Student Loan Rehabilitation: How to Recover From Default
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Today’s recent graduates have had a lot of trouble landing the rosy jobs that they were told their stints in college would guarantee them. An ever-shifting economy and a job market where “entry level position” means “5 to 10 years of experience” have made it harder than ever to pay back student loans, which also happen to be higher than ever.
As a result, over 10 percent of graduates with student loans end up defaulting on those loans. Defaulting on your student loans can have serious consequences. Read on to find out how to get your student loan out of default.
What is Student Loan Default
It’s important to understand what student loan default is so that you can either avoid it or, if you’re already in default, figure out how you got there and how to return to financial stability.
If you fail to make a payment on your student loans, you won’t automatically be put into default. First, your student loans will be delinquent. If you are more than 90 days late on your last payment, your delinquency will be reported to the three main credit bureaus. Your delinquency will go on your credit report, counting as a negative mark against your credit score.
This might not seem like a big deal in the short-term, but when you’re looking to get a credit card, take out a loan to buy a new car, or buy your first home, you’ll want to have the best credit score that you possibly can.
Things are already bad for you if you’re in delinquency, but they can get even worse. If you still haven’t paid over a certain period of time (You should check your individual loan programs for details, but most loans have a time limit of 270 days.), then your down will go into default. When this happens you can expect a few things:
- Instead of paying small installments, you will be required to pay the full amount of your debt immediately.
- Useful tools like deferment and forbearance will no longer be available if you’re looking to get a break from your student loans.
- The owner of your debt can take legal action, giving them the right to take your money as they please until the debt is repaid.
Delinquency is bad for your credit score, but default is even worse. Without a plan for getting your student loans out of default, you might find it impossible to have a stable financial life again.
How to Avoid Student Loan Default
If your student loans aren’t in default yet, then the best thing that you can do is to make sure that they never get there. Here are some things you can do to avoid student loan default.
- Make your required loan payments immediately. Your loans will only enter default if you haven’t paid in 270 days. By catching up on your loan payments and sticking to your repayment plan, you can avoid default completely.
- Change up your repayment plan. Your student loan provider doesn’t automatically know your financial situation. If you’re having difficulty meeting your current repayment plan, then it’s up to you to let them know so that you can find a plan that works for both of you. Try switching to an income-based or pay-as-you-earn plan if you’re having trouble meeting your current payments.
- Ask for deferment or forbearance on your student loans. Both of this tools are designed to help you get past difficult financial times or circumstances that make it hard to repay your student loans. When your loans are in deferment or forbearance, you won’t be required to make any payments, but you also won’t be at risk of going into default.
Student Loan Rehabilitation
If you’re unable to avoid going into default, you should know that it’s not the end of the world. Student loan rehabilitation (or student loan rehab) is a path that can take you out of student loan default and back to financial stability.
How to Get Your Student Loans Out of Default With Student Loan Rehab
There are several ways to get your student loans out of default and repair your credit, but the most straightforward and, for many, the most reasonable is student loan rehab. If you’re in default and you decide to get out of it with student loan rehab, here’s what you can expect.
- The owner of your debt will provide you with a reasonable payment schedule, where you will be expected to pay about 15 percent of your discretionary income for the year over the course of 12 months. This amount is a baseline, but it is negotiable if you won’t be able to make the payments.
- If you meet this payment schedule for nine months, then you’ll be moved out of default. However, you will still be expected to stick to a reasonable payment schedule — using student loan rehab to get out of default does not mean that you’re off the hook for your student loans.
- If you have private student loans, your rehabilitation process may be different. Contact your loan provider to find out if they offer student loan rehab.
In order to get started on student loan rehab, contact your loan provider and ask about their loan rehabilitation plans.
Once you are out of default, you will be back on a regular student loan repayment schedule. Even more importantly, the record of your default will be removed from you credit history. The payments that you missed while your loan was delinquent will still count towards your credit score, but with the default removed you can start taking steps towards improving your credit.
When to Stay in Default
Depending on your circumstances, you may be considering staying in default with your student loans. Is it ever a good idea to stay in default?
Should You Pay Off Student Loans or Save?
You might find yourself stuck between two good pieces of financial advice. The first being to get your student loans out of default and the second being to save up money whenever you can. You can do both, since getting out of default will require dipping into your savings, so which should you do?
Whenever you have the means to get your student loans out of default (either through student loan rehab or some other method) you should do it. Saving money is something that you can do once you’re financially stable, but as long as your student loans are in default, financial stability will elude you. Without your credit score in ruins, you’ll have a very hard time getting a credit card, taking out a personal loan, or getting a mortgage to buy a house.
Having your student loans go into default can seriously mess up your financial life, including your credit history. Fortunately, student loan rehab allows you to get your loans out of default and resume your life without having your student loan default appear on your credit history.
You can find more information about credit scores at our credit score resource center. For more student financial resources, visit the student finance learning center. Trying to improve your credit score and notice errors on your credit report? Visit our dispute letter template resource center for more information.
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Nick Cesare is a writer from Boise, ID. In his free time he enjoys rock climbing and making avocado toast.
This post was updated May 7, 2018. It was originally published December 13, 2017.