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Bad student loans give your credit status a beating? Try taking it to the top.

Q: I have several school loans, both federal and private. A few years ago I took a job that didn't pay enough to cover my bills and my expenses and I let two of the private loans get behind and eventually they were charged off (not defaulted). But I'm still paying off these loans regularly, and at a higher rate than I was when they were in good standing. Every other loan and the one credit card I have are in good standing, but my credit is terrible because of these charged-off loans. My "counselor" at the lending institution has not been helpful at all and demands total repayment every time I talk to her, which is impossible. Is there any way to get these loans out of charged-off status and back onto a regular repayment schedule so that my credit reflects the payments I've been making?
- M.M., via e-mail

A: Since you're now repaying the loans, it would be very customer friendly if the lender would be willing to work with you and change your status to "current and in good standing" rather than continue to report it as a "charge off."

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That's the opinion of Stephen Snyder, author of "Do You Make These 38 Mistakes With Your Credit?" But as he notes, in this case your lender is in complete control of the status of the student-loan accounts.

In fact, outside the student-loan environment a "charge off" means that the lender has quit trying to collect the debt. This isn't the case in your situation. As such, there really is no reason to continue to report the loans as charged off.

So, the question becomes how to get the lender to return those two loans to good standing with no record of the charge off. You have a few options, says Mr. Snyder, such as asking the lender to provide you with an official record of on-time payments for the past 12 months. Then, provide this record to the credit bureaus and ask them to change the status to "current." This will require that you successfully persuade your lender to stop reporting the accounts as charged off.

You might work your way up the ladder and stop dealing with the front-line service people who aren't allowed to deviate from the standard credit-reporting policy.

You'll need to find someone who is willing to listen to your offer of getting back onto a regular repayment schedule in exchange for them changing the status back to current.

Snyder wonders whether you could consolidate and refinance the loans with another lender. The replacement loan would be in good standing. Over time, the old loans will lose their negative impact to your credit scores.

Lastly, Mr. Snyder says that you might want to consult with an attorney to see if any of your legal rights are being violated. The Fair Credit Reporting Act is very specific with respect to penalties for noncompliance. You might be able to get the lender to consider your side of the story if you have legal representation.

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Q: I am selling my rental house, which I have not lived in for two out of the past five years. I live in another house on which I make regular mortgage payments. Can I avoid capital-gains taxes on the former if I prepay my current mortgage with the capital-gains proceeds?
M.S., via e-mail

A: That won't work, says Doug Spencer, a certified financial planner in Little Rock, Ark. You have to either make the rental property your principal residence by living there two out of past the five years, or consider what is called a like-kind exchange for the rental property you intend to sell. That latter course of action would allow you to defer any taxes as long as you buy a qualifying replacement property.

You could move into the replacement property after a year or two, and use it as your principal residence for the next two years, after which you could sell it under the principal residence gain exclusion.

But under that scenario, Mr. Spencer says, you would then have to recapture any depreciation taken during those rental years.

Another alternative might be to donate the rental home to a qualified charitable trust. This would allow you to obtain a tax deduction, have an income stream over future years, and avoid any capital gains. You ultimately should seek some advice from a tax expert on this subject, he says.


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