Past Due on Student Loans - Fix it Now

For many people, the idea that they could take out a loan, attend college and improve their financial life has not become a reality. Sometimes, life interferes with completing college and sometimes, the jobs they hoped to enter didn’t materialize and they are left with student loan debt and normal life expenses.

The scary thing about student loans is that they don’t go away. There is no statute of limitations like there is for items like credit cards and medical debt and the government has many options for collecting that debt. They may garnish wages, freeze a bank account or intercept income-tax refunds. Although they are required to notify the borrower that these steps are being taken, we often hear from people who were very surprised to find the money they were expecting to receive, was gone.

So what can someone do when they can’t afford their student loan payment? Well, there are a few options. But, first people have to understand the timeframes the Department of Education and its loan servicers have instituted. The first day someone misses a payment they are considered delinquent. At that point, the servicer, guarantee agency or college are going to email, call and send letters trying to collect the debt. The second level of collections occurs once an account is in default – meaning the loans are at least 270 days past due.

When an account goes into default, typically a collection agency takes over the collecting the debt. They will add collection fees to the amount of the total student debt. The worst part is they will ask the borrower to pay the entire debt – now. This is called accelerating the loan. Obviously, if someone could pay the entire debt off, they would.

Even at this point people have options to bring loans out of default.

Loan Rehabilitation. If someone has a Direct Loan or a Federal Family Education Loan (FFEL), they agree (in writing) to make nine monthly payments over a consecutive period of 10 months AND make the payments within 20 days of the due date, the loan will be rehabilitated. The payments will be set at 15% of the borrower’s discretionary income. People can submit proof of income if the 15% presents a hardship. In some cases payments may be as low as $5. Payments made from garnished wages do not count towards loan rehabilitation.

A rehabilitated loan means that the loan will show as current on a credit report and be eligible for any of the standard repayment plans or other benefits such as deferment or forbearance. Borrowers will also be eligible to receive financial aid if they want to return to college.

It is important to note two points in a rehabilitation:

• Any payments missed prior to the rehabilitation will still be shown on the credit report.
• Loans can only be rehabilitated one time. 

Loan Consolidation. In a loan consolidation, the borrower is taking out a new loan to pay off current student loans. Loan consolidations are done through StudentLoans.gov. There are two options on how to complete the consolidation. First, loans can be consolidated by applying for a Direct Consolidation at StudentLoans.gov. The borrower must agree to pay the new loan using an income driven repayment plan.

The other option is to make three, consecutive, voluntary payments on the defaulted loan(s). The payments all must be on time and based on the normal monthly loan payment.

There is a down side to the consolidation. If the loans are delinquent or in default when they are consolidated, the statuses will NOT be updated to current on credit reports.

The loans we have discussed here are all Direct Loans or FFEL loans. Borrowers may also have Federal Perkins Loans or private student loans. To determine what type of federally backed student loans a person has, visit the National Student Loan Data System and click on Financial Aid Review. If someone has private student loans visit Annual Credit Report.com to view credit reports from Experian, TransUnion and Equifax.

We know student loans can be confusing and frustrating. If someone needs help, contact a certified student loan counselor at 800-895-4795 or visit our website and click on Get Started Now. They can help people determine the status of their student loans and help to determine available repayment options.

Published Jan 25, 2016.