What are my options if I’ve defaulted on my student loans?


News | by — July 4, 2012

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The most recent statistics from the department of education (from the 2009 fiscal year) indicate that student loan default-rates continue to increase. Although they haven’t reached their all time high of 22.4 percent in 1989, more and more borrowers find themselves unable to pay back their student loans, 8.8 percent in 2009.

What are the consequences of defaulting on my student loans?


According to the U.S. Department of Education, if you’ve defaulted on your loans you can expect the following consequences:

  • National credit bureaus can be notified of your default, which can harm your credit rating, making it hard to buy a car or a house.
  • You will be ineligible for additional federal student aid if you decide to return to school.
  • Loan payments can be deducted from your paycheck.
  • State and federal income tax refunds can be withheld and applied toward the amount you owe.
  • You may have to pay late fees and collection costs on top of what you already owe
  • You can be sued


What happens when my student loan account goes into default?


Generally if you’ve missed a payment(s) on your student loan the accounts are transferred to the debt resolution department, within the department of education. However, if payment arrangements aren’t made within the first couple months of the transfer, the debt resolution department will transfer the account to a third party collection agency. Thus, the longer your account is in default the more likely it is to be transferred to a collection agency.


What are the consequences of having my student loan account transferred to a third party collection agency?


If your account is transferred to a third party collection agency, you will incur additional charges like collection fees. Also, payment plans made with the collection agency will likely take those fees into account and likely be larger than ones made directly with the debt resolution department. In addition, the collection agency may garnish your wages without going through the formal legal process of obtaining a judgment.


What are my options if I’ve defaulted on my student loans?


There are several ways to work with the government if you have defaulted on your student loans. The simplest option is to pay in full. However, most of the time, this is not a realistic option for debtors.  The debt resolution department may also make you a settlement offer which discounts principal and interest. They may also help you set up a new monthly payment plan that takes into account your income and expenses. On a new payment plan you may “rehabilitate” your loan and move it out of default.


Once I’ve defaulted on my student loan can I change my payment plan to something that is more affordable?


Probably.  The U.S. Department of Education and its guaranty agencies will accept regular monthly payments as long as the payments are reasonable. To find out what is “reasonable,” contact the Department of Education directly at 1-800-621-3115.


Once I’ve defaulted on my student loans can I defer my loans?


You cannot defer your loans once you’ve defaulted. In order to defer your loans you must specifically qualify by fitting into a narrow category: you must be in school, you must have severe economic hardship, you must be unemployed or you must be in active military duty. However, if you are able to rehabilitate your loan by making regularly scheduled payments, you may still be able to qualify for deferment. More information can be found here.


Once I’ve defaulted on my loans can I set up forbearance?


You cannot set up forbearance once you’ve defaulted. If you know in advance that you may not be able to make your monthly payment, you should contact the Department of Education and try to set up forbearance.


How do I stop a wage garnishment for student loans? 


One way to stop wage garnishment for a student loan is to “rehabilitate” the loan. For most types of student loans, rehabilitation requires nine monthly payments within a ten month period. Each payment must be made within twenty days of its due date, and for an agreed upon amount. Rehabilitating your student loans has other advantages. For example, your loan holder will no longer report your loan status as “default” to national credit bureaus.


How do I make my loans eligible again for forbearance or deferment after going into default?


Generally, if a debtor rehabilitates the loan, as described above, it will be eligible for benefits again, like forbearance or deferment.


Once I’ve defaulted on my loans can I consolidate my loans at a lower interest rate?


Probably. By making three months of payments on time and for the agreed upon amount, you may qualify for consolidation of your loans.


More information can be found at: MyEdDdebt.com




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