When student loans hit collection agencies

Also: Should emergency savings be used to pay high-interest debt? And how to enjoy an inheritance.

Dear Liz: I'm in default on my student loans.

I don't know how many there are, I don't know who owns them, and I don't know how to start paying them off. I've had a debt-collection agency threaten to cut my throat and to hurt me in other physical ways if I didn't pay.

I've talked to the Department of Education, which doesn't seem to know who owns the loans because the secondary lenders have since turned all the debt over to collection agencies.

I'd like to begin repaying my loans, but I have no idea who to pay and I certainly don't want to pay the company that threatened me with violence.

This is killing my credit. What to do?

Answer: At the very least, you should complain to the Federal Trade Commission about this rogue collector. Any kind of harassment, including physical threats, is forbidden under the Fair Debt Collection Practices Act. You can find the FTC's guide for consumers at www.ftc.gov/bcp/edu/pubs /consumer/credit/cre18.shtm.

You can use the resources at www.finaid.org/loans/lost lender.phtml to try to track down your lenders. The FinAid website recommends two services to find loans, both based on the National Student Loan Data System, said Mark Kantrowitz, the site's founder.

Another possible source of help, Kantrowitz said, is the financial aid office at your college.

If you have any federal loans, you can dig them out of default by making nine out of 10 consecutive on-time voluntary payments, Kantrowitz said. Then you'll be able to consolidate them into the Direct Loan program at loanconsolidation.ed.gov. This will also remove the default from your credit history.

After you consolidate those loans, Kantrowitz suggests switching them to an income-based repayment if you can't afford to pay the full amount due under standard repayment. For more tips, see www.finaid.org /loans/troublerepayingdebt .phtml.

If you run into a wall, either finding your loans or working out repayment, contact the Federal Student Aid Ombudsman at www.ombudsman.ed .gov or (877) 557-2575.

If you have any private student loans, contact the lenders directly about working out a repayment plan, Kantrowitz said. Repayment options for private loans are more limited than those for federal loans.

Use savings to pay off the card

Dear Liz: I have $16,000 in the bank as an emergency fund. I'm trying to get serious about paying off my debt, including a $7,500 credit card balance. I was thinking of getting a fixed-rate loan from my credit union to pay off the credit card balance in 36 months.

I have another loan (for my son's private school tuition) with an original balance of $4,950. I'm supposed to make 12 payments interest-free, which will leave a balance of $3,020, which then reverts to 12.5% interest for the next 14 payments until it is paid off.

What should I do?

Answer: Getting a fixed-rate loan from a credit union to pay off credit card debt is often a good idea -- if you don't already have cash sitting around to pay off the debt, which you do.

Unless you're in real danger of losing your job, using your savings to pay off the cards is a virtual no-brainer. Clinging to cash that's earning less than 2% doesn't make sense when your debt is probably costing you a double-digit interest rate.

When the card debt is paid off, you can focus on rebuilding your emergency fund -- until the interest-free period on the school loan is up. At that point you should pay off the rest of the debt.

It should go without saying, but you also need to fix whatever issue caused you to rack up the debt in the first place.

If you can't afford to pay in full when the bill comes, you shouldn't buy it. That's as true for private school tuition as it is for credit card purchases.

Spend part of a windfall on joy

Dear Liz: Your recent advice about investing an inheritance prudently is all good. However, I think most people waste unexpected money, spending it in dribs and drabs with not much to show for it. So, to your advice, I would add this:

Take a minor portion of the inheritance and spend it on some indulgence you would never have done otherwise. About 15 years ago, I used about 20% of a sizable inheritance to take my family, including kids, spouses and grandkids, on a three-week African safari. The result? We all have wonderful memories of a trip in which family members bonded closely with one another, and of once-in-a-lifetime sights and experiences.

The rest I invested, spent on college tuition and used for retirement. I can't account for it all, but I have no regrets about that Africa vacation.

Answer: Your advice is terrific. It's important to enjoy our windfalls and even more important to invest in experiences and memories that last. Your family is lucky to have you.

Liz Pulliam Weston is the author of the book "Your Credit Score: Your Money and What's at Stake." Questions for possible inclusion in her column may be sent to 3940 Laurel Canyon Blvd., No. 238, Studio City, CA 91604, or via the "Contact Liz" form at www.asklizweston.com. Distributed by No More Red Inc.