I can certainly understand why issues surrounding student loans seem like an unknown foreign language for many people. While the information is out there it seems that nobody knows what to make of it.
Almost the worst place to turn for advice seems to be the student loan debt collectors. In all fairness it just might not be their job to provide good advice and instead focus on collecting the debt. But that does leave the average student loan debtor out in the cold.
Today I’d like to talk about a little explored option when dealing with unmanageable federal student loan debt.
Through a quirk of policies and procedures the federal government has some amazing options to help those in default to deal with their debt.
People who pay attention to this advice should never find themselves letting their federal loans get so delinquent they end up with an Administrative Wage Garnishment or getting their Social Security benefits garnished.
The Government Will Lend You the Money to Get Out of Default
Through the U.S. Department of Education Direct Consolidation Loan program you can combine all your individual government student loans into one single loan. This has some great benefits. One little known benefit is if for some reason you ran into money troubles in the future, then your wages can only be garnished up to 15% rather than 25% if you have multiple outstanding loans.
By consolidating all your eligible federal student loans you will experience the following benefits.
You will only have only one payment to make each month.
You’ll be able to elect to repay your new loan under one of the available income based repayment plans or other flexible payment programs.
There is no fee to consolidate your loans. It is a totally free process.
There is no minimum or maximum amount you can consolidate.
The new minimum monthly payment may be less than the combination of the individual loan minimums.
See also I Had No Idea I Was Selling My Soul When I Signed for the Student Loan. - Leslie
Here is the Magic Wand
Under the Direct Consolidation Loan program, the U.S. Department of Education will allow you to consolidate your loans out of default if you agree to repay your new Direct Consolidation Loan under the Income Contingent Repayment Plan or Income Based Repayment Plan. If you’d like to calculate what your new reduced payment might be, click here.
There are Some Nasty Issues to Avoid
For anyone who has had their head in the sand and allowed their student loans to get to a point where they were sued over them and received a judgment, those loans are not eligible to be consolidated.
If your credit report is showing a default status, just consolidating the loans will not change that status. You must first rehabilitate your defaulted loan. For more on loan rehabilitation, see this article.
Keep in mind that even if you rehabilitate your student loans successfully, that will not remove any credit report notations of late payments reported before the loan defaulted.
Once your loan is rehabilitated the current default status will no longer be reported to the credit bureaus. You can then consolidate your loans and be reported current.Then again, consolidating a defaulted loan will result in your credit report bearing the notation that the loan was in default but then “paid in full.”
Do You Have a Question You'd Like Help With? Contact Debt Coach Damon Day. Click here to reach Damon.
That is a fine point but not one I would worry too much about if you want to consolidate your loans into one lower payment loan as quickly as possible. Either way, your past late status will be reported, but with a rehabilitation, just not the default.
Being a Day or a Month Late is Not a Default
Being in default with your student loans is entirely different than being late on a credit card bill. Typically we think about being a month late as a really bad thing.
However, according to the U.S. Department of Education you are technically not in default until your payment is more than 270 days past due. So even if you’ve not made a student loan payment for the last six months, you are still eligible to consolidate your loans and reduce your payment.
See also I Went to a Second-Hand College and I'm Deep in Student Loan Debt. - Amber
The Process
Once you complete your direct consolidation loan application online it will take 60-90 days for it to be processed. After it is approved, you generally will not need to make your first payment for another 60 days.
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One way to get 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 new consolidation loan.
There are typically three options for getting out of default: 1) pay the debt off in full, 2) consolidate your student loans and begin making payments, or 3) rehabilitate your loans.
Defaulted loans are not eligible for any of our student loan forgiveness programs. But if you take advantage of Fresh Start, you'll get out of default status. Then you'll regain the ability to apply for forgiveness programs, including Public Service Loan Forgiveness.
You can refinance your student loans to consolidate your debt and get a lower interest rate to decrease your monthly payment. Let's say you owe $50,000 with an 11% interest rate and a 10-year term. If you refinance to a 5% interest rate and a 10-year term, you will pay $158 less each month.
Good to know: If you have a negative mark on your credit report related to student loans that is accurate, such as a delinquent or defaulted loan, there's no way to remove it. The best way to overcome it, though, would be to rehabilitate the loan status with your lender.
Normally, one of the main ways to get out of default is by rehabilitating your loans. But right now, loan rehabilitation has been replaced by the temporary Fresh Start program. After Fresh Start ends, loan rehabilitation will be an option again.
No, you can't be arrested or put in prison for not making payments on student loan debt. The police won't come after you if you miss a payment. While you can be sued over defaulted student loans, this would be a civil case — not a criminal one. As a result, you don't have to worry about doing any jail time if you lose.
In most cases, the Fair Credit Reporting Act (FCRA) allows derogatory items like defaulted debts or collection accounts to stay on your credit report for up to seven years. Because federal student loans do not have a statute of limitations, these negative accounts can remain on your credit report indefinitely.
The entire unpaid balance of your loan and any interest you owe becomes immediately due (this is called "acceleration"). You can no longer receive deferment or forbearance, and you lose eligibility for other benefits, such as the ability to choose a repayment plan.
A deferment or forbearance allows you to temporarily stop making your federal student loan payments or temporarily reduce your monthly payment amount. This may help you avoid default. Note: Interest accrues during forbearances and some deferments.
Yes, you can negotiate a settlement with your lender or servicer. However, if you are submitting a compromise for federal student loan debt, the Department of Education might need to approve it.
A. ISAC reports your defaulted loan to all national credit reporting companies as a “collection account.” Once the defaulted loan is paid in full, the classification will change to “paid collection account,” but record of the default will remain on your credit report for seven years after the account is paid in full.
Do student loans go away after 7 years? While negative information about your student loans may disappear from your credit reports after seven years, the student loans will remain on your credit reports — and in your life — until you pay them off.
Besides paying in full, student loan consolidation is the fastest route to exit default. You can do either of the following to qualify: Make three full, on-time, consecutive monthly payments on the defaulted loan. Agree to repay your new loan under an income-driven repayment plan.
Borrowers default when they miss 270 days' worth of payments. Soon after, they can have their tax refunds and paychecks garnished, their credit scores fall, and their eligibility for more student aid revoked.
You'll still be able to submit the FAFSA and access federal grants, work-study and student loans for college or graduate school. However, it may not be a good idea to take on more debt when you're already behind on your student loan payments, and private loan default is still a difficult situation.
Settling your student loan debt is likely to hurt your credit score. Lenders report loan default to the credit bureaus, and you must usually be in default to initiate a settlement agreement. But you can ask the lender to remove the default from your credit history as part of the settlement agreement.
If I defaulted on my federal student loan, can I get more federal student aid? If you're eligible for the Fresh Start program, you've regained your access to federal student aid (unless you're ineligible for aid for reasons other than your default status).
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