Douglas Olsen
Student loan defaults are a common issue, with almost 25% of federal student loan borrowers in default. When a student loan defaults, the full amount becomes due immediately, which is unaffordable for most borrowers. To get out of default, one option is to pay back the entire balance. However, this is often not feasible, and other options should be considered, such as loan rehabilitation and consolidation. Loan rehabilitation involves making nine monthly payments within ten months, calculated at 15% of your discretionary income. This is a good option as it removes the default from your credit report. Additionally, the U.S. Department of Education has announced initiatives to help borrowers get out of default, such as the Fresh Start program. It's important to explore options to get out of default and avoid further financial strain, such as wage garnishment and dealing with debt collectors.
| Characteristics | Values |
|---|---|
| What happens when student loans default? | The full amount becomes due immediately. |
| How to pay off student loans in default? | Pay off the full amount, negotiate a settlement, or rehabilitate the loan. |
| How to rehabilitate the loan? | Make nine monthly payments within 10 months. The payments are usually 15% of discretionary income. |
| How to check if your student loan is in default? | Contact your loan servicer, check your My Federal Student Aid account, or pull your credit report. |
| What happens if you default on private student loans? | The loan is sold to a collections company, and your credit score takes a hit. |
| What happens if you default on federal student loans? | The Department of Education may resume collections of defaulted loans, and your wages may be garnished. |
| What to do if you cannot pay your student loans? | Explore options like loan rehabilitation and consolidation, or apply for income-driven repayment plans. |
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What You'll Learn
Loan rehabilitation
To start the loan rehabilitation process, you must contact your loan holder or loan servicer. You will then enter into a loan rehabilitation agreement, which involves making nine consecutive monthly payments based on your income. These payments are typically set at 15% of your discretionary income, but you may request a lower amount if needed. It's important to note that if you have Perkins Loans, you will need to make the full standard payment.
Once you complete the loan rehabilitation agreement by making all nine payments within ten consecutive months, your loan will be removed from default. Any collections activities, such as wage garnishment or tax refund offset, will stop, and you will return to making regular payments on your loan. Your loans may be transferred to a new loan servicer, and you will need to continue making these monthly payments to avoid defaulting again.
It's important to remember that loan rehabilitation is a one-time opportunity. If you default on your loan again after rehabilitation, you won't be able to rehabilitate it a second time. However, this restriction does not apply to borrowers who rehabilitated their loans during the pandemic payment pause or used the Fresh Start programme to exit default.
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Consolidation
To consolidate a defaulted federal student loan, you must submit an application on paper or online. In your application, you must agree to repay the new Direct Consolidation Loan under an IDR (income-driven repayment) plan, or make three consecutive, voluntary, on-time, full monthly payments on the defaulted loan before you consolidate it. After your loans are consolidated, your loan will be removed from default, and collections (such as wage garnishment and tax refund offset) will stop.
There are downsides to consolidating your loans, and it may not be the best option for getting your loans out of default. For example, you will have to continue to make monthly payments on your loans to avoid defaulting again. If you consolidated your loans by agreeing to sign up for an IDR plan, your payment will be based on the IDR plan you signed up for. If you consolidated by making three full payments, you can sign up for whatever repayment plan you are eligible for, including IDR plans. Under an IDR plan, your payments are based on your income and family size and could be as low as $0 per month.
Student loan rehabilitation is another option for getting out of default. It is the only option that removes the default from your credit report, though previously reported late payments will remain. To rehabilitate your loans, you must make nine monthly loan payments within 10 consecutive months. Your monthly payments will be 15% of your discretionary income, or you may request a lower amount.
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Loan settlement
To be eligible for a loan settlement, your loans generally need to be in default. Federal student loans enter default after 270 days of missed payments, while private student loans usually default after 90 days. Private loan lenders may offer more settlement options, even if the borrower is not fully in default. Settlements for defaulted private student loans are more common because these lenders don't have the same collection tools as federal lenders, such as wage garnishment and tax refund garnishment.
To start the settlement process, you must first confirm your default status with your loan servicer. Lenders are more likely to negotiate if you are experiencing financial hardship. Gather proof of your situation to demonstrate why you cannot repay the full amount. If you are seeking to reduce the amount you owe by a substantial amount, you should have the money available to pay the settlement, as lenders will be looking to recover as much of the loan as possible.
It is important to note that a loan settlement can damage your credit score and have tax consequences. Rehabilitation is an alternative option to remove the default status from your credit history, but it can only be done once. Additionally, federal student loans have other options to eliminate debt, such as loan forgiveness in cases of school fraud or permanent disability.
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Avoid personal loans
If your student loan has gone into default, it's important to take action to remedy the situation. However, it's recommended that you do not take out a personal loan to pay off your student loan debt. Personal loans typically carry higher interest rates than student loans, which can put you even further into debt.
Student loan rehabilitation is often the best option to pursue. It's the only remedy that removes the default from your credit report, though previously reported late payments will remain. To rehabilitate your loans, you'll need to make nine monthly loan payments within ten consecutive months. These payments will be 15% of your discretionary income, or you may request a lower amount if needed.
Another option is to negotiate a student loan settlement for less than you owe. However, this option may not result in significant savings. You can also explore loan consolidation, which can help you manage your debt by combining multiple loans into one.
Be cautious of "debt relief" companies that promise immediate student loan forgiveness. These companies may not be legitimate, and their offers are often too good to be true. Instead, seek advice from established organizations with verified histories, such as certified nonprofit credit counselling agencies or attorneys. These professionals can provide guidance and help you explore your options without putting you further into debt.
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Fresh Start program
If you've defaulted on your student loan, the Fresh Start Program could be a way to get back on track. This program offers a second chance to borrowers who have defaulted on their federal student loans. Here's how it works:
First, you'll need to get a copy of your credit report to understand the details of your default. You can do this for free at annualcreditreport.com. Your credit report will show your federal and private student loan defaults under the negative information section. It's important to check this information as federal student loan holders may place defaulted loans with a collection agency if you don't make payment arrangements.
The Fresh Start Program involves entering into a rehabilitation agreement for your defaulted loan. This means you'll need to make nine monthly loan payments within ten consecutive months. These payments are calculated as 15% of your discretionary income, although you may be able to request a lower amount if needed. During this rehabilitation period, your loan holder may also agree to stop using collection agencies to contact you.
Successfully completing the Fresh Start Program has several benefits. Firstly, it's the only option that removes the default from your credit report, although late payments will still be listed. Secondly, it can prevent further collection actions, such as wage garnishment or tax refund offsets, which are commonly used to collect on defaulted student loans. Finally, it may open up opportunities for loan consolidation or other repayment plans that could make managing your student loan debt more manageable.
To enrol in the Fresh Start Program, contact your loan servicer or the collection agency handling your defaulted loan. They will guide you through the process and help you set up a payment plan that fits your financial situation. Remember, the key to successfully completing the program is making those nine monthly payments on time and in full. So, ensure you understand the payment schedule and amounts before committing.
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Frequently asked questions
You can check your loan status by contacting your loan servicer, logging into your My Federal Student Aid account, or checking your credit report.
If your student loan is in default, the full amount owed becomes immediately due. Your wages may be garnished if your lender sues you and gets a court order. Your credit score will also take a hit.
You can pay back your entire balance, but this may not be feasible for most people. Student loan rehabilitation is another option, where you make nine monthly payments within 10 months, usually 15% of your discretionary income. Loan consolidation is also an option for federal student loans.
The Fresh Start program was announced by the Department of Education to help borrowers get out of default quickly and easily before collections begin again. The program is currently running until one year after the payment pause ends.
Debt collectors are required to follow the Fair Debt Collection Practices Act (FDCPA) when contacting you. If collectors are harassing you, you can submit a complaint to the Consumer Financial Protection Bureau (CFPB). The CFPB also provides sample letters that you can use when responding to bill collectors.
