With college becoming more expensive, it is hard to avoid defaulting on your student loan. Defaulting involves missing payment on your loan for nine straight months. This means that the lender of the loan can turn your account over to a third-party agency for collection, which will add additional penalty charges until the debt has been paid. In addition to these penalty charges, you could also be sued for repayment, or face wage garnishment so that 10% of your paycheck can be taken to repay your loan agreement. Here are some ways to avoid and deal with defaulting student loans.
Deferment and Forbearance
- A deferment is defined as the temporary relief from paying debts for up to three years. You can take a deferment more than once throughout the lifespan of your loan, as long as the time-frame does not go past the term of the deferment. You still have to pay the interest accumulated during the deferment period. To apply for a deferment, you will need to have your application approved. Before the approval of the deferment, you will still have to make your monthly payments. You cannot file for deferment if your loan has already defaulted.
- Forbearance is similar to deferment in that you are still responsible for paying the accumulated interest throughout the span of the forbearance period. The forbearance period usually runs for one year, though you can renew it for a period of up to three years.
Advice on how to deal with your defaulted loan:
- You should verify the accuracy of the defaulted loan. Student loans typically get transferred due to refinancing by the lenders. If you see any discrepancies or transactions that are illegal, you can challenge the entry and have your loan reinstated.
- Rehabilitating your student loan will have it reinstated and have the negative entry removed from your credit report. This involves making 9 to 12 monthly payments consecutively.
- The pay-off option is to be considered, but it is not advised for your situation.
- You can also avail yourself of a direct loan consolidation. It provides a way to pay defaulted student loans with low, controlled interest with a long repayment schedule of up to 25 years. You can do this to opt for deferment and forbearance.
- You can also use Federal Family Education Loan Consolidation. It provides borrowers with a consolidated loan with different repayment schedules. A commercial lending company will make the consolidated loan. Credit bureaus will be notified of your account having zero balance, which would show on your credit card. To qualify, you must make 3 monthly payments consecutively on your defaulted loan.
- Declaring bankruptcy does not allow defaulted student loans to be discharged. You can only declare if you can prove that repaying the defaulted loan is not possible. You may want to avoid this option, as bankruptcy stays on your credit report for years.
- You should get help regarding several key legal decisions. You can go to non-profit organizations that provide free legal assistance.
- You should inquire about your company’s policy regarding defaulted student loans. If they offer renewals, this can clear you of your defaulted loan, though at the cost of increased interest and additional fees.
- Make sure that your loan is paid promptly once the loan has been cleared and refinanced.