May 14, 2021

Ways to Get Student Loans Out of Default

Repayment

Getting in a student loan default is a scary financial prospect. Wage garnishment and treasury offset can hurt your current earnings. The default will also affect your credit status, limiting your financial options. If you find yourself in this unfortunate situation, don’t fret.

There are three ways to get a loan out of default. The first way is to pay the loan outright, which not many people can do. The other options are ones you’ll likely pursue.

Loan Consolidation

Loan consolidation is a way to combine multiple loans into one direct payment. It is also an effective way to get your student loan out of default. There are two options to qualify for consolidation on a defaulted loan.

  1. Make three consecutive voluntary payments on the defaulted loan. The amount of the payments will depend on what your loan holder calculates. The calculation will never exceed your means. It will be reasonable, taking into account your current financial situation. If you don’t know who your loan holder is, you can check the Federal Student Aid website.
  2. Agree to repay the new consolidation loan using an income-driven repayment plan.

You’ll also need to ensure there are no orders of a wage garnishment. Wage garnishment means you cannot consolidate the loan. You’ll need to have the order lifted or vacated before you can enter into the new loan. If you’re using an income-driven repayment plan, you’ll need to supply income documents with the application.

After you consolidate the loan, you’ll regain the benefits taken away from the default. These include loan forgiveness, deferment, and forbearance.

Consolidation does not remove the record of default from your credit history. Your credit score will still take a hit due to the default, but at least you’ll get out of mandated wage garnishment.

Loan Rehabilitation

To start the loan rehabilitation process, you need to contact your loan holder. For a Federal Perkins Loan Program, rehabilitation is simple. You need to make monthly payments for nine consecutive months. These payments must be within 20 days of the due date. The amount you pay will depend on the calculation of the loan holder and your present financial circumstances. You’ll submit documentation. You can even ask for an alternative monthly payment calculation if you find that the first offer isn’t too difficult to achieve.

FFEL Program and Direct Loan Program Rehabilitation

To rehabilitate these loans, the nine affordable monthly payments will apply. However, you have to make all nine payments within ten consecutive months. If you’re handling direct loans, you need to mail the FSA a copy of your latest transcript. You’ll also need to send your spouse’s tax returns if they file separately.

They’ll send you a loan rehabilitation agreement in the mail, which you’ll sign. The agreement will include the payment options, the monthly amount, and the terms. After signing and returning, you’ll then fulfill the payments. You can also apply for a recalculation if needed.

Following your ninth payment, your loan holder will send a request to remove the default. The good thing about rehabilitation is that it will remove the default status from your records. It will still, however, record a late payment coinciding with the time you defaulted the loan.

Putting It All Together

While loan consolidation works, rehabilitation is the better option. It removes the default status from your records. It helps you recover your credit status and only adds a late payment to your records.

During the COVID-19 pandemic, there is temporarily 0% interest, and collection has also halted. The pause will apply until September 2021, and then the normal system will resume. The government placed these measures as a way to help those significantly affected by the lockdowns.

While a default may at times be unavoidable, there are solutions to avoid it. Apply either of these two options to free yourself from the effects of being in default.

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