Defaulted Student Loans - recovering and consolidating

The Effects of Defaulted Student Loans

Once a student loan goes into "default" status the full balance of the loan becomes due immediately. It also means that other options for delaying payment, including student loan deferment and forebearance, can no longer be used.

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Eventually, unpaid defaulted student loans can have long-term consequences beyond just the loan directly. For example, your credit report will take a hit. Once the loan has been forwarded for collection your wages can be garnished and your federal income tax refunds can be withheld. You also lose your elgibility for other types of federal loans. The ramifications of defaulted student loans are outlined by the Federal School Aid Collections page.

Recovering from a Defaulted Loan

Given the size of most student loans, it's usually impossible to repay a defaulted student loan in the single payment that loan collectors may request. There are mechanisms for repaying defaulted loans and for both regaining your eligibility for more student loans and improving your credit score. FSA outlines the general approach to recovering from a defaulted loan (see repayment options), but these suggestions are very general and hard to apply in practice.

We recommend working with a company that specializes defaulted student loans. Several such companies exist, and can be found online. In general their services are free - eventually they plan to take you from a defaulted loan to a "current loan" status and consolidate your other loans. The long-term benefit is reducing yout interest rate, monthly payments and student loan debt. The short term benefit is that they will guide you through the processes of "fixing" your defaulted loan.

Preventing Student Loan Defaults

There are several mechanisms for keeping your federal student loans current (that is, not defaulted). These include:

Consolidate federal student loans - the main idea behind student loan consolidation is to reduce the interest rate and lengthen the term on all of your student loans. Because rates are currently low, consolidating can easily reduce your monthly payments. In addition, because the consolidated loans are for longer terms that the original student loans, the monthly payment goes down. The net effect is that your loans are more affordable and you're more likely to make payments on time.

Student loan deferment - under specific conditions you can defer payments on student loans. Common reasons for deferment include continued education, medical internship or residency, or economic hardship. There are also "public service" deferments that delay your payment requirement while you serve in the armed forces and other capacities.

Forebearance - forebearance is a delayed payment of the principal of the loan. The borrower must pay the interest but may delay paying the principal. This reduces monthly payments, but prolongs the loan repayment period. Forebearance can be request when you are doing a medical intership/residency, when you have a very high student loan-to-income ratio, or in select other situations.

Loan forgiveness or cancellation - certain federal student loans can be forgiven for specific types of service. The most common qualification is for teachers in underserved areas or subject matter.

References and Links

1. Collections Guide to Defaulted Student Loans
2. Consolidation recommendations of the College Journal: from the Wall Street Journal
School loan consolidation - Information on eligibility and rationale for student loan consolidation.

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