Back Into Repayment After Student Loan Default

How to Get Back on Track with Student Loan Repayment After Default

If you’ve fallen behind on your student loans and defaulted, don’t panic—there are ways to get back on track. Defaulting on a loan can be a stressful experience, but understanding your options for rehabilitation and consolidation can help you recover your financial standing and get back into repayment. Here’s a detailed guide on how to approach repaying your defaulted loans.

What Happens After Default?

When you default on a federal student loan, it means you’ve failed to make payments for an extended period, usually 270 days (around 9 months) or more. Defaulting can lead to wage garnishments, tax refund offsets, and a significant hit to your credit score. However, the good news is that you’re not stuck in default forever. You have two primary options for getting out of default: consolidation and rehabilitation.

Both options will help restore your eligibility for federal loan repayment options, deferments, and income-driven repayment plans that were available before you defaulted. Keep in mind that since 2008, federal loan borrowers can only rehabilitate a loan once, and there are restrictions on how many times you can consolidate a loan.

1. Loan Consolidation to Get Out of Default

Loan consolidation allows you to combine multiple federal loans into one new loan, which helps simplify your repayment process. When consolidating a defaulted loan, you essentially start fresh with a new loan, which means the “currently in default” mark on your credit record will be removed. Additionally, collection efforts such as wage garnishment will stop.

With consolidation, you may also become eligible for more flexible repayment options, including income-driven repayment plans, which can make your monthly payments more affordable. Here’s how consolidation works:

• Apply for Consolidation: You’ll apply for a federal consolidation loan through the U.S. Department of Education or through a loan servicer. Once approved, the defaulted loan is paid off, and you’ll begin making payments on the new consolidated loan.
• Stop Collection Efforts: Once consolidation is complete, collection activities such as wage garnishment or tax refund offsets will cease. This can provide immediate relief and reduce financial stress.
• Repayment Flexibility: After consolidation, you may qualify for various repayment plans, including income-driven repayment, which adjusts your monthly payments based on your income.

Pro Tip: Consolidation is a great option if you want a fresh start, but keep in mind that it can extend the life of your loan and increase the total amount you pay over time. Make sure to calculate the long-term cost before proceeding.

2. Loan Rehabilitation to Get Out of Default

Loan rehabilitation is another option for borrowers looking to exit default. Rehabilitation is a process where you work with your loan servicer or collection agency to agree on a new payment plan based on what you can afford. This option allows you to gradually bring your loan back into good standing.

Here’s how rehabilitation works:

• Request Rehabilitation: You’ll need to formally request rehabilitation from your loan holder or collection agency. This is a process that involves negotiating your monthly payment terms based on your financial situation.
• Negotiate Your Payments: One key point to remember is that there is no minimum payment that the loan holder must charge you. By law, you only have to pay an amount that is fair and affordable based on your financial situation. If you feel the payment terms are unreasonable, don’t be afraid to push back and seek additional assistance.
• Get the Agreement in Writing: Always request that the terms of your rehabilitation agreement be provided to you in writing. Review the terms carefully before signing anything. This ensures you understand the repayment expectations and avoids any surprises down the road.

Pro Tip: If you are struggling to negotiate a reasonable payment, consider speaking with a financial advisor or a student loan advocate. They can often help you get better terms and make sure you’re not being taken advantage of.

Private Student Loan Default: A Different Approach

Unfortunately, the process for defaulted private student loans is different. Unlike federal loans, most private lenders do not offer a formal rehabilitation program. However, if you’ve defaulted on a private loan, it’s important to reach out to your lender as soon as possible. They may be willing to offer a repayment plan or other options to help you get back on track.

Here’s what you can do:

• Contact Your Lender: Reach out to your private lender immediately to discuss possible solutions. Private lenders may offer forbearance or alternative repayment plans, but each lender’s policies can vary widely.
• Negotiate a Payment Plan: If you’re in default, you may be able to negotiate new terms with the lender, especially if you can show financial hardship. Be persistent and try to find a solution that works for both you and the lender.

Pro Tip: Private loans often come with less flexibility than federal loans, but it’s still worth trying to work something out with the lender. If you’re unable to find a solution, consider seeking assistance from a credit counselor or financial professional.

Considerations When Getting Back on Track

Before you jump into rehabilitation or consolidation, consider these key points to ensure you make the best choice for your financial situation:

• Impact on Credit: While consolidating or rehabilitating your federal student loan can remove the default status from your credit report, the process may still affect your credit score temporarily. However, these options will ultimately help improve your credit score over time by putting you back on track with payments.
• Long-Term Costs: Consolidation can extend the repayment period of your loan, which may reduce your monthly payments, but it can also increase the total interest you pay over the life of the loan. Make sure you understand the financial impact of either option.
• Loan Forgiveness Opportunities: If you are rehabilitating federal loans, keep in mind that you may become eligible for federal student loan forgiveness programs, especially if you work in public service or other qualifying fields.

Pro Tip: It’s a good idea to explore income-driven repayment plans after getting out of default. These plans can help make your payments more manageable and may even lead to loan forgiveness after a certain number of years.

Next Steps: What to Do After You’ve Gotten Out of Default

Once you’ve completed the rehabilitation or consolidation process, your loan should be back in good standing. To keep it that way, it’s important to stay on top of your payments. You should also take advantage of federal repayment plans, deferment options, or even consider loan forgiveness programs if applicable.

If you’re still struggling to make payments, reach out to your loan servicer to discuss other options. You may qualify for an income-driven repayment plan that can make monthly payments more affordable, or you could explore deferment options if you face temporary financial hardship.

Defaulting on your student loans can be overwhelming, but it’s not the end of the road. Whether you choose consolidation or rehabilitation, both paths offer a chance to regain control over your loans and start fresh. It’s important to weigh the pros and cons of each option, consider how they’ll impact your finances, and reach out to your loan servicer for personalized guidance. The sooner you take action, the sooner you can get back on track and avoid further damage to your credit.