How to Get Student Loans out of Default
Commit to resolving the problem., Figure out what you owe., Take a careful look at your finances., Determine who to contact about your defaulted student loans., Decide whether you prefer rehabilitation or consolidation.
Step-by-Step Guide
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Step 1: Commit to resolving the problem.
Fortunately, the federal government offers a variety of options for repaying your student loans, even after you’ve been in default.
Ignoring the problem won’t make it go away, and if you do not take action to get your loans out of default, you could wind up facing serious consequences.
For example:
Your credit rating will plummet, making it difficult for you to rent an apartment, secure a car loan, or qualify for a mortgage.
You will not have access to any further federal financial aid or to the government’s deferment, forbearance, and forgiveness plans.
Any income tax refund you have coming could be garnished.
Your wages could be garnished.
You could face “acceleration” – in other words, the entire balance of your student loan debt, plus any collections fees, will become due immediately. -
Step 2: Figure out what you owe.
Because student loans come in a variety of forms – Stafford, Perkins, PLUS, etc. – and are distributed in increments over a period of years, many borrowers lose track of exactly what they owe.
This is completely understandable, but if you are in default, it’s imperative to get a clear picture of your debt so that you can address the problem effectively.
If your records aren’t clear or you aren’t sure how much federal student loan debt you have, visit the National Student Loan Data System at https://www.nslds.ed.gov/npas/index.htm.
You’ll be able to see all of your federal student loans, including those in default, even if they are serviced by multiple lenders. , When you discuss your defaulted loans with the Department of Education or a collection agency, you’ll need to know how much you can realistically afford to pay.
Before you call, get a sense of: what your monthly income is. what your financial obligations are. what your “discretionary income” is.
The Department of Education bases many of its repayment procedures on the idea of discretionary income.
To figure out yours, you need to subtract your income from 150% of the poverty line, which will vary depending on your family size and where you live.
Visit http://www.aspe.hhs.gov/poverty/index.cfm to determine your specific poverty line.
As an example, say that you live in California, have no dependents, and make $26,000 a year.
The poverty line in this case is $11,670. 150% of that is $17,505.
Subtract that amount from your income of 26,000 to get $8495.
That amount is your annual discretionary income.
Most federal repayment plans will require you to make monthly payments that add up, in a year, to a certain percentage (usually 15% or 20%) of that amount. , Once your loans are officially in default status, the Department of Education will assign them to a collections agency.
You will probably receive snail mail, email, and/or phone calls from this collections agency, so determining who to contact should be simple.
If, however, you do not know who to call, the government keeps a list of its collection agencies and their contact information at https://www.myeddebt.com/borrower/myoptions_collectionAgencies.If you have Perkins loans, you will need to speak to someone in your school’s financial aid office in addition to someone from your assigned collections agency.
Perkins loans are administered through individual programs, so contact a local representative to ask about getting those loans out of default. , Both methods will get your loans out of default, but the processes and ultimate benefits are a bit different.
Rehabilitating your loans will mean that you negotiate new payment terms with the collections agency and make those new payments regularly.
The process will take almost a year, but ultimately, all references to the default will be removed from your credit.
Consolidating your loans with the federal government will mean that you get a new loan with a new interest rate, and you'll make regular payments on that.
The reference to default won't be removed from your credit, but you'll be out of default status immediately.
If you plan to go back to school and need access to further financial aid, consolidating might therefore be a better plan for you. -
Step 3: Take a careful look at your finances.
-
Step 4: Determine who to contact about your defaulted student loans.
-
Step 5: Decide whether you prefer rehabilitation or consolidation.
Detailed Guide
Fortunately, the federal government offers a variety of options for repaying your student loans, even after you’ve been in default.
Ignoring the problem won’t make it go away, and if you do not take action to get your loans out of default, you could wind up facing serious consequences.
For example:
Your credit rating will plummet, making it difficult for you to rent an apartment, secure a car loan, or qualify for a mortgage.
You will not have access to any further federal financial aid or to the government’s deferment, forbearance, and forgiveness plans.
Any income tax refund you have coming could be garnished.
Your wages could be garnished.
You could face “acceleration” – in other words, the entire balance of your student loan debt, plus any collections fees, will become due immediately.
Because student loans come in a variety of forms – Stafford, Perkins, PLUS, etc. – and are distributed in increments over a period of years, many borrowers lose track of exactly what they owe.
This is completely understandable, but if you are in default, it’s imperative to get a clear picture of your debt so that you can address the problem effectively.
If your records aren’t clear or you aren’t sure how much federal student loan debt you have, visit the National Student Loan Data System at https://www.nslds.ed.gov/npas/index.htm.
You’ll be able to see all of your federal student loans, including those in default, even if they are serviced by multiple lenders. , When you discuss your defaulted loans with the Department of Education or a collection agency, you’ll need to know how much you can realistically afford to pay.
Before you call, get a sense of: what your monthly income is. what your financial obligations are. what your “discretionary income” is.
The Department of Education bases many of its repayment procedures on the idea of discretionary income.
To figure out yours, you need to subtract your income from 150% of the poverty line, which will vary depending on your family size and where you live.
Visit http://www.aspe.hhs.gov/poverty/index.cfm to determine your specific poverty line.
As an example, say that you live in California, have no dependents, and make $26,000 a year.
The poverty line in this case is $11,670. 150% of that is $17,505.
Subtract that amount from your income of 26,000 to get $8495.
That amount is your annual discretionary income.
Most federal repayment plans will require you to make monthly payments that add up, in a year, to a certain percentage (usually 15% or 20%) of that amount. , Once your loans are officially in default status, the Department of Education will assign them to a collections agency.
You will probably receive snail mail, email, and/or phone calls from this collections agency, so determining who to contact should be simple.
If, however, you do not know who to call, the government keeps a list of its collection agencies and their contact information at https://www.myeddebt.com/borrower/myoptions_collectionAgencies.If you have Perkins loans, you will need to speak to someone in your school’s financial aid office in addition to someone from your assigned collections agency.
Perkins loans are administered through individual programs, so contact a local representative to ask about getting those loans out of default. , Both methods will get your loans out of default, but the processes and ultimate benefits are a bit different.
Rehabilitating your loans will mean that you negotiate new payment terms with the collections agency and make those new payments regularly.
The process will take almost a year, but ultimately, all references to the default will be removed from your credit.
Consolidating your loans with the federal government will mean that you get a new loan with a new interest rate, and you'll make regular payments on that.
The reference to default won't be removed from your credit, but you'll be out of default status immediately.
If you plan to go back to school and need access to further financial aid, consolidating might therefore be a better plan for you.
About the Author
Evelyn Ruiz
Writer and educator with a focus on practical lifestyle knowledge.
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