Why It’s Crucial To Get Out Of Default
It’s natural to feel ashamed or uneasy when you miss one or more student loan payments. But you shouldn’t just avoid your loans your best bet is to address the situation as soon as possible.
While student loan default has far-reaching repercussions, there are multiple ways to regain control of your finances, especially if you have federal loans. The sooner you decide to get out of default, the sooner you can improve your credit and move toward a loan-free life.
Rehabilitate Your Student Loans
Student loan rehabilitation involves setting up a payment plan with the Department of Education. The goal is to come up with a mutually agreed upon plan that is affordable for the borrower. After making nine on-time voluntary monthly payments within a 10-month period, you can rehabilitate your loan. This would take it out of default status and stop the collections calls.
Under your loan rehabilitation payment plan, your payment could be as little as five dollars per month. However, you may need to spend more than that on your loan each month. Involuntary payments collected through wage garnishment or tax offset may continue during your 10-month rehabilitation period. If this happens, they will stop being collected after you make some of your voluntary payments or after your loan is fully rehabilitated.
Generally, you should only resort to student loan rehabilitation if federal student loan consolidation is not an option. Rehabilitation is also only a one-time deal. You cannot rehabilitate a previously defaulted loan a second time.
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Federal Student Loan Collections
Federal student loans are much different than private student loans. Your federal student loans will become delinquent after youâre 30 days late making your monthly payment. If you continue missing payments for 270 days, the loan will enter default.
At that point, the lender will send your student loan to one of the Department of Educationâs approved debt collection agencies. However, the original lender still owns that loan. The collection agency takes over obtaining payment in exchange for a fee.
Federal student loan debt is never sold to a collection agency. Instead, the federal government assigns defaulted student loans to a debt collector to handle the debt collection process.
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Choose The Right Repayment Plan
The federal government offers several repayment plans for federal student loans. You cannot change the repayment plan of defaulted loans, but you can switch plans once your loans are out of default. Switching to a new repayment plan will help make your monthly payments more manageable and make it easier to avoid defaulting again. Plus, you can have your loans forgiven after a set number of years.
The federal government offers six different repayment plans, but here are three to make note of:
Income-Based Repayment : Your monthly payment is based solely on your income and family size. Your outstanding loan balance is not taken into account. Instead, borrowers just pay 15% of their discretionary income toward their federal student loans. For some, this means paying as little as $0 per month.
Pay As You Earn : PAYE is similar to IBR, but it only uses 10% of your discretionary income to calculate your monthly payment. Borrowers usually end up paying less with the PAYE program, but it is more difficult to qualify for. Payments can run as low as $0 per month.
Revised Pay As You Earn : The REPAYE program also uses 10% of your discretionary income to calculate your monthly payment. Unlike, the PAYE program, the REPAYE program counts both your income and your spouses income even if you file separately. This plan comes with the best interest loan forgiveness benefits.
Repercussions Of Defaulting On Your Student Loan Debt
Student loan default is one of the worst financial actions that can happen to you. You’ll be dealing with the following.
- Low after poor payment history is reported. Higher interest rates if you need to take out other loans based on your new low credit score
- Fees from the collections agency
- Potential wage garnishment
- Legal action – if your student loan company or the government files a lawsuit against you
If you do find yourself in default on your student loans, you’ll need to communicate with the collections agency that has been assigned to your debt. You’ll have a couple of options, including student loan rehabilitation, setting up a repayment plan with them, or potentially even settling the debt.
Federal vs. Private vs. Privately-Held Federal Loans
Depending on your loan type, you’ll encounter various debt collectors. For Federal loans, the Department of Education has stopped using private debt collectors and now simply uses it’s existing loan servicing companies. You can see your loan information here:
For private and privately-held Federal loans , you may encounter one of the agencies below.
There are over 20 different student loan collections agencies, many with names you’re not going to be familiar with. If one of them reaches out to you, you need to take it serious.
Below is a list of common student loan collection agencies along with their contact information if you need to reach out to them.
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Dealing With A Student Loan Lawsuit
As noted above, federal student loans are typically recovered through either debt collection efforts, or administrative garnishment or tax refund captures.
For private student loans, they are just like any other consumer credit contract. That means the only way to forcibly collect money is obtain a judgment through a lawsuit. In many ways, this can actually be a good thing for a consumer.
If a student loan proceeds to a lawsuit that means the consumer now has access to all of their legal rights under the law. It also means the creditor have the burden of proving the debt. That is not always easy for them to do.
Every case is different, but here are some potential defenses in student loan lawsuits:
- The statute of limitations has expired
- The creditor cannot prove they own the loan or how they acquired it
- The creditor cannot provide evidence to support the balance sought in the lawsuit
- The creditor has improper paperwork
- The creditor sued the wrong person.
Again, that is not an exhaustive list of defenses, but they are some of the more common defenses that a consumer may be able to raise.
Your Federal Tax Return May Be Withheld
Along with garnishing your wages, the federal government can seize your federal tax returns. The Department of Treasury simply withholds your partial or full refund to help settle your federal student loan debt. If you file married jointly, the IRS will also withhold your spouses refund.
If your federal loans are currently in collections, you will most likely have your tax refund withheld. The IRS must notify you of the tax offset and give you time to review your records. You will also have the chance to challenge the tax offset. You can earn more about avoiding a tax offset here.
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Ed Ends Contracts With Student Loan Debt Collection Companies
The Departments action is yet another example of putting the preferences of their progressive allies over the needs of struggling student borrowers, Foxx said in a statement.
ED asserts the move is meant to further center FSAs work on borrowers and ensure they are supported and not taken advantage of by servicers or collection agencies.
Publication Date: 11/8/2021
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Student Loan Collections: What It Is And How To Get Out
If you are in student loan collections, you probably ended up there because you failed to make payments on your loan. Student loan collections can be frustrating and stressful, but there are ways to get out and stay out. These include student loan consolidation, rehabilitation, or quickly catching up on payments.
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Canada Student Loan Forgiveness For Doctors And Nurses
Doctors and nurses can qualify for loan forgiveness for their Canada student loans by working in a remote or rural area. If you are a family doctor or resident in family medicine, you can qualify for up to $40,000 in loan forgiveness for a maximum of five years at $8,000 per year. Nurses or nurse practitioners can qualify for up to $20,000 in Canada student loan forgiveness for a maximum of five years at $4,000 per year.
Resolve Student Loan Disputes
If you and your loan servicer disagree about the balance or status of your loan, follow these steps to resolve your disputes:
1. Talk with your loan servicer
You may be able to solve a dispute by simply contacting your loan servicer and discussing the issue. Get tips on working through an issue with your loan servicer to resolve the dispute.
2. Request help from the FSA Ombudsman Group
If you have followed the guide and still cannot resolve your issue, as a last resort, contact the Federal Student Aid Ombudsman Group. The FSA Ombudsman works with student loan borrowers to informally resolve loan disputes and problems. Use FSA’s checklist to gather information youll need to discuss the dispute with them.
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Make 100 Dollars Fastdebt Collection Laws Are On Your Side
The FTC enforces the FDCPA . This act protects you by prohibiting debt collectors from using abusive, unfair or deceitful practices to try and collect from you.
Heres a list of things a debt collection agency may NOT do:
- They may not pretend to be someone else like a government agent or lawyer.
- They are not allowed to call you before 8 am or after 9 pm.
- They may only call you at work if theyre told that you are allowed to receive calls at work.
- They may not talk to anyone besides you, your spouse or your lawyer in regards to your student loan debt.
- They cant harass you which includes repeatedly using the phone to annoy you.
- They cant make false statements.
- Theyre prohibited from saving that you can be arrested or that theyll garnish your property or wages.
When To File An Adversary Proceeding: Chapter 13
In a Chapter 13 bankruptcy, when you can file an adversary proceeding also depends on the bankruptcy court rules where you live. Regardless of when you file, your student loan nightmare will not be complete if you win the adversary proceeding. That’s because you have to wait until you’ve completed the necessary Chapter 13 plan payments and earned your discharge order for your other debts before your student loans will be discharged.
If you are allowed to file the AP early in your case, you might get the proceeding over with sooner and obtain a decision on your student loans. The table below compares Chapter 7 and Chapter 13 bankruptcy.
|Comparing Bankruptcy Options|
|Varies by state|
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What If The Defaulted Student Loan Isnt On My Credit Report
Some student loan defaults no longer appear on your Equifax, Experian, or TransUnion credit reports. Thatâs because itâs been more than seven years since you defaulted on the loan.
But even if your defaulted loans arenât on your credit report, they can still stop you from getting approved for a mortgage backed by the federal government. Although your federal student loans donât appear on your credit report, theyâll still appear in CAIVRS.
Private student loans that are in default donât appear in CAIVRS. So if your private student loan debt isnât on your credit report, then it shouldnât stop you from getting a mortgage.
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CommonBond Disclosures: Private, In-School Loans
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Debt Collection Laws Protect You
Remember, these companies are third party debt collectors, and there are laws that limit what they can and can’t do. The Fair Debt Collection Practices Act is a federal law that provides limitations on what debt collectors can do when collecting certain types of debt. The federal Fair Credit Reporting Act covers how debt collection is reported in credit reports. In addition, there are state laws that provide protections.
These companies may NOT:
- Contact you before 8am or after 9pm. Also if a debt collector knows that you’re not allowed to receive the debt collectors communications at work, then the debt collector is not allowed to contact you there.
- The debt collector may not harass you or anyone else in regards to the debt.
- If you tell the debt collector to stop contacting you in writing, they must stop contacting you except to take legally allowed actions against you, such as filing a lawsuit .
If you are contacted by a debt collector for your student loan debt, they are required to tell you the following information about your debt:
- The name of the creditor
- The amount owed
- That you can dispute the debt
- That you can request the name of the original creditor, if different than the current one
Also, certain states have also increased borrower rights. For example, California recently passed the California Student Loan Borrower Bill of Rights.
Does Getting Student Loans Out Of Default Help Your Credit
Getting out of default can have a positive impact on your credit long term. Late payments from before your loans went into default will continue to negatively affect your credit score, and can’t be removed through federal default-resolution methods. But student loan rehabilitation can remove the default status from your credit report, which may help your credit.
Since payment history is the most important contributing factor to your , making on-time student loan payments after default will give your credit a chance to recover. Make sure to pay other bills on time, too, including credit cards, and keep other debt balances as low as possible.
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How To Avoid Having Student Loans In Collections
Once your loan is out of default, be careful not to end up in the same spot again. Hopefully, youre now on a manageable payment plan that lets you repay without missing payments and falling behind again but its possible that could change. The key is to be proactive and get help if you do run into problems, before you end up in collections again.
To start, make sure your payment plan is the right option for you. There are various student loan repayment plans that can bring the monthly payment amount down based on a variety of factors. Just keep in mind that many of these payment plans could increase the total amount youll have to repay.
And for federal and private loans, look into loan repayment assistance programs that could deliver meaningful benefits, depending on your career and home state.
If you cant pay or otherwise need to pause payments, see if either student loan deferment or forbearance is an option for you. Deferment means you can temporarily stop making payments on your loans, and interest doesnt accrue on federal direct subsidized loans during that time. Youll typically be eligible if youre enrolled in college at least half time or in other cases like unemployment or military service.
Bottom line: Always take action to find potential alternatives to ending up in default. Youll be glad you did.
What Are The Requirements To Get Student Loan Relief For Federal Student Loan Borrowers
- You had to enter student loan repayment on a Direct Loan or FFELP student loan before January 2015.
- You must have had at least one federal student loan that was eligible for income-driven repayment.
- You didnt enroll in income-driven repayment prior to forbearance.
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Options For Private Student Loans
When it comes to private student loans, private lenders may or may not offer borrowers the opportunity to rehabilitate their loans. And, when it comes to private student loan rehabilitation there is not much federal legislation. Borrowers who have rehabilitated a private student loan may ask to have the default removed from their credit report, but there is no guarantee that it will be removed.
In some circumstances, the statute of limitations on debt may be a consideration for private student loan debt. This is a legal time frame in which a creditor is allowed to collect on the debt and it is determined by state law. In the case that the statute of limitations on private student loan debt has been met, entering into a rehabilitation plan may restart the limitations period.
Additionally, its important to note that some lenders may charge off private student loans that are delinquent for 120 days, or a set period of time, which may vary from lender to lender. If a debt is charged off, the lender may not be willing to work with the borrower.