If you’re dealing with the stress of having your federal student loans in default, you may wonder how you can get out of this mess. At this point, your debt may be sent to collections and your wages can also be garnished (yes, really.)
In order to avoid escalating the issue, you’ll want to get in good standing with your student loans and out of default asap. You can do that through student loan rehabilitation vs consolidation.
Read on to learn more about whether student loan rehabilitation or student loan consolidation is the right one for you.
How To Get Out Of Student Loan Default
If you’re in default, first off you should know you’re not alone. According to Urban Institute’s 2018 Underwater on Student Debt report, 22 percent of borrowers have defaulted on their student loans. It’s also not a life sentence, either, if you take action.
The American Enterprise Institute reported that 70 percent of borrowers who defaulted on their loans got out of default within five years’ time. Rehabilitation and consolidation each have their own pros and cons that you should consider before working to get out of default. Let’s review.
Student Loan Rehabilitation
Student loan rehabilitation essentially means getting your student loans in good standing. In order to do that you’ll need to agree to make nine payments during a 10-month period.
How much you will pay amounts to 15 percent of your yearly discretionary income. That number is then divided by 12 to come up with your monthly payments.
“Note that reasonable and affordable payments are defined through a rehabilitation agreement,” said Mark Kantrowitz, student loan expert and VP of Research at Savingforcollege.com. “Given that most defaulted borrowers who rehabilitate will end up under an income-driven repayment plan, it might be best to take the on-time payments route toward rehabilitation, since it removes the default from your credit history.”
So while getting out of default may be a lengthier process through student loan rehabilitation, getting the default status removed from your credit history could pay dividends for your financial future. It’s important to note though, that late payments will still likely be on your credit report from before your student loans went into default. To review, here are the pros and cons:
Pros:
- Default status removed from your credit history
- Your monthly payments are capped at 15 percent of discretionary income
Cons:
- It’s a longer process to get out of default
- Late payments may remain on your credit report
Student loan rehabilitation might not be the right course for everyone. Depending on your personal situation, student loan consolidation might make more sense.
Student Loan Consolidation
In order to get out of default through student loan consolidation, you have two options:
- Take out a Direct Consolidation Loan to pay off your current loans. You’ll be left with the new loan which you must agree to pay back with an income-driven plan.
- Make three consecutive payments, in full, on your defaulted loans first before pursuing consolidation.
If your wages are currently being garnished to pay back your defaulted student loans you cannot consolidate your student loans. Only when the wage garnishment requirement has been removed can you consolidate your student loans to get out of default.
This option is the fastest way student loan borrowers can get out of default but there’s also a big caveat: this method doesn’t remove the default from your credit history.
When deciding whether student loan rehabilitation vs. consolidation is the right choice for you, weigh the pros and cons of each option.
Pros:
- Consolidation is a faster way to get out of default
- Monthly payments may be capped at a percentage of your income under student loan consolidation option #1
- You may be eligible for more repayment plans under student loan consolidation option #2
Cons:
- Does not remove the default status from your credit history
- The process of consolidation should be considered and can take between 30 to 90 days
Your monthly payments under either option are fairly comparable as both are based on your income. But you also have to worry about fees though, too.
“In all cases, the collection charges will be added to the loan balance, although they typically will be capped at 16%. In some cases, they may be waived,” said Kantrowitz.
Consequences Of Staying In Default
As you can see, getting out of default is a process but one that you should go through nonetheless. Staying in default has its own consequences as you may already be aware of or dealing with at the moment. Consequences include:
- Wage garnishment
- Collections
- Treasury offset
Up to 15 percent of your discretionary income can be garnished from your paycheck in order to pay back your defaulted student loan. Not only that but your tax refund as well as your Social Security payments can be garnished, too. In other words, there is no escaping so it’s best to get adulting and face the music. When you take charge to get out of default, you want to play your cards right, too.
“Rehabilitation is a one-time opportunity. If the borrower defaults again, their only option will be to pay off the debt in full,” warned Kantrowitz.
Take Action Now
If you’re looking to get out of default, the key is to choose an option that works best for you and your priorities. Student loan rehabilitation or consolidation, there’s no right or wrong answer here.
Both options lead to the same result– that you get your student loan payments back on track, get out of default and are in good standing with your payments. Once you do this, you’ll feel better and won’t stress out about getting bothered by debt collectors or having your hard-earned dough taken out of your paycheck automatically. That kind of peace of mind is priceless.
After looking at the pros and cons would you consider rehabilitation or consolidation?
Take our 11 question quiz to get a personalized recommendation of whether you should pursue PSLF, IDR forgiveness, or refinancing (including the one lender we think could give you the best rate).
Take Our Quiz1Earnest: $1,000 for $100K or more, $200 for $50K to $99.999.99. For Earnest, if you refinance $100,000 or more through this site, $500 of the $1,000 cash bonus is provided directly by Student Loan Planner. Rate range above includes optional 0.25% Auto Pay discountEarnest disclosures. 2Laurel Road: If you refinance more than $250,000 through our link and Student Loan Planner receives credit, a $500 cash bonus will be provided directly by Student Loan Planner. If you are a member of a professional association, Laurel Road might offer you the choice of an interest rate discount or the $300, $500, or $750 cash bonus mentioned above. Offers from Laurel Road cannot be combined. Rate range above includes optional 0.25% Auto Pay discount. Laurel Road disclosures.3Elfi: If you refinance over $150,000 through this site, $500 of the cash bonus listed above is provided directly by Student Loan Planner. Elfi disclosure. 4Sofi: If you refinance $100,000 or more through this site, $500 of the $1,000 cash bonus is provided directly by Student Loan Planner. Rate range above includes optional 0.25% Auto Pay discount. Sofi disclosures.5Commonbond: If you refinance over $100,000 through this site, $500 of the cash bonus listed above is provided directly by Student Loan Planner. Commonbond disclosure. 6Credible: If you refinance over $100,000 through this site, $500 of the cash bonus listed above is provided directly by Student Loan Planner. Credible disclosure. 7LendKey: If you refinance over $150,000 through this site, $500 of the cash bonus listed above is provided directly by Student Loan Planner. Rate range above includes optional 0.25% Auto Pay discount.
Leave a Reply