As I mentioned in other posts, defaulting on your student loans is a no good, terrible, very bad thing. You’ve (royally) screwed up, but it’s not the end of the world. Shit happened, but now it’s time to move on. You aren’t alone, either. Roughly 11.3% of federal student loans are in default. With this guide, you’ll get out of default (the adult equivalent of detention) and see the sun again!
To get out of default you will have to rehabilitate your student loans. This is important as you can begin repairing your credit rating, become eligible again for student loans, and qualify for some federal repayment plans. Basically, you’re currently like a player in a video game without powers. Rehabilitation gets you all the cool powers back!
Federal Student Loan Rehabilitation:
Student loan defaults are scary and complex, so I’ll break it down for you step by step:
- To rehabilitate your federal student loans, you must make at least 9 on-time payments. If you miss one payment then the count starts back at 1 and you must make 9 more on-time payments before you’re rehabilitated. These payments might be the amount you were paying previously or there is a small chance that you can negotiate a lower monthly bill. As of July 2014, you can request income-based repayment (IBR) before or after your loan is rehabilitated. While IBR is only approved in very special circumstances before rehabilitation, you might qualify after your loan is rehabilitated.
- If you’re having your wages garnished, you can have your garnishment suspended by making five rehabilitation payments. This can be challenging as the garnishment will be happening at the same time, unless you were able to negotiate voluntary payments in lieu of garnishment with your provider.
- Then you and your loan holder can determine an amount that is reasonable and affordable for you to pay. Usually, this amount is 15% of your monthly income, however you can potentially negotiate for a lower rate if there are exceptional circumstances.
- You will probably have to pay collections costs for letting your account go into default. These will be added to the principal of your loan.
Option 2: (The workaround)
- You can also potentially consolidate your loans at this point and avoid rehabilitating them entirely if you have a number of federal loans. However, if you rehabilitate your loan instead of consolidating it, then the default gets taken off your credit report. Also, you cannot consolidate your loans if you have a judgment against you for the amount of the loan, or if your loans were previously consolidated.
- You will also need to make three consecutive monthly payments on your loan that are reasonable and affordable or you must negotiate a repayment plan under the Income Based Repayment Plan or the Income Contingent Repayment Plan to qualify.
Private Student Loan Rehabilitation:
Defaulting on private student loans is equally bad. Each lender has their own options for loan rehabilitation, so check out what your lender offers. Student loan collectors aren’t like telemarketers – you shouldn’t ignore them. They have big-time lawyers who will often take you to court to recover their money and try to get a money judgment against you giving them the ability to garnish your wages, place liens against your property, or real estate, and freeze and garnish your bank accounts. Basically, they can make your life a costly, living hell.
To make matters worse, you will also have to pay for collection costs and court and attorney costs if you go to court. Many private lenders offer options and repayment programs to prevent you from defaulting. Take advantage of whatever they offer to help you not default on your student loans. Think of yourself like Oliver in Oliver Twist. You’re not going to be given a lot of gruel so make sure you savor what you get!
Don’t let your loans go into default as you will be in for a world of hurt. There are many ways to keep from defaulting on your loans, but once you default you open up a can of worms that you don’t want to deal with.
This article is part of my Complete Guide to How Student Loans Work.