Taking out student loans to pay for college is already stressful. The last thing any borrower wants is to let their loan go into default. Keep in mind that there’s a difference between delinquency and defaulting. Delinquency is when you initially miss a payment. Defaulting is when you miss a payment and don’t make any payments past a specified amount of days. The number of days depends on your lender. When you default on your loan, it damages your credit score and makes it more difficult for you to get a home mortgage or to borrow money for any other large purchases. If, despite all precautions, you let your loan go into default, you have two options to get your student loans out of default.
Loan rehabilitation is the best option available to get your student loans out of default. It involves making 9 monthly payments over a period spanning 10 successive months. One of the biggest benefits of loan rehabilitation is that the monthly payments that you have to make are calculated as a percentage of your income. That way, they are always affordable.
There are two important things to keep in mind about loan rehabilitation:
- You have to make the monthly payments within 20 days from the due date.
- You can claim loan rehabilitation only once over the life of the loan.
Keep in mind, you only have one chance to rehabilitate your loan. Once you’re given the opportunity, don’t waste it.
Loan consolidation is another effective way of getting out of student loan default. With this option, you consolidate your defaulted federal loans into a new Direct Consolidation Loan. To do this you must agree to either one of these conditions:
- The new Direct Consolidation Loan must be repaid under an income-driven repayment plan
- Before consolidating your defaulted loans, you must make 3 successive on the defaulted loans. All three payments must be full monthly and must be made on time. Partial payments or payments made after the due date do not qualify, so make sure that you make full payments
Loan Rehabilitation vs Loan Consolidation
Both loan rehabilitation and loan consolidation will ultimately help you get out of student loan default. However, there are a few key differences between the two. And of course, you should know about the differences. That way, you can make an informed decision as to which is the right choice for you.
The big difference between the two is that with loan rehabilitation, the record of default will be removed from your credit history. Your credit history will still show the delayed payments prior to the default. But, all references to the default will be deleted. This can be a huge benefit, especially when you’re trying to get loans or other big transactions in the future.
With loan consolidation, the record of default as well as the late payments prior to the default will remain in your credit history. However, the advantage here is that you will be out of default status immediately. This is helpful if you are planning on going back to school for an advanced degree and you need additional financial aid.