The national student loan debt has increased rapidly to over $1.4 trillion dollars and the default rate has also been on the rise. More than 25 percent of students who dropped out of post-secondary in 2010 and 2011 are reported to have defaulted on their student loan responsibilities.
Defaulting isn’t the end of the world but borrowers should throw everything they have at getting out of default. Your future financial health, including credit score and more, will thank you for getting back on track as quickly as possible.
One of the largest differences between private and federal student loans is the level of protection and benefits offered.
If you run into financial trouble with repaying federal student loans, there are programs and services available through to help alleviate the financial stress. Today, the majority of student loans are issued through the Federal Student Aid program, and therefore qualify for student loan rehabilitation, income-driven repayment plans, or consolidation as methods for getting out of default.
But just what do these programs look like, and how do you get started?
What Does It Mean to Default on Your Federal Student Loans?
Entering into the repayment period of your federal student loan is a contractual agreement with the federal government. You agree to make a set monthly payment before the due date every month, but what happens if you miss a payment?
Missing a payment by a single day qualifies the loan as delinquent. You’ll remain in delinquency until you make up the missed payment and are back on track. After 90 days of delinquency, your status is reported to one of the credit bureaus and your credit score takes a hit.
Depending on the type of loan you hold, there are a few ways by which it goes into default.
If you have Direct Loan or Federal Family Education Loan, your loan will enter into default after 270 days of missed repayment. If you have a Federal Perkins Loan, you can declare the loan in default yourself after one missed payment.
Once in default the federal government puts an increasing number of restrictions and punishments in place. This can eventually lead to wage garnishment and court cases, among other things.
Student Loan Rehabilitation and Defaulted Federal Student Loans
If you have recently entered into default on your student loan, there are a few ways through which you can get out of the default hole. One method is through a process called student loan rehabilitation. Although it varies slightly by loan, it typically entails making nine repayments within the following ten months. In some cases, the repayment is renegotiated for that period. It must be “voluntary, reasonable, and affordable.”
Consolidating Defaulted Student Loans
The second option is consolidating defaulted student loans into a Direct Consolidation Loan. When you enter into this agreement, you must either agree to the new repayment terms laid out under an income-driven repayment plan or alternately make three consecutive payments (on time, in full) on the defaulted loan before consolidation.
If you’ve already had a judgment against you or your wages are already getting garnished, these orders must be lifted prior to consolidation. As a bonus, if you consolidate, your new Direct Consolidation Loan is eligible for all the protections offered through normal federal student loans again like deferment or forbearance.
Student Loan Rehabilitation vs. Consolidation
Deciding what option works for you comes down to your specific situation. Rehabilitation keeps your original loan through a rehabilitation process while a consolidated loan essentially gives you a new one.
Be sure to do your homework before deciding on either.
What if You Default on Private Student Loans?
Unfortunately, if you have defaulted on a private student loan, there are fewer protections out there. First, it's important to speak with your lender directly to see if they have any financial hardship programs or repayment assistance. Second, know your rights as a borrower, and understand what happens when debt is sent to collections. You may have other options such as debt settlement that can help you get out of debt somewhat.