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3 Ways to Get Out of Student Loan Default — And How to Avoid a Relapse

What happens when you miss a student loan payment? Or more than one? Can you get in trouble? Possibly. You put yourself at risk of student loan default.

Student loan repayment is becoming a huge issue for college students. As of 2019 Q2, 5.3 million borrowers have Direct student loans in default for a total of $108.7 billion. As common as it’s become, this is still something you want to avoid.

Here’s a closer look at what student loan default is and how can you get out of it.

What is student loan default?

When you don’t make payments for some time, there’s a chance you could default on your loan. When you took out a student loan, you signed an agreement that you’d make payments in an approved manner. This is called a promissory note.

Your loan is considered to be in default at a certain point depending on the type of loan you have. Direct and Federal Family Education Loan (FFEL) Program Loans are considered to be in default if you don’t make your scheduled loan payments for 270 days. That’s roughly nine months without a scheduled payment. The time when Perkins Loans go into default is at the discretion of your loan holder, which can declare your loans are in default if you miss only one scheduled payment.

What effect can student loans in default have?

Defaulting on your student loans is a costly mistake. It’s also one filled with consequences that will make life more difficult. How does defaulting on your student loans affect you? Penalties for student loan default can include:

  • Your unpaid balance and interest become due immediately.
  • You lose access to federal programs like forbearance, deferment and loan repayment plans.
  • You can’t take out any more federal student loans.
  • Your credit rating will be damaged because the default is reported to the credit bureaus.
  • Your tax refund can be withheld to pay back your loan. You can also have your wages garnished.
  • You could end up in court.
  • You can’t purchase or sell assets, like a house.
  • You might be charged for court costs, attorney fees and other collection costs.
  • Your academic transcript can be withheld by your school until your loan is paid.

Defaulting on your loan can affect your life long term. It might even force you to change plans you have for your career, family and more. Having a student loan in default is a serious matter you need to avoid at all costs.

3 ways to get out of student loan default

If you find yourself in student loan default, you do have options to get out. It’s not easy, but it’s worth the cost. There are three main options you have when you default on your loan.

1. Loan rehabilitation

You need to contact your loan holder about loan rehabilitation. For Direct and FFEL Loans, you must agree to make nine voluntary, reasonable and affordable monthly payments within 20 days of the due date. All nine payments must happen within a 10-month period.

Your loan holder will determine what’s considered a reasonable monthly payment, which will be based on 15% of your annual discretionary income divided by 12 months. Your discretionary income is calculated by multiplying the Federal Poverty Level for your family size by 150%. Then subtract that number from your adjusted gross income on your latest income tax return. You may be able to work with your loan holder if you can’t afford your monthly payment, but it’s not a given.

Loan rehabilitation for a Perkins Loan is slightly different. It requires a full monthly payment each month for nine consecutive months. Payments are determined by your loan holder and must be made within 20 days of the due date.

Unfortunately, your paycheck may still be garnished during the loan rehabilitation process. Worse, wage garnishments don’t count as voluntary loan rehabilitation payments. You still have to make your nine payments, regardless of how much is garnished. During loan rehab, you can also face a Treasury tax offset, where money is withheld from your income tax return.

Once you’ve finished making your nine voluntary payments, your loans will no longer be in default. At this time, any wage garnishment will stop. You’ll also gain access to federal programs previously lost when your loan defaulted.

The best part is that the record of your defaulted loan will be removed from your credit history. Unfortunately, it still shows your late payments from before your loan defaulted, which could greatly affect your credit score.

2. Loan consolidation

If you’ve defaulted on one or more student loans, you can also consolidate them into a Direct Consolidation Loan. This will get your loans out of default.

With loan consolidation, your loans are paid off and replaced with a new consolidation loan that has a new payment and terms.

You have two options to choose from when consolidating a defaulted loan. You must either:

  • Repay your new Direct Consolidation Loan under an income-driven repayment plan, or
  • Make three consecutive, voluntary, on-time, full payments on your defaulted loan before consolidating

What if you default on a Direct Consolidation Loan? You can consolidate your loan again, but you must include at least one other eligible loan in addition to choosing one of the payment options listed above. If you don’t have another eligible loan, you must repay your loan in full or choose loan rehabilitation.

Note that you can’t consolidate a defaulted loan if there’s a wage garnishment in place. You must get the garnishment order lifted to consolidate your defaulted loan.

Once your loan is consolidated, you’ll be eligible for federal benefits previously lost when your loan defaulted. You can also apply for additional federal student aid at this time. However, unlike loan rehabilitation, the record of the default won’t be removed from your credit history.

3. Repay your loan in full

Your last option is repayment of your entire student loan balance in full. This usually isn’t a viable option for many borrowers — if you had money to pay off your loan in full, then you probably wouldn’t be in student loan default.

Loan rehabilitation may be your best bet if you want to avoid your loan default showing up on your credit report. Whatever you choose, have open and honest communication with your loan holder regarding payments. You want them on your side so you can get your loans out of default as quick as possible.

How to recover after student loan default

As mentioned, defaulting on a student loan can have a lasting effect on your life. It’s possible to recover from, though. There are steps you can take to repair your credit and create financial stability so you don’t fall back into student loan default.

Create an emergency fund

Once your loan is out of default, try and set money aside in an emergency fund. This will protect you in case of any type of hardship or emergency that pops up. Having an emergency fund could keep you from missing any student loan payments. Experts suggest you save three to six months' worth of expenses in an emergency fund. If you can’t do that, try and save as much as possible.

Have a plan for loan repayment

Try and find the best method for loan repayment. This could be switching to an income-driven repayment plan. Or maybe you need to set up automatic payments so you don’t miss a due date. Whatever you choose, it’s important to know how you’re going to make your payments.

Cut your expenses

If money is tight, create some breathing room in your budget by cutting unnecessary expenses. Skip eating out as much, bike to work or downsize your living arrangements or vehicle if necessary.

Make payments on time

On-time payments are a must. Simple as that. Don’t mess around with loan payments after defaulting on a loan.

Where to get help if you have student loans in default

Dealing with a loan in default can be tricky. This is especially true if you end up in court. If you need legal consultation, we encourage you to reach out to a lawyer who specializes in student loan law. We recommend Josh Cohen, Adam Minsky, Jay Fleischman or Stanley Tate if you reside in one of the states where they practice.

Student loan default should be avoided by anyone with federal student loans. There’s too much at stake. You can recover from it, but doing so is an uphill battle. If you can’t make your payments, looking at loan deferment or forbearance options might be best.

If you do have a defaulted loan, choose one of the methods mentioned above to get yourself out of trouble. Get back on track with your loan payments so you can move on from this unfortunate situation.

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