The rising cases of unemployment is taking a toll on the new college graduates who are behind on their student debts. The National Center for Education Statistics reports that some 651,000 (or 13.7%) of the 4.7 million students who started paying back their student loans in 2011 defaulted before the end of 2013.
Defaulting means you fail to make a payment on your loan according to the terms indicated in your promissory note. In this case, your creditor will be forced to hand it over to a collection agency. The collection agency will then do whatever legal action is necessary to recover the money you owe.
A defaulted loan can lead to serious consequences—it could harm your credit ratings and make you ineligible to apply for any other loans until the defaulted loan is fully paid. So it only makes sense to avoid defaulting on your loan by any means. Even so, there are times when your budget becomes tight or when you commit a financial blunder.
At any rate, when you find yourself in default of your student loans, know that it’s not yet the end of the world. It’s just an indication that you need to develop a new financial plan to save your credit history. While getting out of default can be easier than you can imagine, it’s important to act decisively and quickly. Be wise enough to contact your lender and justify your situation. Let them know your willingness to repay and ask for modification options on your loan repayment terms to resolve the issue. Your creditor may offer you at least three ways to get your loan out of default, and these are loan repayment, loan rehabilitation, and loan consolidation.
Of course, the easiest option to get out of default is to repay your loan in full. If you have enough cash to repay your full balance, ask your lender about repayment information for your loans. Also, ask them where you can send payments and how you should do it.
Another option for getting out of default is to enter a loan rehabilitation program. Through such a program, your loan can be restructured to match your current financial condition; thus, making your payments more reasonable and affordable. Your loan’s original underwriter will help you devise a new payment plan based on your current salary and financial obligations.
Rehabilitating your loan gives you back the benefits which were available on your student loan before it went on default. Some of these benefits include forbearance, deferment, loan forgiveness, a choice of repayment plans, and eligibility for additional federal student aid.
Other benefits you can enjoy through loan rehabilitation include the removal of the following: wage garnishment, the default status reported to the national credit bureaus, the default status on your defaulted loan, and any income tax refund withholding by the Internal Revenue Service (IRS).
Note, however, that collection costs are usually added to your principal balance so you’ll end up owing more than the amount before your loan went into default. So don’t be surprised if after rehabilitation, your monthly payment would be more than the amount you paid while your loan was under rehabilitation.
For many borrowers who want to get out of default, loan consolidation may be the best option. Loan consolidation locks in your student loans at a lower interest rate. You will also be given the option of extending your repayment plan to lower your monthly payments. Remember, however that choosing this option will increase your interest rate because of the longer loan repayment terms.
In any event, loan consolidation allows you to have a fresh start, making you qualified for grants, new loans and even deferments. Moreover, your credit record won’t reflect your defaulted loan, and you will be released from wage garnishments, tax intercepts, or other collection efforts.