Dealing With Student Loan Consolidation and Default

 

 

What is Default?

 

Default is when a borrower fails to make regular, consecutive payments on their loan or breaches some other term of the loan.  Not only does default hurt your credit score and make it harder to repay the debt, but it also lead to:

• Ineligibility for other student loans as well as many other types of lending
• Hefty collection charges
• Refusal to issue you a professional license
• Administrative Wage Garnish which will deduct money directly from your paycheck
• Lawsuit for the entire amount of the loan 

The good news is there are ways in which to better manage student debt to avoid default and also get out of default if you already find yourself in the predicament.

Loan Rehabilitation Programs

There are a number of loan rehabilitation programs that can help borrowers get out of default and even get the default removed from their credit record.  This isn’t a quick fix, and federal student loans are a little more lenient than private loans with this type of loan repair.  The defaulted borrower must contact their lender and the two parties must come to an agreement on a suitable payment that the borrower can handle. 

At that point to get out of default, borrowers with federal student loans must make 9 consecutive payments on time within 10 months time whereas with private student loans or a Perkins loan there are 12 consecutive payments required.  Once a borrower has made it past this period they are considered out of default and their loan benefits will be reinstated as long as payments are made on time. 

Borrowers need to understand that not all loans offer this option and loan rehabilitation can only be used once on a defaulted loan.

Student Loan Debt Consolidation

If you have more than one loan servicer and a fair amount of debt an option for both federal and private student loans is loan consolidation.  Through loan consolidation, a borrower who has been making their payments but finds their debt to be more than they are likely to manage can combine all of their loans into one loan under a single servicer. 

This will make it so that all the loans are in one lower payment, but it also means that the loan will be extended out beyond the standard 10 year term.  For federal loans there is the Federal Consolidation Loan which extends the loan to 20 years if there’s more than $7,500 and extends it to 30 years if there’s up to $60,000 in debt.  Once the loans are consolidated they can’t be consolidated again unless another loan is taken out or one that wasn’t eligible before becomes eligible. 

If your one of your current lenders isn’t willing to consolidate then the borrower can seek the assistance elsewhere as the loan consolidation will require a new promissory note and agreement on a new interest rate and repayment terms.  For more info and to apply for federal loan consolidation, visit http://loanconsolidation.ed.gov.

Student Loan Forgiveness

Under special circumstances a borrower can get a loan discharged or be given loan forgiveness.  Volunteer organizations, such as the Peace Corps and AmeriCorps, work with borrowers to get their loans cancelled in part or in total through loan forgiveness.  Through volunteer work, military service, as well as teaching or practicing medicine in certain communities, a borrower can essentially work off their loan debt.  With a loan discharge the loan is essentially cancelled or could be reduced. 

However, there are only a few circumstances when this option is available which include; bankruptcy, death of the student for whom the loan was taken out, if the loan was falsely certified by a school, the student becomes totally and permanently disabled, the college the student was attending closed, and there are also loan discharge options specifically for teachers and military armed forces personnel.

One Last Note on Digging Out of Debt

It may feel like a hopeless situation if debt has built up from student loans, but there are many options available to at least adjust your loan to fit your financial situation.  There are also one time fixes that can help you financially, such as changing the due date on your monthly payment to a better time in the month, or deducting student loan interest from your taxes. 

Remember, your lender is there to help you in this effort since it’s better for them having you pay a reduced monthly payment as opposed to nothing.  The key to solving student loan debt is to address the issue as soon as it arises, and create a plan for the future to keep your loan on track.