With more than 42 million Americans in varying stages of debt to the U.S. Department of Education, it’s no surprise that over 11% of these loans are currently in default. It’s a staggering number indeed, when you consider that it represents more than one billion dollars in delinquent student loans owed to the federal government.
The part of the story that’s missing, however, is how these loans went into default in the first place. In many cases, the reasons for these defaulted loans come down to simple things like forgetting to change a billing address, not setting up automatic payments, the rising costs of living, instability in the job market, or other unseen financial hardships.
If you find yourself in this situation, getting out of student loan default doesn’t have to be complicated. While creditors and collectors may be calling, and your credit score has likely taken a hit, there is often a workable path to recovery, once you’ve made the decision to repair your defaulted federal loans.
For federal student loans, default begins on these loans after 270 days of non-payment in most cases. Prior to the 270 days that result in a loan’s defaulted status, the loans are considered delinquent by your loan servicer. Either way, the options for repairing your student loans – and ultimately your credit – are similar in many ways. But first, here’s how a defaulted federal student loan can affect you in the short- and long-term.
By defaulting on a federal student loan, you could be subjecting yourself to several undesirable outcomes that may have a semi-permanent impact on your credit and personal finances. These include:
You should know, however, that there is hope if you do have a defaulted federal student loan.
While the path to fixing a federal student loan in default may feel difficult, it can be achieved in a few ways, depending on your financial situation, and how you want to begin rebuilding your credit.
One of the best options for anyone with federal student loans in default is a federal student loan consolidation, which combines any outstanding student loans (and in the case of a Direct Consolidation Loan, even one federal loan) into a single loan.
By converting your loans into a single monthly payment, you not only have an opportunity to make student loan repayment more affordable, you also gain the added benefit of bringing your loans out of default upon approval. This, of course, means you will also need to commit to a new repayment plan that replaces any old plans your prior loans were issued through.
If you meet the requirements for federal student loan consolidation, you could also become eligible for other perks, which may include Public Service Loan Forgiveness (PSLF) or other types of student loan forgiveness options. One thing to note, however, is that if you plan on consolidating any Parent PLUS loans during the process, you could lose access to most income-driven repayment plans, but you may be qualified for the Income-Contingent Repayment (ICR) plan or the PSLF program.
Rehabilitating your defaulted federal student loans requires you to contact your lender directly, and then make an agreement on a “reasonable and affordable” repayment plan. In this type of agreement, you’ll be obligated to make nine out of 10 on-time payments to the lender, but you won’t be able to count any garnished wages, tax returns or social security earnings that your lender received while collecting on your defaulted loan or loans.
After your nine out of 10 on-time payments are made, your loans will be considered rehabilitated. You can then likely apply for an income-driven repayment plan which includes the following:
In special cases, your defaulted student loans may be eligible for cancellation under certain conditions and only if you have a federal loan that qualifies. While very few individuals qualify for a student loan discharge, the following circumstances may award you a cancellation if:
The last option, and sometimes most difficult option, for repairing your defaulted federal student loans is paying off the balance of your loan completely. This means you will have to come up with the full amount owed on your federal student loans and make a one-time payment for the entire balance.
If you’d like some help exploring your options for taking care of your defaulted student loans, speak with one of our student loan specialists at (800) 771-6358, or fill out our online form immediately. The sooner you take care of your debt, the sooner you can get on the road to financial freedom.