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 are looking for a solution to your student loan problem and wondering if there is one, then there is a great way to find out for free! Just click here to provide me with all the details on your loans. I will then, for free and with no obligation on your part, look at your situation to see if I can provide you with a way to deal with them. If there isn't one, it didn't cost you anything. If there is, then I will contact you to schedule an analysis session with my office to lay out a plan of action.
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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