Options For Resolving Loan Defaults
USA Funds Services
Those who are in default on federal education loans can resolve their default and even restore good credit. They should be advised to pursue one of these options:
PAYMENT IN FULL. When borrowers default on their loans, the entire balance immediately becomes due. If at all possible, education-loan borrowers who are in default should arrange to make payment in full.
REPAYMENT ARRANGEMENTS. Because most borrowers who are in default cannot afford to make payment in full, their guarantor, the collection agency to which their account has been assigned, or the U.S. Department of Education can establish repayment arrangements with them. Typically, these plans require that each installment cover at least the accruing interest and collection costs on their loans.
LOAN CONSOLIDATION. Under certain circumstances, borrowers can resolve their loan defaults by consolidating their outstanding loans. In some cases, they may be required to make a minimum number of payments, typically three payments, before being permitted to consolidate their loans. Once their consolidation is approved, their credit report will be updated to reflect that their defaulted loan is paid in full, although the report will continue to document that they previously defaulted on their loans. Borrowers must make the required payments on their new consolidation loan.
LOAN REHABILITATION. From the standpoint of restoring good credit, loan rehabilitation is the best option. Borrowers must first make 12 consecutive, voluntary, on-time monthly payments. These payments can be reasonable and affordable, but typically must cover at least accruing interest and collection costs. After borrowers have made their 12 monthly payments, their guarantor will help them locate a lender to purchase their defaulted loan. Once a loan is rehabilitated and purchased by a new lender, the default will be deleted from the borrower’s credit report. The borrower will be required to make payments to their new loan holder.
Failure to pursue any of these options could cause defaulted borrowers to face additional sanctions such as the following:
- Continuing calls and letters from collectors.
- Further damage to their credit rating.
- Garnishment of wages.
- Additional costs.
- Seizure of income-tax refunds.
- Inability to receive additional federal financial aid.
- Possible lawsuit.
For assistance in resolving their default, borrowers should contact their student-loan guarantor. To learn which guarantor holds their loans, current and former students may refer to the free LoanLocator service of the National Student Clearinghouse, www.loanlocator.org, or the National Student Loan Data System (NSLDS) Student Access Web site, www.nslds.ed.gov.