Have you missed a payment on a federal student loan?  Does that meant that you are in default? What can they do to me?  Missing a payment on a student loan is not the end of the world and it does not mean that you are in default.  If you miss alot of payments and end up in default, that can be a very serious issue.

When you miss a payment on a student loan you are “delinquent”.  The delinquency will continue until you make all necessary payments to make the loan current.  If you become 90 days delinquent, loan servicers will make a derogatory notation on your credit report.  If you are at the delinquency stage, you should consult with a student loan attorney to see about how to avoid a default.  There are many income based repayment programs available that may allow you to lower your payment and bring yourself current.

Default on a student loan occurs when you are 270 days late.  Obviously, this is akin to being 9 months or more behind.  Default is a very serious issue that can subject you to many negative forces.  At this point, the lender can request a wage garnishment (without suing you…this is called an administrative wage garnishment), it can do a tax refund intercept, your loan will be transferred to a collection agency who will add collection fees to the loan (fees can range up to 18%), you will lose eligibility for further federal loans, you will lose eligibility for income programs, deferments and forbearances, and the balance on the loan is going to increase faster because of the collection costs.

So what do I do if I am in default?  Well, you have three general options.  1. Pay the loan in full.  2. Rehabilitate.  3. Consolidate.

Paying the loan in full is an option for 1% of borrowers, maybe less.

Rehabilitation is an option for most of the remaining 99%.  In order to rehabilitate a federal student loan, you must make 9 monthly (timely) payments within a 10 month period.  Yes, 9 out of 10…there is a grace period built in if you happen to mess up again.  The monthly payment can be at a lower rate than your normal payment if you qualify under income and loan guidelines.  The initial guideline is 15 percent of your discretionary income.  If you still cannot afford that amount, then you can submit a request that your actual expenses versus income be considered.  If you are in default and your wages are being garnished, you can end the garnishment after 5 months of on time rehabilitation payments.

Once you rehabilitate the loan, you will be eligible for all federal benefits that you lost because of the default.  In addition, the lender/servicer will remove the default notation from your credit report.  You can only rehabilitate a loan once…meaning, you get one crack at this.  You cannot rehabilitate a loan a second time.

The final option is consolidation.  Not all loans can be consolidated, and some loans should not be consolidated.  Consolidation is what it sounds like, “combining” loans into a new Direct Loan.  The payment on this loan can be based upon income driven repayment program guidelines.  Just like with rehabilitation, once you consolidate you will be eligible for all federal benefits that you lost upon student loan default. Unlike rehabilitation, consolidation will not require the lender/servicer to remove the default entry from your credit report. We can walk you through this option and see if its right for you.