How To Get Student Loans Out Of Default

Student loans are an extra expense that stays with some people for over a decade. If you cannot repay these loans, they go into default. Even though they go into default, creditors still have a way to collect their money. Your wages will get garnished, debt collection agencies will tack on more fees, and your Social Security benefit could become at risk. Social Security has the authorization to use your benefit to repay a student loan you defaulted on in the past.  A student loan default is extremely risky, but you can get it out of default. This article explains how the process works so you can get back to good standing.

Why you shouldn’t default on your student loans

Defaulting on your student loans poses numerous consequences. Some of them have been covered but defaulting presents additional disadvantages.

You’ll lose your benefits

Your repayment plan goes out the window when you default on your loan. You will owe the entire balance and lose federal programs that make student loan repayment easier. Federal loans tend to have lower interest rates than the competition, and the government even lowered interest rates on these loans to 0% at the start of the pandemic. Those benefits make loans easier to pay off, but you lose them if you default on the loan. In the meantime, the defaulted loan’s principal will continue to grow.

You’ll hurt your credit score

Defaulting on your student loan will hurt your ability to qualify for other types of financing. Lenders look at your credit score to determine whether you can handle a mortgage and other types of financing. A student loan default will make a significant dent in your credit score and make lenders more cautious about giving you funds. 

You may get sued

Your student loan lender can sue you for not making payments if you fall far behind. A loan is a contractual agreement between the borrower and the lender. The lender provides capital right away, which the borrower is obligated to pay in monthly increments. The lender has the right to sue if you default on the loan. A complicated legal battle will increase your expenses. Those proceeds could have gone into your student loan balance or any other area of your life, but now you will have to allocate funds for a court battle. This scenario mostly plays out with private lenders, but the risk of getting sued is always present if you default on your student loans.

How to get out of default on student loans

If you default on your student loans, it’s not the end. You can get the loans out of default, which would help your credit score and avoid the significant disadvantages of defaulting on the loan. Here are some strategies you can use to get out of default and embark on the journey to repaying your student loans.

Loan rehabilitation

The federal government has a Student Loan Rehabilitation Program that helps borrowers get their loans out of default. The federal program lets borrowers get their loan out of default, but you must then agree to make nine consecutive payments toward your loan over a 10-month period. You have to contact your lender to begin the loan rehabilitation process.

Loan consolidation

Loan consolidation is a strategy that involves taking out another loan to repay your current loan. Borrowers use loan consolidations to lower their interest rates, extend a loan’s duration to make monthly payments more manageable, or group several debts into a single loan. Many people who use the loan consolidation route add more years to the backend of the loan to make the monthly payments more manageable. 

The federal government has a Loan Consolidation Program that makes it easier to get this type of financing. If approved, you must first make three consecutive payments for your original student loan before getting the loan consolidated. These payments must be equal to the full monthly payment instead of partial payments. Your lender also may invite you to consolidate your student debt for a fee.

Income-driven repayment plan

If you cannot make three consecutive, on-time, and full monthly payments on your student loan, you can opt for an income-driven repayment plan instead. This plan lets you make monthly payments on your student loans in relation to your income. You can choose from four different income-driven repayments plans as outlined by the federal government:

• Revised Pay As You Earn Repayment Plan (REPAYE Plan): Approximately 10% of your income.

• Pay As You Earn Repayment Plan (PAYE Plan): Approximately 10% of your income unless it would exceed the 10-year Standard Repayment Plan amount.

• Income-Based Repayment Plan (IBR Plan): Approximately 10% of your income if you borrowed on or after July 1, 2014. Anyone who borrowed before that date may owe approximately 15% of their income for student loan payments. You will not have to pay more than the 10-year Standard Repayment Plan amount.

• Income-Contingent Repayment Plan (ICR Plan): Either 20% of your income or what you would pay on a 12-year repayment plan, depending on which is lower.

Other resources for help paying your student loans

These federal programs offer a starting point for getting back on track with your student loans and becoming debt-free in the future. You can use these additional resources for assistance with paying student loans.

Grants: Find one in your industry or with qualifications that apply to you. Borrowers can find grants for nurses, teachers, lawyers, and other professions.

One-Time Federal Student Loan Debt Relief: The Biden Administration proposed repaying $10,000 from qualifying borrowers’ student loans and up to $20,000 for certain borrowers. You can see whether you qualify here. But the courts recently blocked this program from passing. The administration says it will challenge this ruling, so don’t put all of your eggs in this basket.

Loan forgiveness: The federal government lists several ways you can receive loan forgiveness if you meet specific conditions. Most of these plans involve consistent loan payments for over a decade. You may not get immediate relief, but knowing these programs exist can provide inspiration and help you plan a quicker path to loan forgiveness.

Recovering from a Student Loan Default

A student loan default is very risky and has practically zero upsides. Debt grows, your lender can sue, and your Social Security benefits could be at risk. Getting your loan out of default can help you rebuild your credit, get closer to living debt free, and create other advantages.

FAQ

How can you get your student loans out of collections?

The federal government has several programs to help you get your loan out of collections. You can also contact your lender to work out a new loan agreement.

Do student loans go away after seven years?

Student loans do not go away after seven years. You are obligated to pay them, even if you endure bankruptcy.

What happens if you don’t pay defaulted student loans?

If you do not pay defaulted student loans, a lot of bad things can happen. You can lose Social Security benefits, get your wages garnished, get sued, and lose a lot of points on your credit score.