Student Loan Blog Series VII: Default Options
Default Options Available for Your Student Loans
Sometimes borrowers can have no further options with regards to their student loans. The student can’t postpone payments, and the repayment plans will not meet the borrowers financial needs. This results in a default of their student loans. Default occurs if you are more than 270 days behind in your student loan payments.
If you default on your student loans do not lose hope. Below, Orange County bankruptcy attorneys, provide options even for situations as dire as the dreaded default. This part of our student loan blog series will focus on default options for getting your student loan current again.
What Happens When Student Loans are Placed in Default
When placed in default, any Federal Direct Student Loan or Federal Family Education Loan will be assigned to collections. For defaulted Federal Perkins Loans, you’ll need to check with the school from which you borrowed to find out about loan repayment.
Options to get your student loan out of default include loan repayment, loan rehabilitation, and loan consolidation.
Repaying your defaulted student loan in full is the easiest way to get out of default. However, if you could repay your student loan, then you probably wouldn’t have defaulted. In any case, it is the fastest way to get out of default.
Another option for getting your loan out of default is loan rehabilitation. To rehabilitate your Student Loans, you and ED must agree on a reasonable and affordable payment plan.
Your loan will be rehabilitated if you make the agreed upon payments on time and the loan has been purchased by a lender. Any garnished monies do not count towards this rehabilitation. Also, keep in mind that collection costs may be added to your principal balance.
Once your loan is rehabilitated, you may regain eligibility for benefits that were available on your loan before you defaulted. Those benefits may include deferment, forbearance, a choice of repayment plans, loan forgiveness, and eligibility for additional federal student aid.
Other benefits of loan rehabilitation include the removal of the default status on your defaulted loan, the default status reported to the national credit bureaus, wage garnishment, and any withholding of your income tax refund made by the Internal Revenue Service (IRS).
Also, after rehabilitation, your monthly payment may go up from your agreed upon payment. Again, collection costs might be added to the principal. As for your credit report, the delinquent reports will not be removed from your credit report. However, you will be considered current on your loan, and you can begin to rebuild your credit as well as your finances.
Loan consolidation is also a good way to get out of default. It ties back to repaying your entire loan balance. If a lender is willing to consolidate your loans, then they will pay the balances of the other loans and take you out of default. Loan consolidation allows you to pay off the outstanding combined balance(s) for one or more federal student loans to create a new single loan with a fixed interest rate.
A defaulted federal student loan may also be included in a consolidation loan after you’ve made arrangements with ED and made several voluntary payments (again, contact your school for information about making payments on a Perkins Loan). Usually, you would be required to make at least three consecutive, voluntary, and on-time payments prior to consolidation.
Cancel Your Student Loan
You can get out of default if you qualify to have your loan canceled (discharged). This is the best option, because when you cancel the loan, you are no longer obligated to repay it. However, there are limited ways to qualify for loan cancellation, so this option won’t work for many people.
If these options are not available to you, you still have options such as bankruptcy. Although, it is difficult to obtain a discharge of your student loans through bankruptcy, it is worth a try. Additionally, there are other benefits of filing a Chapter 7 or Chapter 13 that can help you eventually get your finances back in order. Part 8 of this student loan blog series will further explain the benefits of bankruptcy with regards to student loans.
In addition to managing your student loan debt, you should also consider reading our blog series on credit debt. Together, you can manage all of your debts into something more manageable.