Defaulting on your federal student loans can lead to severe consequences, like:
You might also find continuing your education or returning to school difficult because the Department of Education can deny you eligibility for new education grants or loans.
But most borrowers get a reprieve from many of these actions during the COVID-19 pandemic. Also, borrowers who are delinquent or in default will receive a fresh start—their loans returned to good standing and any delinquency cured.
If, after that time, you go into default on your federal student loans, you might be able to resolve the matter by rehabilitating your loans or consolidating them.
On August 24, 2022, the Biden administration announced that $10,000 in student loan debt ($20,000 if you went to college on Pell Grants) would be canceled for those earning less than $125,000 per year or households earning less than $250,000.
But several parties, including certain states, challenged the legality of this plan and filed a lawsuit to stop the forgiveness program. So, on November 22, 2022, the Biden Administration announced that the Education Department would extend the ongoing payment suspension and interest waiver for federal student loans while its student loan debt cancellation program is tied up in the courts.
Payments will resume:
Borrowers will have their payments automatically suspended without penalty or accrual of interest. Collection actions, wage garnishments, and Treasury offsets for defaulted federal student loans are also paused.
Also, under Biden's plan, borrowers who have defaulted on their federal student loans can have their loans returned to good standing, any delinquency cured, and again get access to several student aid benefits under the "Fresh Start" initiative. The Fresh Start program will continue for one year after the COVID-19 payment pause ends.
But nondefaulted FFEL-Program loans held by entities other than the U.S. Department of Education, Perkins loans that aren't held by the U.S. Department of Education, and private student loans aren't included in the suspension.
If you go into default on your federal student loans, you might be able to resolve the matter by:
Unlike most other kinds of loans, you have the right to get out of default on your federal student loans through rehabilitation or consolidation.
If your FFEL or Direct Loan payments are due monthly, default will occur after 270 days—about nine months—of missed payments. If your payments are due less frequently than monthly, default occurs after 330 days of missed payments, about 11 months.
But a Perkins loan is in default as soon as you miss a payment or violate any other term of the payment agreement.
To rehabilitate a defaulted student loan, you must make nine payments within 20 days of the due date over the course of ten months. The servicer will set the amount of the payments.
Under the initial payment suspension, if you were already in a rehabilitation agreement, suspended payments starting March 13, 2020, will count towards the rehabilitation. If you enter into a new rehabilitation agreement after that date, suspended payments that would have been made from the beginning of your agreement until the end of the suspension will count.
You must submit information about your income, and the servicer will calculate a "reasonable and affordable" monthly payment based on that information and the federal poverty guidelines.
First, the servicer will find 150% of the poverty level for your family size. Then the servicer will then determine your "discretionary income" by subtracting the amount from your adjusted gross income (AGI) in your most recent tax return. The payment will be equal to 15% of your discretionary income.
If the amount is still more than you can afford, you may submit documentation of your expenses. The servicer can determine a lower payment by deducting reasonable expenses. In all cases, the payment must be at least $5 per month.
Once your payment has been set, your servicer will send you documentation of the payment amount, which may require a rehabilitation agreement.
Collection fees usually will continue to accrue on your loan as long as it is in default and can be as much as 18.5% of the loan balance. These fees are in addition to the interest, which will normally continue to accrue.
After completing your rehabilitation payments, the loan will no longer be in default. The servicer will remove all references to the default status from your credit reports. But late payments will continue to be reported.
Nearly all defaulted federal student loans can be consolidated into a Direct Consolidation Loan. Combining your student loans through consolidation is a faster and cheaper way to get out of default on federal student loans than rehabilitation.
You don't have to pay fees to consolidate your loan, and consolidation should be completed in fewer than six months. So, collection fees will accrue for a shorter amount of time than under a rehabilitation plan.
If you consolidate into a Direct Consolidation Loan before the end of the suspension, the new consolidation loan will automatically be placed in a forbearance (payments are suspended) until it ends. But once the 0% interest rate period ends, the interest rate on your loan might be higher than what you were paying before you consolidated.
To consolidate (or to start a loan rehabilitation arrangement related to your defaulted federal student loans), contact the Department of Education's Default Resolution Group, or call them at 800-621-3115 (TTY for the deaf or hearing-impaired 877-825-9923) for assistance. Learn more at StudentLoans.gov and at the Federal Student Aid's coronavirus website.
Though, be sure to consider the pros and cons of federal student loan consolidation before taking this step.
When you consolidate, you must choose a servicer for your loan. This opportunity can be advantageous if you've had a bad experience with your current servicer.
You will also select a repayment plan.
You'll have to make three payments before consolidating unless you choose an income-based repayment plan (IBR, PAYE, REPAYE, or ICR). If you're married and applying for an income-based repayment plan, your spouse must usually also sign the request.
Also, remember that you must submit income verification each year that you're enrolled in an income-based repayment plan.
The default status of the previous loan and late payments will remain on your credit reports for the total amount of time allowed under the Fair Credit Reporting Act.
Both rehabilitation and consolidation are available only once for each federal student loan. But it's possible to consolidate just one loan.
So, you could get out of default quickly on a particular loan while retaining the ability to consolidate other federal student loans if you default on a different one.
A few other options for getting out of default are getting a discharge, repaying the full loan amount, or refinancing the loan.
In some cases, you might qualify for student loan forgiveness (also called a loan "discharge" or "cancellation").
If you think you qualify for loan forgiveness under one of the many programs, you should apply even if you're in default. Though, you might have to get out of default to qualify.
If you have money available, it could make sense to pay off the loan.
Private lenders usually require a cosigner. Depending on the cosigner's credit scores, a private lender might be willing to refinance your defaulted loan.
Sometimes, it makes sense to refinance a federal student loan as a private loan, but you will lose access to federal repayment plans, repayment incentives, and forgiveness programs. Make sure that it's in your best interest before you do so.
To find out more about how to get out of default, ask your servicer.
If you need help dealing with your servicer or need information about your available options, consider consulting with a student loan attorney or debt settlement attorney who deals with student loans.
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