What Is Defaulting On A Student Loan – Have you fallen into the student loan default pit? it’s good You may be experiencing many feelings right now – discouragement, fear, shame, anger. That is normal. Although student loan default is a serious bummer, it’s not the end of your world. It’s important to remember that you can climb out of that hole.
There are three main options for getting student loans out of default: repayment in full, consolidation and student loan rehabilitation. Not paying your student loans was what got you into student loan default, so it makes sense that getting out of default requires some money being paid toward your balance. The key difference between these options is how much money you pay up front to get out of default.
What Is Defaulting On A Student Loan
The easiest way to get out of student loan default is to repay your student loans in full. Easiest, however, does not mean that it is possible for everyone. In fact, this is probably one of the least commonly taken paths out of student loan default. Most borrowers don’t have enough money to pay off their entire student loan balance in one go. If they did, this probably wouldn’t be a problem.
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If you’re thinking about taking out a personal loan to pay off your student debt in full, think again. This move could land you even deeper in debt, as personal loans tend to have higher interest rates than federal student loans.
Some people may be able to find ways to make repayment in full work for them. And the benefits of repayment as a whole are many. The best part of paying back in full? You will pay off your student loan debt immediately.
Consolidation is the next fastest way out of student loan default. This option consists of you paying off one or more of your federal student loans with a new federal consolidation loan. You can choose your loan servicer once you’re settled. Consolidation will prevent collectors from coming after you, as long as you continue to pay your loans.
If you choose to go with the first qualifying action, your servicer will determine the amount of those payments. But don’t worry – the amount will be based on your overall financial circumstances.
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If the second qualifying act is more your speed, you won’t need to make any prepayments to get out of student loan default.
Your third option is to rehabilitate your loans. This process requires you to contact your loan holder to begin the process. To successfully reinstate your federal direct or FFEL loans, you will need to:
The amount of those payments is determined by your loan officer. It is usually equal to 15 percent of your annual discretionary income, divided by 12. Your annual discretionary income is the amount of your adjusted gross income that exceeds 150 percent of the poverty guideline amount for your family size and state. So, if your annual discretionary income is $20,000, you’ll be looking at nine payments of $250.
If that amount is too high, you may still be able to negotiate a lower payment depending on your current financial situation.
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Rehabilitation for Perkins loans is a little different. Instead, you will need to make a full payment each month within 20 days of the due date for nine consecutive months to successfully reinstate federal Perkins loans.
Any wage garnishment will stop after your fifth rehabilitation payment. Once you have met the terms of your rehabilitation agreement, your student loans will no longer be in default and will return to good standing. You will then receive information about your new assigned servicer and where to send future payments.
While rehabilitation may take longer than consolidation, you will retain any benefits or privileges associated with your unpaid loans (such as forbearance and deferment, student loan forgiveness, and repayment options).
When it comes to your credit report, rehabilitation is also slightly more attractive than consolidation. If you successfully reinstate your unpaid student loans, previously reported late payments will remain on your credit report, but the notation of your default will be removed.
Government Hits Reset On Student Loan Defaults, But Many Could Experience Default Again
Each exit from student loan default has its strengths and weaknesses, as outlined above. Ultimately, only you can answer this question. If you’re having trouble figuring out how to get your student loans out of default, one of our Student Loan Consultants can walk you through each option and how it might work in your life.
If being in student loan default felt bad, you definitely don’t want to experience it a second time. No one enjoys the threat of a tax lien, wage garnishment or collectors coming after you. Defaulting again can also have serious complications for the future.
If you repaid or consolidated your student loans, you just used your one “Get Out of Default Free” card. If you fall back into student loan default, you won’t have those options available to you again.
If you ever fear that you are slipping back into delinquency or default, give us a call. We can help you on the right path.
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Disclaimer: The views and information expressed are those of the author(s) and do not necessarily reflect the opinions, views and official policies of any financial institution and/or government agency. All situations are unique and more information can be obtained by contacting your loan servicer or student loan professional.
You are about to go to an offsite link. has no control over the content of the external website. Click OK to continue. As of the end of 2017, Americans owed approximately $1.4 trillion in student debt. That’s more than the amount of outstanding credit card or car loan debt. 44.2 million Americans owe student loan debt – more than ever before. Student loan delinquency rates remain high, with approximately 11% of those loans being seriously delinquent (90 days or more behind in payments). Clearly, student loan debt is a major problem for many of us.
What happens if you are seriously #delinquent on your #federal student loans (let’s not worry about private loans for now)? Thanks to various repayment options, including deferment and forbearance, you may temporarily reduce or avoid loan payments while you sort out your financial situation; of course, deferment and forbearance both require approval from your loan holder, based on various federal guidelines. However, if you fail to pay your student loans for at least 270 days (about 9 months), your loan will be considered in default.
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When this happens, you can face various severe negative consequences. The entire balance of your loan becomes due (this is known as an “acceleration” clause). Your wages may be garnished, that is, your employer may be required to withhold a portion of your earnings, and send that money to the loan holder, to help repay your loan. You can be sued in court, and have a judgment entered on your behalf. Money can also be deducted from your tax refund (known as a tax offset), and applied to pay off your student loan. You really don’t want your loan to go into default.
However, if you end up defaulting on your loans, you do have a powerful tool to help you recover: loan rehabilitation. Rehabilitation is a means of bringing your loan current again by making a series of payments on time.
The first step in rehabilitating your loan is to contact your loan holder. Your #loanholder will decide on a reasonable monthly payment, equal to 15% of your discretionary income, divided by 12. Let’s see how that works.
Discretionary income is calculated by considering several numbers. First, a lender/loan servicer will look at your adjusted gross income (that is, how much money you make each year, before taxes). Next, they’ll look at federal poverty guidelines for your family size, and the state you live in, that is, how much money a household would have to earn each year to live in poverty. In all states except Hawaii and Alaska, for a household of 1 (ie you are single, no children), the federal poverty line is $12,140.
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Now, the loan servicer calculates your annual discretionary income by subtracting 150% of the federal poverty limit from your adjusted gross income. The lender will then take 15% of this number, and divide it by 12, to calculate your monthly payment.
Let’s try a real example. Let’s say your adjusted gross income (again, that’s income before taxes), is $23,000. Now, 150% of your federal poverty line number of $12,140, is $18,210. Now, the lender will subtract $18,210 from $23. , 000, for a total of $4, 790. This is your annual discretionary income.
We’re not quite done yet. We need to take 15% of your annual discretionary income, and divide it by 12, to calculate your monthly payment. This comes to approximately $59.88. You will have to pay this amount every month. If all of this sounds a little complicated, don’t
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