If you are in default on a private student loan, you cannot get out of it unless the lender lets you. Unlike the federal system, there is no rehab. But what if there was the equivalent of a federal “consolidation”? In other words, what if you could refinance out of default? Wouldn’t that solve your problem? Maybe not.

A blog called the “Consumer Ledger” posted recently with some interesting thoughts on the subject. If you are looking to get out of default, here are some downsides to consider:

The Downsides

You May Not Qualify. What is your credit score? Is it good enough to take out the refinance loan? It might not be, which could take that option off the table. Even if it is, it might not be high enough to get you a better interest rate, which leads us to the second downside.

There’s No Guarantee That Your Payment Will Go Down. The very problem that put you into default (you couldn’t afford the monthly payment) may not go away. A refinance should not only get you out of trouble, but also make the loan more affordable (the main reason why people refinance mortgages).

It Doesn’t Help Your Credit. A refinance will get you out of default, but it doesn’t remove the black mark of the default itself on your credit. The loan is back on track, but your credit score is not. It is not like a rehab on a federal loan, which gets you out of default and the default erased from your credit.

You May Need a Cosigner. If you are in default, it is your problem. But a refinance may require someone else to be hitched to your star, whether it is rising or falling. This needs to be carefully considered.

It Resets the Statute of Limitations. How long has the loan been in default? Has the lender come after you? Have they instituted suit? If not, and it has been years since you have made a payment, you may have passed (or be close to) the statute of limitations. If you have gone past it, the lender may well not be able to collect it at all, and it will go off your credit anyway once it goes past 7 years. A refinance would reset the clock and put you on the hook again.

I Might Be Able to Offer a Better Option

If you are in default on your private student loans, you need to consider your options carefully. If you live in the Gloucester County New Jersey area, I may be able to be of assistance. 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.

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Steven J. Richardson
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Bankruptcy, Collections, Student Loan, DUI and Traffic Court attorney in Woodbury, NJ.
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