle .kb-table-of-contents-icon-trigger:after, .kb-table-of-content-nav.kb-table-of-content-id_055987-a5 .kb-toggle-icon-style-xclosecircle .kb-table-of-contents-icon-trigger:beforebackground-color:#f9fafa;

Stock Advisor

Motley Fool Stock Advisor recommendations have an average return of 618%. For $79 (or just $1.52 per week), join more than 1 million members and don’t miss their upcoming stock picks. 30 day money-back guarantee.

Amy Livingston is a freelance writer who can actually answer yes to the question, “And from that you make a living?” She has written about personal finance and shopping strategies for a variety of publications, including,, and the Dollar Stretcher newsletter. She also maintains a personal blog, Ecofrugal Living, on ways to save money and live green at the same time.


How to pay off old debt in 3 steps

Couple looking over paperwork together.Couple looking over paperwork together.

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

Paying off an old debt that has gone to collections requires that you make decisions about your current financial situation. Before anything else, you’ll want to verify the amount and validity of the debt. If the debt is yours, you’ll need to pay it, though you may be able to set up a payment plan or settle with the debt collector.

You don’t want to ignore debt collectors, who may be able to file a lawsuit against you if you fail to work toward paying a debt. You’ll want to consult an attorney and financial advisor, as the statute of limitations for debts varies by state. If the statute of limitations has run out on a debt, a debt collector won’t be able to successfully complete a lawsuit against you.

If you are facing a long-overdue account, read on to learn how to pay off old debt and work toward rebuilding your credit score. 

Step 1: Verify the debt

Before beginning to make any payments on old debt, you’ll want to verify that the debt is actually yours and that the amount of the debt is accurate. Some unsavory debt collectors are known for illegal debt collection practices, like phantom debt collection—which is misrepresenting the balance of an unpaid debt. 

Importance of verifying a debtImportance of verifying a debt

To verify the debt, you’ll want to contact the original creditor as well as the collection agency to ask for proof that the debt is valid. In some cases, asking for verification is enough to make an old debt disappear if the debt wasn’t legitimate to start with. Additionally, some collection agencies try to collect debts from spouses, which may not be legal depending on your state. You may need to contact a lawyer to determine if you’re responsible for a debt.

In any case, if the debt is legitimately yours, you’ll need to get details about the current balance from the collection agency. Interest may have continued to accrue, so the balance could be different than you remember. 

Once you have details about what you owe, you’re ready to make a plan to pay off the old debt.

Step 2: Consider your options for paying old debt

If you need to pay an old debt, you have several options to consider: paying a lump sum, establishing a payment plan or settling the debt. 

Any of these options could be the best choice for you, so read on to learn more about each route you could take.

Pay your debt as a lump sum

The most straightforward way to get rid of an old debt is to pay it as a lump sum. However, you’ll want to keep a few things in mind before taking this approach:

  • Ensure you get the lump-sum payment agreement in writing from the collection agency prior to paying.
  • Consider if paying the debt quickly is the best financial approach for your situation—could the money be used more effectively in other areas?
  • After paying the debt, keep documentation proving you made your payment to ensure no other agencies try to collect it.

If you have the money available and you decide to pay as a lump sum, this can be a quick way to eradicate your old debt. However, for many people, a payment plan is a more manageable way to handle an old debt.

Establish a payment plan for your debt

When paying a lump sum isn’t viable, it’s often possible to establish a payment plan with the collection agency. Make sure you have a good grasp on your finances and what you can afford each month, then contact the collection agency to negotiate a plan that works for both parties.

As with all debt payments, make sure you get the agreement in writing before making payments. Additionally, be sure that you can stick with the commitment you make, as failing to make timely payments could invalidate your payment plan. 

If the debt amount feels completely unmanageable, you may want to consider debt settlement as an option.

Settle the debt with the collection agency

If you simply cannot pay the full amount of your debt for any reason, debt settlement is an option, but there are drawbacks to this approach.

Debt settlement is the process of negotiating the total balance of your debt to a more manageable amount. If you’re going to attempt this route, you’ll want to know the following:

  • Be certain that you have the debt settlement agreement in writing before making any payments.
  • Be careful that the collection agency won’t sell the remainder of your debt to another collector.
  • Be mindful that the amount of your debt forgiven may be considered taxable income, so consult with a tax attorney.
  • Be aware that the debt collector may not report the debt as paid in full to the credit bureaus.

While debt settlement can reduce the overall burden of an old debt, it can be difficult to arrange. If you decide to pursue this route, you may want to consult with a credit counselor or financial advisor before contacting the debt collector.

Regardless of how you decide to pay your debt, you’ll likely need to work to rebuild your credit after working with a collection agency. 

Step 3: Rebuild your credit after paying off old debt

If you have an old debt that has gone to collections, it may continue to have implications for your credit. In general, the negative item from a collection account can stay on your credit report for up to seven years. Additionally, paying off the account, while important, may not have an immediate positive effect on your credit score. 

Rebuilding credit after paying off old debt.Rebuilding credit after paying off old debt.

Other negative items associated with an old debt—like missed payments or charge-offs—can also linger on your report and continue to negatively affect your score. 

However, rebuilding your credit after having an account go to collections is possible with time and dedication. By building positive new credit habits, like on-time payments and lower credit utilization, your score is likely to go up over time. As older negative items fall off your credit report, your new positive credit history will have a larger impact on your score. 

Throughout this process, it can be helpful to work with a credit repair consultant who can review your report with you, help you dispute inaccurate information and provide credit score monitoring services. 

Reviewed by Peter Richins, Associate Attorney at Lexington Law Firm. Written by Lexington Law.

Peter Richins was born and raised in Davis County, Utah. Mr. Richins attended law school at the University of Idaho in Moscow, Idaho. He graduated with a Juris Doctorate degree from Idaho with an emphasis in business law and entrepreneurship. Since becoming a member of the Utah Bar after graduation, Mr. Richins’ legal work has largely focused on bankruptcy practice. He worked in a corporate bankruptcy and compliance office considering bankruptcy from the Creditor’s perspective, and then transitioned into Debtor representation while working as an associate attorney with the law firm LeBaron & Jensen in Layton, Utah. Mr. Richins also established himself in private practice as a bankruptcy attorney, filing Chapter 7 and Chapter 13 petitions for individuals and families. As an attorney with Lexington Law, Mr. Richins continues his bankruptcy practice and enjoys working on behalf of clients who need a fair and accurate credit score. Mr. Richins is licensed to practice law in Utah. He is located in the Utah office.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.


How to Get Out of Default on Student Loans

@media (max-width: 1200px) body .novashare-buttons.novashare-inline .novashare-button-icon width: 100%; .novashare-inline .novashare-button .novashare-button-block background: #000000; .novashare-inline .novashare-button .novashare-border border-color: #000000; .novashare-inline .novashare-button .novashare-inverse color: #000000;

Dig Deeper

Additional Resources

Defaulting on your student loans can be a stressful situation. Daily calls from collection agencies and damage to your credit score are bad enough. But if you’re in default long enough, you’re looking at severe penalties like garnished wages and claims against your property.  

Fortunately, there are options for getting out of default whether you have federal or private student loans. 

How to Get Out of Default on Federal Student Loans

Delinquent federal student loans have repayment options like income-driven repayment or deferment and forbearance that can help you catch up when you fall behind. But you can’t use these options once your loans are in default.

Default means more than just a few missed payments. It means missing so many payments your lender assumes you have no intention of repaying the loan. 

Motley Fool Stock Advisor recommendations have an average return of 618%. For $79 (or just $1.52 per week), join more than 1 million members and don’t miss their upcoming stock picks. 30 day money-back guarantee. Sign Up Now

For most federal student loans, default happens after 270 days of missed payments, or roughly nine months. However, Perkins loans can go into default immediately. 

And once federal loans go into default, the U.S. Department of Education (ED) has extraordinary powers to collect. Federal law allows the ED (or anyone collecting on its behalf) to garnish up to 15% of your disposable income to collect on defaulted student loans. And, unlike private lenders, the ED doesn’t have to sue you before it can seize the money.

Fortunately, the ED offers three pathways to recover from a default: full repayment, consolidation, and rehabilitation. Which is best for you depends on your situation and goals. 

1. Best Immediate Solution: Full Loan Repayment

When you’re in default on any loan, the full balance becomes due immediately. Thus, if you can afford it, the easiest and quickest way to deal with the debt is simply to pay off the balance and be done with it.

Of course, that isn’t realistic for most defaulted student loan borrowers. After all, it’s likely you defaulted on the student debt because you couldn’t afford it in the first place. 

You may be able to negotiate a student loan settlement, which lets you pay off the balance for less than you owe. But the government rarely settles for less than 90% of the balance.  

Thus, most borrowers need to explore student loan consolidation or rehabilitation.

2. Best Fast Solution: Student Loan Consolidation

If you can’t pay off the debt entirely, consolidation is the next fastest route to exit default. To remove your default status, you must either:

  • Make three full, on-time, consecutive monthly payments on the new consolidation loan 
  • Agree to repay your consolidation loan under an income-driven plan.

Most income-driven plans calculate your monthly student loan payments as 10% of your discretionary income, and the formula also accounts for family size. Some plans even take your spouse’s student loans into account.   

Income-driven payments are significantly lower than the wage garnishment penalty of 15%. But you can’t consolidate a student loan if the government is already garnishing your wages. 

Note that student loan consolidation gets your loans out of default. But it doesn’t remove the default line from your credit report.

Start by contacting your servicer to request a new direct consolidation loan. 

3. Best for Improving Your Credit Score: Loan Rehabilitation

Student loan rehabilitation is the best option in most cases because it’s the only one that removes the default from your credit report, although previously reported late payments remain on your report. Therefore, it’s the best way to improve your score. 

To rehabilitate your loan, you must make nine on-time monthly loan payments within 10 consecutive months. Usually, your monthly payments will be 15% of your discretionary income. However, if that’s unaffordable, you can request a lower amount.

Now is the perfect time to try federal loan rehabilitation. The government’s pause on payments means that any “payments” you don’t make between now and the pause’s lift count toward rehabilitation. 

You make the payments to the ED (or guaranty agency in the case of federal family education loans). Once you’ve completed the payments, the ED transfers the loan to a student loan servicer. 

Once you’ve completed rehabilitation, the ED removes the default status from your credit report.

A word of caution: You can only rehabilitate your student loans once. So if you choose this option, ensure you can afford the payments. 

One potential risk is that your monthly payments post-rehabilitation could be higher. That’s because loan holders can calculate lower payments for borrowers based on their living expenses.

But there are no federal repayment plans that take a borrower’s living expenses — or even other debts, such as private student loans — into account. Income-driven plans only consider family size in calculating their income-based payments.  

You can use the loan simulator at to see what the monthly payment for your rehabilitated loan could be, depending on the repayment plan you choose.

How to Get Out of Default on Private Student Loans

Unfortunately, private student loans don’t come with legally mandated options for getting out of default like federal student loans. Your lender may have an option to rehabilitate your loan, but it’s unlikely, though it never hurts to ask.

More likely, the lender will send your debt to a collection agency, which typically happens much quicker than with federal student loans, 90 to 120 days of missed payments, or roughly three to four months. But default time frames for private student loans vary by lender, so check your loan contract. 

A collection agency will do everything it can to collect the debt. Bear in mind that while receiving phone calls and letters from debt collectors can feel stressful and scary, most collection agencies can’t take legal action against you. 

Only the owner of the debt can sue you. And while sometimes collection agencies buy debts, they rarely buy student loan debt. More often, they contract with the lender to collect the debt on their behalf and charge a fee when they’re successful.

However, if you receive a debt collection letter from a law firm, they likely plan to sue you. 

If that happens, request they verify the debt, even if you believe it’s valid. Mistakes and scams are possible, and you need to ensure you’re paying the right amount to the right lender. 

Further, the burden is always on the collector to prove the debt, and they can’t bring suit against you without adequate evidence. It will give you time to decide how to proceed at the very least.

The Consumer Financial Protection Bureau (CFPB) has a sample letter you can send. 

Also be aware all debt collectors must follow the Fair Debt Collection Practices Act. If collectors harass you in any way, including calling at odd hours, threatening you, lying to you, or asking your family members to pay your debts, document the interaction and submit a complaint to the CFPB.

The CFPB also has sample letters you can send to collectors for other situations, such as if you want the collector to stop contacting you or only contact your attorney. 

Whatever you do, don’t simply ignore the debt. Ignoring it won’t make it go away. Instead, you’ll need to decide on one of three options for dealing with defaulted private student loans:

1. Best Immediate Solution: Full Loan Repayment

As with federal student loans, you can immediately get rid of the debt — and the default on your credit report — by simply paying the full amount due. 

However, it’s equally likely that if you defaulted on private student loans, it’s because you couldn’t afford to pay them. 

2. Best to Save Money: Negotiate a Settlement

Although it’s difficult to negotiate a debt settlement with the ED, it’s much easier to settle private student loans. That’s because private lenders have less ability to collect on the debt, so they’re more willing to negotiate. Private lenders also aren’t tied by Congressional regulations, so they have more wiggle room to make deals.

Thus, unlike the ED, which rarely settles loans for less than 90% of the balance due, private lenders often settle for as little as 40% to 60% of the balance owed. 

3. Best for Those Who Borrowed Nonexempt Loans: Discharge the Loans in Bankruptcy

Traditionally, it’s been excessively difficult to get student loans discharged in bankruptcy, whether federal or private. That’s due to federal regulations requiring borrowers to prove the debt causes an undue hardship, which bankruptcy courts have historically interpreted strictly. 

But multiple court cases over the past several years have set new standards for the dischargeability of student loans, especially private student loans. 

For example, in August 2021, a New York-based court of appeals ruled that certain types of private student loans aren’t “qualified education loans,” meaning they’re not exempt from discharge in bankruptcy. 

These include: 

  • Loans borrowed to attend nonaccredited for-profit schools
  • Loans used for non-degree-granting programs, such as for a coding boot camp
  • Loans paid directly to the student that exceed the school’s certified total cost of attendance    

How to Get Help if You’re in Default on Student Loans

If you’re in default on private student loans, it’s best to contact a lawyer who specializes in them. Dealing with debt collectors or negotiating a settlement is complicated. So having someone who understands the system and your rights is beneficial. 

Although you can consolidate or rehabilitate your student loans without the help of an attorney, student loan lawyers can also help you navigate the complex system of federal student loans. They can also help you decide on your best options if you’re unsure. 

Many lawyers offer free consultations, so you can find out what your options are or if that lawyer is a good fit. 

To find one, use an online attorney directory like the one at the National Association of Consumer Advocates, the bar association for consumer rights attorneys, some of whom specialize in student loans. 

If you decide bankruptcy is the right path for you, try the American Bar Association or the National Association of Consumer Bankruptcy Attorneys to find a bankruptcy lawyer. Ensure your bankruptcy attorney specializes in student loans, as many bankruptcy attorneys specify they don’t.

Final Word

If now’s not the right time to pursue getting out of default, explore the federal options for cancellation or discharge to see if you qualify for any. These include having your loans canceled if your school intentionally misled you, committed fraud, or closed before you could graduate with your degree.

But most borrowers don’t qualify for those, and they’re not available on private loans. So as a last resort, pay your loan holder whatever amount you can afford every month until your situation changes. Then pursue the process of getting out of default when you’re able.  

Once you’re out of default, it’s vital to keep up with your payments. Defaulting again only causes more damage to your credit, increases your stress levels, and may even rob you of options you had the first time you defaulted, such as rehabilitation.

To avoid default in the future, contact your lender before you miss a payment and explain the situation. 

.kb-table-of-content-nav.kb-table-of-content-id_055987-a5 .kb-table-of-content-wrappadding:30px 30px 30px 30px;background-color:#f9fafa;border-color:#cacaca;border-width:1px 1px 1px 1px;.kb-table-of-content-nav.kb-table-of-content-id_055987-a5 .kb-table-of-contents-titlefont-size:14px;line-height:18px;letter-spacing:0.06px;font-family:-apple-system,BlinkMacSystemFont,”Segoe UI”,Roboto,Oxygen-Sans,Ubuntu,Cantarell,”Helvetica Neue”,sans-serif, “Apple Color Emoji”, “Segoe UI Emoji”, “Segoe UI Symbol”;font-weight:inherit;text-transform:uppercase;.kb-table-of-content-nav.kb-table-of-content-id_055987-a5 .kb-table-of-content-wrap .kb-table-of-content-listcolor:#001c29;font-size:14px;line-height:21px;letter-spacing:0.01px;font-family:-apple-system,BlinkMacSystemFont,”Segoe UI”,Roboto,Oxygen-Sans,Ubuntu,Cantarell,”Helvetica Neue”,sans-serif, “Apple Color Emoji”, “Segoe UI Emoji”, “Segoe UI Symbol”;font-weight:inherit;.kb-table-of-content-nav.kb-table-of-content-id_055987-a5 .kb-table-of-content-wrap .kb-table-of-content-list .kb-table-of-contents__entry:hovercolor:#16928d;.kb-table-of-content-nav.kb-table-of-content-id_055987-a5 .kb-table-of-content-list limargin-bottom:7px;.kb-table-of-content-nav.kb-table-of-content-id_055987-a5 .kb-table-of-content-list li .kb-table-of-contents-list-submargin-top:7px;.kb-table-of-content-nav.kb-table-of-content-id_055987-a5 .kb-toggle-icon-style-basiccircle .kb-table-of-contents-icon-trigger:after, .kb-table-of-content-nav.kb-table-of-content-id_055987-a5 .kb-toggle-icon-style-basiccircle .kb-table-of-contents-icon-trigger:before, .kb-table-of-content-nav.kb-table-of-content-id_055987-a5 .kb-toggle-icon-style-arrowcircle .kb-table-of-contents-icon-trigger:after, .kb-table-of-content-nav.kb-table-of-content-id_055987-a5 .kb-toggle-icon-style-arrowcircle .kb-table-of-contents-icon-trigger:before, .kb-table-of-content-nav.kb-table-of-content-id_055987-a5 .kb-toggle-icon-style-xclosecircle .kb-table-of-contents-icon-trigger:after, .kb-table-of-content-nav.kb-table-of-content-id_055987-a5 .kb-toggle-icon-style-xclosecircle .kb-table-of-contents-icon-trigger:beforebackground-color:#f9fafa;

Stock Advisor

Motley Fool Stock Advisor recommendations have an average return of 618%. For $79 (or just $1.52 per week), join more than 1 million members and don’t miss their upcoming stock picks. 30 day money-back guarantee.

Sarah Graves, Ph.D. is a freelance writer specializing in personal finance, parenting, education, and creative entrepreneurship. She’s also a college instructor of English and humanities. When not busy writing or teaching her students the proper use of a semicolon, you can find her hanging out with her awesome husband and adorable son watching way too many superhero movies.


What Is a Debt Consolidation Loan and How Does It Work?

@media (max-width: 1200px) body .novashare-buttons.novashare-inline .novashare-button-icon width: 100%; .novashare-inline .novashare-button .novashare-button-block background: #000000; .novashare-inline .novashare-button .novashare-border border-color: #000000; .novashare-inline .novashare-button .novashare-inverse color: #000000;

Additional Resources

Like many Americans, Shauna was laid off during the COVID-19 pandemic. After running through her meager savings, she turned to credit cards to make ends meet. In three months, she racked up $8,500 in charges across four credit cards.

Shauna is back at work now, but all that credit card debt is really weighing down her budget. Right now, just making the minimum monthly payments is costing her $255 a month. At this rate, it will take her nearly 17 years to pay off the balance — and she doesn’t know how she’ll manage at all if interest rates rise.

For people in Shauna’s position, a debt consolidation loan offers a way out. It’s not a perfect solution for everyone, but it can make things a lot easier for someone juggling multiple payments at high interest.

What Is a Debt Consolidation Loan?

Consolidating your debt means rolling many debts into a single payment. Instead of making payments each month on several credit cards or other loans, you take out one loan to pay off all the other debts. You then make monthly payments on the new loan until it’s paid off.

Motley Fool Stock Advisor recommendations have an average return of 618%. For $79 (or just $1.52 per week), join more than 1 million members and don’t miss their upcoming stock picks. 30 day money-back guarantee. Sign Up Now

The main point of a debt consolidation loan is that it can offer more favorable payment terms than your existing debts. For instance, it could have a lower interest rate or a lower monthly payment. Thus, using one allows you to pay less in total and get out of debt faster.

Types of Debt You Can Consolidate With a Loan

You can use a debt consolidation loan to pay off any kind of unsecured debt — that is, loans not backed by any physical asset. However, they’re most useful for debts that have high interest rates or high monthly payments. Examples include:

In some cases, you can consolidate student loans together with other debts. However, the rules around this type of loan can be complicated, so it’s sometimes easier to consolidate student loans separately or find another way to refinance them.

Who Qualifies for Debt Consolidation?

Getting a debt consolidation loan isn’t always easy. Lenders know that people seeking these loans have trouble paying their current debts, so they take extra care to make sure these borrowers can meet the payments on a new loan. Factors they look at include:

  • Your Credit Score. Most lenders look for borrowers with good credit. That means a credit score of at least 650 to 700. Some lenders offer debt consolidation loans for borrowers with low credit scores, but they charge higher interest rates.
  • Your Credit History. Lenders also look at your credit history. They want to make sure you have no record of negative events like bankruptcy, foreclosure, repossessions, or debts sent to collections.
  • Your Income. Many lenders require a certain minimum annual income for this type of loan. They typically ask for a letter from your employer that lists your job title, work history, and salary. 
  • Debt-to-Income Ratio. Your debt-to-income ratio, or DTI, is the percentage of your monthly income that goes toward debt payments. You generally need a DTI under 50% to get a debt consolidation loan, and some lenders look for lower ratios than that. 

How Does Debt Consolidation Work?

The most common tool for consolidating debt is a fixed-rate debt consolidation loan. You borrow enough money to pay off your other debts, then pay off the new loan in installments. Typically, the new loan has a lower monthly payment or a shorter repayment term than your existing debt.

Hundreds of lenders offer these types of loans, including traditional banks, credit unions, digital lenders like SoFi, and peer-to-peer lenders. Debt consolidation loans typically have terms of one to five years and can consolidate between $1,000 and $50,000 in debt, but the exact parameters can vary.

Most debt consolidation loans are unsecured loans. Some debt consolidation lenders also offer secured loans backed by an asset such as your home or your car. 

Secured loans can be easier to get, and they may allow you to borrow more money at a lower interest rate. However, even unsecured loans tend to have lower interest rates than credit cards.

Other Types of Debt Consolidation

A fixed-rate loan isn’t the only way to consolidate your debts. Other options exist, but they all have significant downsides. They include:

  • Balance Transfers. If you can have only credit card debt, you can pay it off with a 0% balance transfer credit card. You need good credit to get one of these cards, and you can only transfer a limited amount to them. Most also come with balance transfer fees of 3% to 5%. The 0% interest period is typically no longer than 21 months, after which regular APR applies.
  • Home Equity Loans. Your home equity is your home’s value minus your mortgage balance. Using a home equity loan or home equity line of credit (HELOC), you can borrow up to 80% of your equity, and sometimes more. Home equity loans and lines of credit tend to have lower interest and longer repayment periods than unsecured loans. But you often need at least 20% equity to get one, and if you fail to meet the payments, you could lose your home. 
  • 401(k) Loans. You can take out a 401(k) loan for up to $50,000 or half of your vested account balance, whichever is less. You then have five years to pay it back. These loans are attractive because they have low interest rates and are available to borrowers with poor credit. Their biggest downside is that they put your retirement savings at risk if you don’t pay them back.

How to Get a Debt Consolidation Loan

To take out a debt consolidation loan, start by figuring out how much you need and how big a monthly payment you can afford. Then start looking at loan offers that match these terms. Check out offers from multiple lenders, starting with your current bank or credit card company. 

Some lenders offer instant prequalification for debt consolidation loans online. Using this process makes it easy to compare the actual terms of different loan offers. And it doesn’t hurt your credit score, since getting quotes for a loan doesn’t usually require a hard credit check.

As you compare loan offers, pay particular attention to fees. Some debt consolidation loans come with origination fees that can range from 1% to 8% of the loan, depending on the lender. Lenders may also charge fees for late payments, returned payments, or check processing.

Once you get a loan, use it to pay off your existing balances in full. If your loan can’t pay all your debts, pay off the highest-interest debts first. But don’t close your old accounts right away — closing too many accounts at once can harm your credit score.

Pros and Cons of Debt Consolidation

Debt consolidation sounds like an ideal choice for someone like Shauna. Right now, she’s barely making the minimum payments on her credit cards and will need years to pay them off. A debt consolidation loan could slash her monthly payments and get her out of debt much faster.

But debt consolidation loans aren’t a cure-all. They come with significant downsides that Shauna would need to weigh before deciding if this is the right solution for her.

Pros of a Debt Consolidation Loan

A debt consolidation loan offers these benefits:

  1. Less Bookkeeping. With multiple credit cards and loan payments, it’s easy to lose track. That can lead to missed payment due dates, late fees, and damaged credit. With a debt consolidation loan, you have only one monthly payment to make. And since the amount never varies, you can make the payment automatic so you can’t miss it.
  2. Lower Loan Payments. Debt consolidation loans typically have lower interest rates than credit cards and high-interest loans. That means you have a lower monthly payment for the same amount of debt.
  3. Less Interest. Not only is the interest lower on a debt consolidation loan, it doesn’t compound the way it does on a credit card. In other words, you don’t pay interest on the interest. These two facts together mean you’ll pay less interest in total on your debt.
  4. Faster Payoff. Making the minimum payment on credit cards can stretch debt out for decades. By taking out a fixed-rate loan, you get a guaranteed end date for your debt. And with a lower interest rate, you can become debt-free sooner without raising your payments. (However, this depends on the loan term, as discussed below.) 
  5. Freedom From Debt Collectors. With debt consolidation, your new loan pays off your existing debts immediately. That means you no longer need to deal with debt collectors.
  6. Possible Boost to Credit. If you take out a new loan but leave your old accounts open, your total available credit will increase. As a result, your credit score will improve. As you pay down your debt, it will improve still more. By contrast, debt relief programs like debt settlement and bankruptcy damage your credit score. 

Cons of a Debt Consolidation Loan

The downsides of using a debt consolidation loan include:

  1. Upfront Costs. Some loans come with origination fees or balance transfer fees. In some cases, these fees could add up to more than the savings on interest. In addition, some of your old loans might charge a prepayment penalty for paying them off early.
  2. Limited Amount. Debt consolidation loans can only cover a limited amount of debt. With rare exceptions, the maximum is typically $50,000, and some lenders set it lower than this.
  3. No Reduction in Debt. Debt consolidation is not the same as debt relief. Unlike debt settlement or forgiveness, it can’t reduce the overall amount you owe.
  4. Possible Increase in Total Payments. In most cases, you’ll pay less in total with a debt consolidation loan than you would by keeping existing debts. However, if the loan term on the new loan is longer, it could actually increase your total payments. Even if each individual payment is lower, you could pay more because there are more of them.
  5. Possible Damage to Credit. Any time you take out a new loan, it dings your credit score a bit. Also, newer debts aren’t as good for your score as older debts with a longer payment history. This damage could outweigh the benefits of increasing your total available credit, at least in the short term.
  6. Risk of Asset Loss. Unsecured loans for debt consolidation are hard to get if you don’t have good credit. Secured loans are easier to obtain, but they put your assets at risk.
  7. Not a Fix for Problem Spending. A loan can pay off old debts, but it can’t solve the problems that got you into debt in the first place. If you had a temporary problem with your financial situation, like Shauna, a loan can help you fix it. But if you’re prone to overspending, paying off your existing debts could simply free up more credit for you to spend your way through.

Should You Consolidate Your Debt?

Debt consolidation doesn’t make sense for everyone. It depends on a variety of factors, including:

  • Your Credit Score. With good credit, you can qualify for either a 0% balance transfer credit card or a debt consolidation loan with a low interest rate and low monthly payments. With fair or poor credit, you could be stuck with a higher-interest loan or a secured loan that puts your assets at risk.
  • Your Income. You need a steady income to qualify for a debt consolidation loan — and to meet the payments once you get it. Ideally, your job should provide enough income to make your monthly payments and have your loan paid off in five years or less.
  • Your DTI. For a debt payment plan to work, all your financial obligations, including your loan payments and rent or mortgage, should add up to no more than 50% of your income. If your DTI is higher than that, a loan probably can’t help you. You’re better off seeking debt relief from debt settlement or credit counseling.
  • Your Spending Habits. Debt consolidation makes sense for dealing with debts caused by a problem that’s now resolved, such as a temporary job loss or one-time medical bills. But if you have ongoing spending problems, you need to deal with those first. Without a sustainable long-term budget, consolidating your debt will only be a temporary fix.

Final Word

To succeed with a debt consolidation loan, you have to make timely payments. The easiest way to do that is to set up automatic payments. Some debt consolidation lenders offer discounts for borrowers who use this feature.

Even more importantly, you have to avoid racking up new debts to replace the old ones. Switch to debit cards rather than credit cards for everyday purchases so you won’t run up a new balance. Use credit cards only for emergencies, at least until your loan is paid off. 

Most of all, make a budget and stick to it. Figure out ways to keep your spending well within the limits of your income — cutting expenses, earning extra income, or both. By living within your means and breaking bad financial habits, you can avoid falling back into the debt trap in future.

.kb-table-of-content-nav.kb-table-of-content-id_055987-a5 .kb-table-of-content-wrappadding:30px 30px 30px 30px;background-color:#f9fafa;border-color:#cacaca;border-width:1px 1px 1px 1px;.kb-table-of-content-nav.kb-table-of-content-id_055987-a5 .kb-table-of-contents-titlefont-size:14px;line-height:18px;letter-spacing:0.06px;font-family:-apple-system,BlinkMacSystemFont,”Segoe UI”,Roboto,Oxygen-Sans,Ubuntu,Cantarell,”Helvetica Neue”,sans-serif, “Apple Color Emoji”, “Segoe UI Emoji”, “Segoe UI Symbol”;font-weight:inherit;text-transform:uppercase;.kb-table-of-content-nav.kb-table-of-content-id_055987-a5 .kb-table-of-content-wrap .kb-table-of-content-listcolor:#001c29;font-size:14px;line-height:21px;letter-spacing:0.01px;font-family:-apple-system,BlinkMacSystemFont,”Segoe UI”,Roboto,Oxygen-Sans,Ubuntu,Cantarell,”Helvetica Neue”,sans-serif, “Apple Color Emoji”, “Segoe UI Emoji”, “Segoe UI Symbol”;font-weight:inherit;.kb-table-of-content-nav.kb-table-of-content-id_055987-a5 .kb-table-of-content-wrap .kb-table-of-content-list .kb-table-of-contents__entry:hovercolor:#16928d;.kb-table-of-content-nav.kb-table-of-content-id_055987-a5 .kb-table-of-content-list limargin-bottom:7px;.kb-table-of-content-nav.kb-table-of-content-id_055987-a5 .kb-table-of-content-list li .kb-table-of-contents-list-submargin-top:7px;.kb-table-of-content-nav.kb-table-of-content-id_055987-a5 .kb-toggle-icon-style-basiccircle .kb-table-of-contents-icon-trigger:after, .kb-table-of-content-nav.kb-table-of-content-id_055987-a5 .kb-toggle-icon-style-basiccircle .kb-table-of-contents-icon-trigger:before, .kb-table-of-content-nav.kb-table-of-content-id_055987-a5 .kb-toggle-icon-style-arrowcircle .kb-table-of-contents-icon-trigger:after, .kb-table-of-content-nav.kb-table-of-content-id_055987-a5 .kb-toggle-icon-style-arrowcircle .kb-table-of-contents-icon-trigger:before, .kb-table-of-content-nav.kb-table-of-content-id_055987-a5 .kb-toggle-icon-style-xclosecircle .kb-table-of-contents-icon-trigger:after, .kb-table-of-content-nav.kb-table-of-content-id_055987-a5 .kb-toggle-icon-style-xclosecircle .kb-table-of-contents-icon-trigger:beforebackground-color:#f9fafa;

Stock Advisor

Motley Fool Stock Advisor recommendations have an average return of 618%. For $79 (or just $1.52 per week), join more than 1 million members and don’t miss their upcoming stock picks. 30 day money-back guarantee.

Amy Livingston is a freelance writer who can actually answer yes to the question, “And from that you make a living?” She has written about personal finance and shopping strategies for a variety of publications, including,, and the Dollar Stretcher newsletter. She also maintains a personal blog, Ecofrugal Living, on ways to save money and live green at the same time.