Don’t Panic! Here’s How to Get Out of Default on a Student Loan
So you’ve defaulted on a federal student loan. Now what?
Well, not too many people default on purpose. The federal government knows that good people can go into default for all sorts of reasons, including layoffs, income instability, medical issues, and poor financial organization skills.
The good news is, there are three reliable paths out of default.
The bad news is, none of them are easy. And none of them are going to erase the late payments on your credit report. But you probably can get the default status lifted in one of these three ways:
- Pay off the loan in full, or;
- Consolidation (but read this first before consolidating or refinancing a federal student loan!)
- Go through a process called default rehabilitation.
We’re guessing that you don’t have the cash on hand to simply write a check to pay off the entire balance of the federally-guaranteed student loan(s) currently in default status. Loan consolidation can provide some important benefits, but it won’t remove the “default” notation from your credit report.
So if you don’t want to consolidate, and you can’t simply pay off the loan entirely, it’s time to check into rehab.
The stakes are high: Those currently in default are ineligible for federal employment. Many other employers won’t hire you with a default on your student loans on your record. The federal government may gobble up your tax refunds until the loan is paid off, with interest. You’ll have creditors calling you at home and at work (but you probably know this already.) Eventually, they’ll come after you to garnish your wages.
But if you can successfully complete the rehab process, the collection calls will stop, and collectors will cease legal efforts to garnish your wages. Furthermore, the servicer will contact the credit bureaus and have them remove the default notification from your credit report. This will make you eligible once again for certain loan forgiveness programs and federal employment.
Regaining Eligibility for Income-Driven Repayment Plans
It also means you may be eligible again for income-driven repayment plans, as well as forbearance arrangements. This eligibility may be critical in helping you avoid defaulting again in the future, if you run into financial difficulties.
But once you complete the rehabilitation process, be extra careful about staying on top of your student loans. The Federal Student Loan business isn’t Hollywood: You can only go through rehab once.
Here’s what you have to do:
Rehabilitation for Perkins Loans
First, contact your servicer. This could be the Financial Aid department of the school where you received your student loan, or if your loan has been assigned to the Department of Education, call 1-866-313-3797 and speak to the ECSI Federal Perkins Student Loan Servicer. They will look at your current income, decide on an affordable payment for you based on your income, and give you the monthly payment it will take for you to get out of default in nine months.
You’ll need to make your monthly payment in full every month, within 20 days of the due date, for nine consecutive months, in order to get the default status removed.
Rehabilitation for William D. Ford Federal Direct Loan Program Loans and Federal Family Education Loans (FFEL)
The rehabilitation process for William D. Ford Federal Direct Loans and Federal Family Education (FFEL) Loans is very similar: Contact your loan processor. Have your income information handy. Your loan servicer will work with you to arrive at an affordable and sustainable monthly loan payment for your situation. However, there’s not much flexibility: You’ll be expected to pay at least 15 percent of your discretionary income towards the loan every month.[i]
What does “discretionary” mean? It means income above whatever puts you at 150 percent of the federal poverty line, given your family size and your state. Typically, they’ll use your most recent tax return to arrive at your income.
If that’s not workable because of some special circumstances, or because your income has changed substantially, you’ll have to fill out the Loan Rehabilitation, Income and Expense Information form. That form will require you to list your monthly income and expenses in detail. You may need to provide supporting documentation.
If you can’t pay 15 percent, and you won’t pay the alternative amount the loan officer arrives at after processing the Income and Expense form, you won’t be able to go into rehab. Work on increasing your income and lowering expenses until you can do it, or find a way to pay off or consolidate the loan.
Once you agree verbally, your loan officer will send you a written agreement confirming your monthly rehabilitation amount. You must sign and return the form for the rehabilitation to begin.
Once your loan is in the rehab program, most of the collection activity will cease. The loan servicer will only contact you as necessary to support the rehab process, or to communications that are required by law or regulation. However, if you’re already subject to wage garnishment, those garnishments may continue – and you can’t apply amounts collected through garnishment toward your nine mandatory rehabilitation payments. These payments will have to be over and above your involuntary payments through garnishment.
Naturally, this is a tough situation to be in. It’s best to get into the rehabilitation process long before any garnishment proceedings can take hold. It may be worth getting a second or third job, putting payments on unsecured debt like credit cards on hold for a while, and going on the rice and beans diet until you get through the rehab process. And, of course, you can line up some help from friends, family and even employers via the LoanGifting platform. Indeed, you should probably be doing that anyway.
By staying on top of the process and getting into rehabilitation quickly, you may be able to limit the calls to your workplace. You’ll certainly reduce your stress level. And you’ll get out of default.
[i]The 15% formula means 15% of the amount by which your Adjusted Gross Income exceeds 150% of the poverty guideline amount that is applicable to your family size and state, divided by 12. Your minimum payment may not be less than $5.00.
Jason Van Steenwyk is an experienced financial industry reporter and writer. He is a former staff reporter for Mutual Funds, and has been published in SeekingAlpha, Nasdaq.com, NerdWallet, Value Penguin, RealEstate.com, WealthManagement.com, Senior Market Advisor, Life and Health Pro and many other outlets over the past two decades. He is also an avid fiddle player and guitarist. He lives in Orlando, Florida.