My Student Loans fell into default years

Here's my problem, could I get some advice please?

I went to college from 1996 to 2001 on student loans. When I finished college in spring of '01 I thought my parents were taking care of the student loans.

Little did I know, my mother never made one single payment on them. My student loans fell into default years and years ago.

When I worked, I gave them my tax papers and they took them to their accountant (supposedly), so I didn't even find out I wasn't getting any returns because they were being withheld. Naive me believed it when my parents told me that I just wasn't getting any money back this year from tax refunds.

Now, in April my mother suffered a complete mental breakdown. When this happened my father was out of town on business, and I ended up going to their townhouse to feed the family cat. While I was there I checked the mail, and found a collection letter about my student loans. Snooping around a little, I found a big bag of mail addressed to me at that address that had never been given to me, dating back for about 6 years.

So, it turns out that my student loans are in default. I had 23k in principal, now up to 35k with interest, and another 8k in collection fees/"penalties" for a total of 42k in debt. I make about ~20k a year at a call center, so this is a big deal for me.

So, I call the number for the collection agency: NCO Financial Systems. I explain my situation and say I want to repay the loans the best I can and get them out of default. They tell me that based on my type of loan it will take 9 monthly payments to get them out of default and eligible for deferment/consolidation/whatever and after 6 payments my eligibility for future student loans is restored.

So, then we start to talk about the size of these payments. They first ask for about $1100 a month, I tell them that's about my entire after-tax paycheck. So, they ask about how much my rent is, my living expenses. I'm on a fairly tight budget but I could probably spare a couple hundred dollars a month by working some overtime or cutting corners.

I am supposedly escalated up to people with more authority to lower the payment, but the lowest anybody will go is $478 a month, which is still ruinously large for me. They say that's their final offer, it's that or I'm in default on my loans for the rest of my life.

Well, I tell them I'd like to think about it and I'd like to repay it if possible. They say the can set up the payments tentatively and get confirmation from me later. I give them my banking information and say that if they get confirmation from me they will take it out on the 23rd of the month for the next 9 months.

Sure enough, a week later a letter shows up from them asking me to sign and return this statement agreeing to the terms of the repayment plan and acknowledging various things. The more I think of it, the more I realize I just plain couldn't afford it. I don't sign and return the letter, and my 3-year-old stepson has an accident with a juice bottle that ruins the part with the return address and phone number so I don't even really have the number to call them.

Well, the 23rd comes and goes without taking the money out. I figured I'll call them later and try to get a better deal. Then on the 29th I'm going to work and I check my bank balance. . .and a check cleared the bank that day for $478, which overdrafted me by several hundred dollars!

On my lunch break at work that day, I find out that they had produced a check with my name on it (but no signature) and deposited it. My Credit Union tells me that since the check is made to Pay to the Order of the United States Department of Education that they have to treat it as if it's a government lien and they can't reverse it or block it in the future.

My credit union tells me that their suggestion is that since my credit report is pretty good aside from the defaulted loans that if I apply they might loan me the money for the other 8 payments and then consolidate the loan with them.

I'm also considering calling the collection agency and pointing out I never signed their letter they were demanding and don't want them passing checks in my name and revoke any authorization they think they had. Then trying later to get a better deal. On the U.S. Dept. of Education web page about repaying defaulted loans they promise that rehabilitating defaulted loans is done with affordable payments. . .but almost half my take-home pay isn't affordable!

*sigh*, those Congressmen sure messed some folk's lives up royally when they made Student Loan debt totally unforgiveable in bankruptcy. I think with me it would have been a legitimate case.

Any advice?