Do you find yourself asking “How do I get my student loans out of default?” If you’re overwhelmed by massive student debt, you’re not alone. But the consequences for defaulting are severe. Here are 4 ways to get student loans out of default starting today, so you can achieve financial freedom and live your dreams.
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Watch out! If you get behind on student loan payments and your loan goes into default, you lose eligibility for Public Service Loan Forgiveness.
You may also lose your job, ability to borrow money at a decent rate, and more. Here are four ways to get student loans out of default so you can rebuild and live your dreams.
Public Service Loan Forgiveness is a program that forgives the remaining balance of your Direct Loans after you’ve made 10 years (120 months) of qualifying payments – assuming that you work full-time for a qualifying government or not-for-profit organization.
In order to qualify for loan forgiveness, you must be enrolled in a qualifying student loan program and be consistently making on-time payments.
For millions struggling to keep up with student loan payments, this can feel like a ball and chain. And you may despair of ever escaping. If that’s you, you’re not alone.
Let’s talk about how to get student loans OUT of default, so you can move on with your life. Because although the CARES Act suspended payments and accrued interest for a time, it’s about to expire. And you want to make the best of the rest of your life and live your dreams. So it’s time to get going.
But first, let’s start with… What’s the difference between student loan delinquency and student loan default?
Default vs. Delinquency: What’s Your True Status?
Those two “D” words – default and delinquency – can be confusing. Some use them interchangeably. But they’re not the same thing.
Delinquency is far less serious. But that doesn’t mean you should go there. You become delinquent on a federal student loan as soon as you miss a single payment. Your account remains delinquent till you catch up on what the government says you owe… usually your past due balance for all payment(s) missed plus any amount currently due.
If you ignore this, don’t think the problem will go away. It will only get worse.
After 90 days in delinquent status, your delinquency gets reported to the three major credit bureaus. Which will lower your credit score in a hurry.
From there, it becomes a race downhill. It gets harder and more expensive to open a credit card, sign up for utilities without a deposit, buy insurance, get a cell phone plan, or rent an apartment.
Default. If your non-payment continues and you don’t catch up on past payments, you go into default. Going into default has major consequences. Among them, you become ineligible to receive loan forgiveness for your student loans.
The timeline to default varies with different loans. For example, Direct Federal student loans go into default after 270 days (9 months) of non-payment. Federal Family Education Loans (FFEL) don’t go into default till 330 days (11 months) after non-payment.
The best way to avoid extreme collection fees on defaulted loans is to set up a loan repayment plan within the first 60 days of defaulting.
Harsh Consequences for Student Loans in Default
The U.S. Department of Education imposes some severe consequences for loans in default:
- The entire unpaid loan balance and all interest is immediately due and payable. That is, the full balance of the loan, not just the amount required to bring your account current.
- You lose eligibility for deferment, forbearance, and any income-driven repayment plans.
- You lose eligibility for additional federal student aid.
- Your account is turned over to a collection agency. They aren’t known for being nice, and the fees can be enormous.
- You’re reported as delinquent to credit bureaus, further damaging your creditworthiness.
- Your federal and state taxes are withheld via a tax offset… which means the IRS can apply your tax refund(s) toward your defaulted student loan debt.
- Your employer can withhold (garnish) your wages to repay your loan, at the urging of the government. If you work for the government, they’ll do it directly.
- Your loan debt load becomes even higher due to late fees, additional interest, court costs, collection fees, attorney fees, and any other fees related to collecting your debt.
- The lender can take legal action against you.
- You may not be able to purchase or sell assets like real estate.
- In some states, you could actually lose your job, professional licenses, or driver’s license.
Re-establishing credit and recovering from a federal loan default (or any loan default, for that matter) can take years of toil and anguish. It’s far better to avoid getting this far. That said, here are your four “get-out-of-jail” — how to get your student loans out of default — options. Pick one and run with it. Do it today. They can lead to financial security and the ability to live the life you want.
4 Ways to Get Your Student Loans Out of Default
You have four options to get your student loans out of default. None of them are particularly easy to do, or to qualify for. But they’re better than the alternative. Which is to have your life ruined for decades due to your debt.
- Full repayment
1. Rehabilitation to get your student loan out of default.
If you want to rehabilitate a federal student loan, you have to agree with the Department of Education on a “reasonable and affordable” repayment plan. Then you have to make nine out of 10 voluntary on-time payments. Incidentally, garnished wages, tax returns, and social security earnings do not qualify as voluntary payments.
Note: You are only allowed to rehabilitate your loan once.
What to Do for Rehabilitation — First Steps
Log in. Confirm your loans, amounts owed, and status of each loan.
2. Research what collectors might attempt to charge you and the limits of rehabbing a loan.
Lenders and debt collectors add collection costs to loan balances. It is illegal for it to exceed 16% of the unpaid principal and accrued interest for Federal Direct Loans. For FFEL loans, the amount should not exceed 16% of the unpaid balance and interest at the time of the sale of your loan.
Since you only get to rehab a student loan once, make sure you’ll be able to keep making payments once you rehab your loan.
3. Contact your servicer or collector – and document everything!
Seriously, everything! Debt collectors are notorious for falsifying and changing information to borrowers. Tell them you want to apply to rehabilitate your student loan.
Get the first and last name and title of the person you speak with, and note the date of your call. Every time! Keep a running report on every discussion point and agreement. Ask the representative for a written summary and confirmation of any changes to your loan. Don’t ignore keeping your own notes though, in case they don’t follow through.
4. Agree on a payment rate.
They’ll tell you that to rehab your loan, you’ll have to make nine out of the next ten payments on time. At a rated based on the Income-Based Repayment (IBR) Formula, which is 15% of your discretionary income. This means you’ll have to document your income with a pay stub, W-2, or 1040.
If 15% is still too high, request a lower amount. If your IBR calculation is $0 monthly, you’ll need to pay $5 monthly.
Important: You have the right to negotiate how much your monthly payment is.
Debt collectors like to demand a certain amount, which may be more than you can afford. This has been illegal since July 1, 2014. Don’t fall for it. You’re allowed to pay as little as $5 a month to rehab your loan (although that will extend the life of your loan).
5. Optional good faith payments are truly optional.
They may ask you to make “good faith” payments while they calculate your IBR figure. This is optional. You don’t need to make these payments. If you do, make sure the payments are no higher than your rehab monthly payment amount. Then they will count toward your required nine on-time payments.
What to Do for Rehabilitation — Next Steps
6. At 5 months, suspend wage garnishment.
When you’ve made five on-time payments, request they suspend your wage garnishment.
7. Transition to IBR.
After nine on-time payments, congratulations! Your loan is now rehabbed. Now, ask to enroll in an IBR plan or other financially suitable plan. Collectors like to funnel rehabbed loans into standard 10-year repayment plans. But this will make your monthly payments jump significantly.
Set a reminder for the date of your ninth payment. That day, contact your servicer and ask to enroll in the best repayment plan for you.
8. Transition to new servicer.
If your loan is a Direct Loan, you’ll be transferred to a new servicer. Ask for their name and contact info. You do not get to choose your servicer.
If you have an FFEL loan, the debt collector must sell the loan once rehab is complete. Keep making payments during that time. Or, apply for a Direct Consolidation Loan at this point.
Rehabilitation is slightly better for your credit report than consolidation (see below). They will remove your record of default from your credit report. But other negative information will remain for seven years.
2. Consolidation to get your student loan out of default.
Another way to get your student loan out of default is to consolidate your previous loans into one new loan. You can actually “consolidate” into a Direct Consolidation Loan with just one federal student loan.
Consolidation is a quicker way to get out of default, so long as you can commit to the required repayment plans.
To consolidate, you need to make at least three voluntary consecutive payments on your defaulted loan. Or, you can enter into an income-driven repayment (IDR) or income-based repayment (IBR) plan.
Note: As with rehabilitation, you only get one shot at consolidation.
Consolidation of your student loans may affect your eligibility for certain federal loan benefits. Be sure you check the details of your specific loan before committing.
How to consolidate your student loans to get them out of default:
It should take under 30 minutes.
2. To qualify, you need to make three voluntary, on-time, full monthly payments on a defaulted loan before you consolidate it.
Otherwise, your choices are limited to the income-based repayment (IBR) plans. If you make the voluntary payments prior to consolidating, you’ll have more repayment plan options.
3. The Department of Education sends you a list of all included loans and the repayment plan you selected, once they get your application.
The clock is now ticking…
4. You get 15 days to review and dispute (if you need to) any of the terms or details, including interest rates.
Don’t miss this 15-day window. If you don’t contact them during that window, they’ll assume you agree to all terms and will process the consolidation.
5. Keep making at least interest payments on your loans during the processing period.
If you can’t afford your interest payments, apply for forbearance till they notify you to confirm your new payment amount.
6. Collection costs may be added to the principal of your new Direct Consolidation loan.
Legally, those costs cannot exceed 5% of the outstanding principal plus interest. But fees may vary depending on which consolidation method you use.
7. Done with consolidation.
Now all your loans are rolled into one. You only have to make one payment each month.
Compared to rehabbing your loans, consolidation is slightly worse for your credit. The notation indicating you were in default and all other negative information stays on your credit report for seven years.
Quick view – Pros and Cons of Consolidation vs. Rehabilitation
|Consolidates all previous loans into one new loan.||Must rehab each individual loan to bring it current.|
|Quicker way to get out of default. No preliminary payments required.||Must make 9 voluntary (not garnished) payments to get out of default.|
|Fees of up to 18.5% added to your balance.||Government allowed to take 20% of the 9 payments as collection fees.|
|Default and late payments stay on credit report for 7 years.||Default removed from credit report. But late payments stay on report for 7 years.|
|One-time deal. You only get one chance.||One-time deal. You only get one chance.|
|You can choose your servicer.||You can’t choose you servicer.|
3. Cancellation to get student loans out of default.
In certain circumstances – whether or not your loan is in default – you may be eligible to cancel your student loans entirely. But cancellation is often limited to very specific circumstances.
You cannot cancel your student loan just because you’re dissatisfied with your college, degree, or job placement prospects, for example.
You can, however, become eligible in these cases and a few other random ones:
- Your school closes while you were enrolled, or you withdrew 120 days before such closure and were unable to complete the program.
- Your school falsifies your student aid certification – your eligibility for federal student aid.
- You, the borrower, become permanently disabled or die.
- You qualify for Perkins Loan cancellation based on a qualifying profession.
You’ll have to prove beyond a shadow of a doubt that you meet one of these criteria to get your cancellation request approved.
For more information regarding student debt cancellation, visit the Department of Education’s Loan Cancellation website.
4. Full repayment to get student loans in default.
Finally, you can get your student loan out of default by paying off the entire balance. Which isn’t very practical for most borrowers. But if you got a big commission or other windfall, it could get you off the hook with one check or credit card payment. Click here to log into your account and pay off your loan balance.