Defaulting on a loan is never good. It gets debt collectors calling you and accelerates the debt (you owe all of if NOW, not just the payments that you are behind). But federal student loans are actually rather forgiving when it comes to default.
When Am I in Default?
With just about any other loan, you have defaulted if you miss one payment. But did you know that you would have to miss at least nine (9) payments on your federal student loans before you are held in default? Yes, that's right. You must be more than 270 days in arrears (9 months) to default; before that, you are merely "delinquent."
But what do you do if you have defaulted? You now face a possible Administrative Wage Garnishment (AWG), seizure of your tax refund, or a collection law suit. Is there any way to go back and cure the default short of filing a chapter 13 bankruptcy? Fortunately, yes there is!
How Do I Get Out of Default?
There are two ways to get out of default, and each has it's pros and cons.
Rehabilitation. You have the right to "rehabilitate" your loan out of default. This is done by negotiating a reasonable and affordable monthly payment based on your total financial circumstances. These payments continue for 9 months (Perkins) or 9 payments in 10 months (everything else).
Once rehabilitation is complete, the default notation on your credit for the loan is removed, and it is if you were never in default! Thus this option is better for your credit.
Consolidation. This is the student loan equivalent of a refinance. You pay off the defaulted loan by a new one through the Department of Education's Direct Loan program. No monthly payments are necessary first if you go into an income based repayment plan afterwards. Otherwise, you must make three payments first before you are out of default. There are two downsides:
- You cannot consolidate out of default if there is an Administrative Wage Garnishment (AWG) in place; and
- It does not remove the default from your credit, so your scores to not improve
Bear in mind that you can only use each of these options once to get out of default, so it is best that once you are out of default, you do not default again. Get into a plan you can afford and stick with it!
What Do I Do Next?
If you live in southern New Jersey and would like to consult with me on getting out of default on your loans, please feel free to call my office at 856-432-4113 or contact me through this site to schedule an appointment in my Woodbury office to discuss your case.
If you would like more information about student loans, you can dowload my free book, I Graduated; Now What? A Guide to Dealing with Your Student Loans.