Student Loans in Default, How to Save Yourself
One of the best things about student loans are the numerous repayment options that are available. One of the most frustrating things about student loans, is the lack of options borrowers may be presented with when calling for assistance. It is the lack of knowledge about options that may cause many borrowers to end up defaulting on their student loans.
WHAT IS DEFAULT?
If you are in default on a student loan, it means you have not made a payment in, at least, 270 days. There are two exceptions to this rule. If your loans are in deferment or in forbearance, you may not have a made a payment in that period of time, because a payment was not required.
WHAT HAPPENS IN DEFAULT?
If your loans go into default, the servicer may send them to a subservicer, called a collection agency. Because student loans are backed by the federal government, these collection agencies (or the servicer) have other options to force someone to pay. These include garnishing wages, seizing bank accounts or intercepting tax refunds. Collection agencies usually add collection fees to the total loan amount, as well. This increases the overall debt.
In addition, each month a payment is missed, a late mark is added to the credit reports. This can cause significant damage to someone’s credit reports and scores. Negative information in the credit report impacts everything from borrowing money to renting a house or apartment.
GETTING OUT OF DEFAULT
There are three options for taking loans out of default.
- Pay the entire loan off in full. Most people are not in a position to do this or they would not be behind on their loans.
- Loan Rehabilitation - Another option for getting your loan out of default is loan rehabilitation. Below are considerations for the different types of loans you may have: Direct loans, FFEL/Stafford Loans/Perkins Loans/Parent PLUS loans.
- Loan Consolidation - By consolidating your loans you may be able to access lower payments, one fixed interest rate and a way to bring past due accounts current.
To rehabilitate a defaulted Direct Loan or FFEL Program loan, you must agree in writing to:
- Make nine monthly payments, during a period of 10 months.
- Make each payment within 20 days of the due date.
Under a loan rehabilitation agreement, your initial payment will be equal to 15% of your discretionary income. You will need to provide documentation of your income and based on that information, your payment could fall to as low as $5. You must ask for a lowered payment.
Federal Perkins Loans
To rehabilitate a defaulted Federal Perkins Loan, you must make a full monthly payment each month, within 20 days of the due date, for nine consecutive months. Your required monthly payment amount is determined by the school where you took out the loan, or by ED if the loan has been assigned to ED’s Default Resolution Group. You can find who has your loan by visiting the National Student Loan Data System.
Benefits of Loan Rehabilitation
Once your loan is rehabilitated, the default status will be removed from your loan. You are eligible for benefits that were available on the loan before you defaulted, such as deferment, forbearance, a choice of repayment plans, and loan forgiveness. You will be eligible to receive additional federal student aid as well. The credit bureaus will be instructed to remove the record of the default from your credit history for the rehabilitated loan. Late payments reported before the loan defaulted will not be removed from your credit history.
* Important to Note:
- You can rehabilitate a defaulted loan only once.
- FFEL loans. Your loan is rehabilitated only after you have made the required payments. However, you may have to make additional payments between the time you make your last payment and the loan is returned to a lender or the ED.
- Involuntary payments, such as wage garnishment payments or tax refund offsets do not count toward rehabilitation payments. You may experience garnishments until your loan is no longer in default or until you have made some of your rehabilitation payments.
LOAN CONSOLIDATION (also available if loans are not in default)
The third option for getting out of default is to consolidate your defaulted federal student loan into a Direct Consolidation Loan. Loan consolidation allows you to pay off one or more federal student loans with a single, new loan that has a fixed interest rate. You can also select an income driven repayment plan.
To consolidate a defaulted federal student loan into a new Direct Consolidation Loan, you must either:
- Agree to repay the new Direct Consolidation Loan under an income-driven repayment plan, or
- Make three consecutive, voluntary, on-time, full monthly payments on the defaulted loan before you consolidate it.
If you choose the first option, when you apply for the Direct Consolidation Loan, you must select an income driven repayment.
Other Loan Types:
Defaulted PLUS loan - If you want to consolidate a defaulted PLUS loan that you obtained as a parent for your child's education, the only income-driven plan you can choose is the Income-Contingent Repayment Plan (ICR Plan).
If you choose the second option (making three consecutive, voluntary, on-time, full monthly payments), you may repay the new Direct Consolidation Loan under any repayment plan you are eligible for.
Federal Perkins Loan
To consolidate a defaulted Federal Perkins Loan, you must also consolidate at least one Direct Loan or FFEL Program loan.
Once the defaulted loan is consolidated, you will be eligible for benefits such as deferment, forbearance and loan forgiveness. You’ll also be eligible to receive federal student aid again. However, consolidation of a defaulted loan does not remove the record of the default from your credit history.
Cons of Student Loan Consolidation
While consolidation can be a great tool for reducing payments, in part by extending the time for repayment, there are downsides. One caution is that you may lose benefits extended to you by your lender or servicer. These benefits may include the right to cancel loans or special interest reduction programs.
The other con of consolidation is that you may pay more for your loans. If you are extending the time you have to repay the debt you are, most likely, going to pay more in interest. Be sure to use a loan calculator or talk with your servicer or guaranty agency to understand the total costs.
Finally, understand that any default or delinquent entries on your credit bureau reports will not be removed through consolidation. The accounts will be closed and you will have at least one new entry from the consolidated loans.
Pros of Student Loan Consolidation
There are many positive reasons for consolidating student loans.
- You qualify for repayment plans they are not available under your current loan types.
- You have an affordable, monthly payment.
- Garnishments will most likely cease.
- With the new account, you have the opportunity to add positive information to your credit bureau reports.
As you can see there are options for bringing a student loan out of default. Some options are fast and others are time consuming. Remember that information in the credit report, no matter which option you select, will heal.
If you need assistance with your student loans, call American Financial Solutions today. We work to help you find the plan that fits with your budget and your financial goals. 1.888.895.4795 or visit our student loan webpage.
Published Aug 8, 2016.