Student loan debt prevents many graduates from saving as much as they'd like for their futures. But for some, the problem is much worse than that.
They may have to choose between putting food on the table and paying their student loan bill each month. Typically, student loan debt loses. This forces many borrowers into default -- but if it's a federal student loan, that's not the end of the story.
The government offers three ways to get your federal student loans out of default:
- Pay in full
- Loan rehabilitation
- Loan consolidation
Paying in full is self-explanatory and likely not an option for most borrowers. We'll focus on the other two solutions.
Loan rehabilitation is an agreement between you and your loan servicer. You make nine reasonable, on-time payments during a period of 10 consecutive months. Once you meet this requirement, the lender removes the default from your credit report. Your account is in good standing once again.
But it does not remove the records of the late payments leading up to your student loan going into default. While your credit score may improve, you'll probably still have several black marks that will worry potential creditors.
The amount you pay each month under a loan rehabilitation plan isn't the same as your monthly student loan payment. You'll pay 15% of your annual discretionary income -- the difference between your income and 150% of the poverty guideline for your state and family size -- divided by 12. Some borrowers could pay as little as $5 per month, according to the U.S. Department of Education.
If this is still too expensive for you, you can request that your loan servicer recalculate your monthly payment. If they agree, they'll look at how much money you have left over after subtracting reasonable amounts for your monthly expenses.
In either case, you'll have to provide your loan servicer with documentation to prove your income.
Loan rehabilitation is most borrowers' best option because it removes the default from your credit report -- but it's a one-time opportunity. If you default on the same loan a second time, you cannot rehabilitate it again. Should that happen, you'll have to consolidate your loans or pay in full.
Loan consolidation is an option for federal student loan borrowers even if they're not in default. You essentially take out a new student loan that pays off your old student loans. This gives you a single monthly payment instead of several. Consolidation can also help you get your federal student loan out of default.
Unlike rehabilitation, consolidation does not remove the default from your credit report.
You have two options if you'd like to consolidate a defaulted federal student loan.
First, you can agree to an income-driven repayment plan.
The second option is making three consecutive, on-time monthly payments. You'll have to pay the full amount of your monthly payment. If you do, you can choose from any of the federal student loan repayment plans available for Direct Consolidation loans.
Your loan servicer looks at your financial circumstances to decide on the required payment amount. So you may not have to pay the full amount your current repayment plan requires in order to qualify.
If you defaulted on a Direct Consolidation loan, your options are limited. The only way you can consolidate in this case is if you have another eligible federal student loan to merge with the defaulted loan into a new Direct Consolidation loan. If you do not, you'll have to try for loan rehabilitation or pay off the balance in full.
Once you've successfully rehabilitated or consolidated your defaulted loan, wage garnishment stops. You'll also be able to take advantage of federal student loan benefits, like deferment and forbearance, again.
You can choose from any of the available federal student loan repayment plans unless you opted for the income-driven route when you consolidated your defaulted loans. In this case, you're limited to the income-driven repayment options.
Getting your federal student loan out of default won't happen immediately. And no matter what you do, it won't erase all the damage from your credit report. But it can help you avoid wage garnishment and the increased financial strain that comes along with it.
Contact your loan servicer to discuss your options and see which of the above methods is right for you.