Defaulting on a student loan can have some serious consequences. Any federal loan that is defaulted will go to the U.S. Department of Education’s Default Resolution Group for collection. This can be a scary time. People with defaulted loans could face administrative wage garnishment or a withholding of federal and/or state tax refunds, among many other consequences. It is important to get the loan out of default status as quickly as possible. Some options include loan repayment, loan rehabilitation, or loan consolidation.
The first option, loan repayment, can be very hard to do for some struggling debtors. This option asks for the loan to be repaid in full, a sometimes impossible feat. Repayment plans can also be set up. Different repayment options are available, including Income-Based Repayment. Under this plan, the monthly payments will be determined based on the debtors income. This could lower the overall monthly payments, but it will extend the repayment period over the standard ten years. While this may be a good option for short-term payments, debtors face accruing a greater amount of interest over time.
Another option is loan rehabilitation. The debtor and the U.S. Department of Education must agree on a reasonable and affordable repayment plan. A loan may be rehabilitated only after the agreed-upon payments have been made on-time and the loan has been purchased by a lender. However, outstanding collection costs may be added to the principal balance of the loan. Once the loan has been rehabilitated, meaning it has left default status, any benefits available before default are again reinstated. These benefits may include deferment, forbearance, different repayment plans, or loan forgiveness. Additional federal student aid for further schooling may also be available. Upon loan rehabilitation, the loan will be taken out of default (and it may be removed from credit reports), wage garnishment can be stopped, and the IRS will end withholdings on income tax refunds. Keep in mind that upon completion, monthly payments may rise from what was being paid during the rehabilitation process.
The last option is loan consolidation. Consolidation allows the debtor to pay off one or more federal loans through a single loan payment with a fixed interest rate. After making several voluntary payments, usually three, a defaulted student loan can be consolidated as well. Collection fees and late fees may be added to the principal balance for the consolidated loans.
With these three options, anyone can remove a federal student loan from default. Contact loan servicers regarding private student loans and their removal from default status.