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More than four million people have defaulted student loans, with the total amount exceeding $74 billion. If you run into problems making payments and go into default, you have several options available to resolve the issue.
You can regain your eligibility for federal student aid through a program called loan rehabilitation. The lender sets up a 10-month repayment plan and agrees to move the loan out of the default status if you make at least nine on-time payments. You regain federal student loan eligibility slightly earlier in the process, at six months.
This repayment plan is typically structured so you’re paying at least 1 percent of the loan balance each month. Extenuating circumstances may lower this minimum further. Note that you can’t go through the rehabilitation process a second time. If it defaults again, it retains that status.
Loan consolidation is an option if you have multiple defaults. If you can make three payments that are equal to your original student loan terms, you can consolidate them all into one easy-to-manage loan. People willing to change their payment amount to one based on their income can immediately consolidate their loans. The interest rate may be more favorable than the ones you currently have, which can decrease your monthly payment.
Do you have the entire loan amount available in your savings or from another source? Call the lender to get the total repayment amount, since it may have changed from the original due to collection costs, interest payments and other fees.
Paying it off completely changes the loan status from default to repaid, and the account will turn into a closed tradeline on your credit report. This method is the most straightforward of your options, so if you have the money on hand, it’s preferable to leaving a negative account on your credit report while you pay the loan down.
A student loan default is a stressful situation, but you have several methods for addressing it. Take a close look at the big picture of your financial health to determine which makes the most sense for the loan amounts and your budget.