There are two types of student loans available to students and their parents; private and federal school loans.
Federal Student Loans
The Department of Education grants federal student loans to students. These federal loans are a guaranteed by the U.S. government and therefore require no credit check. The main requirement is the students enrollment in classes. There are three types of federal loans the student can borrow directly; federal Stafford subsidized, Federal Stafford unsubsidized loans and Perkins loans. Each loan has benefits over a private student loans.
Benefits include fixed interest rates, several repayment options, there are loan forgiveness programs for students that purse careers in public service, forbearance and deferment options, discharge if the student passes away or permanent disability. The government establishes federal student loan rates. Students do not need credit checks or income verification to take out federal loans out.
Subsidized student loans have the interest paid by the federal government while the student is in school. Unsubsidized federal school loans will accrue interest right away are in school. Perkins loans are also subsidized and have an interest rate cap of 5%. However, Perkins loans are only available to students with exceptional financial need.
Parents are able to take out Parent Loans for Undergraduate Students (PLUS) loans. Although these are federal loans, parents must pass a credit check to ensure eligibility for this loan. The repayment of these loans are the responsibility of the parent.
Defaulted Student Loans (Federal)
Federal loans default after 360 days of nonpayment. If you default on student loans you are subject to having your wages garnished. The collection agency does not have to serve you and go through the courts to accomplish wage garnishment. Filing for bankruptcy will not eliminate federal debt. It does not matter if you file chapter 7 or chapter 13 – neither will eliminate the debt. Additionally, federal money such as social security payments and tax refunds are also subject to garnishment.
Student loan creditors can garnish your wages to repay your student loan debt. The creditor can take able to take 15% of your net salary — or 25% if you have two different creditors. The collection agency servicing the loan receives the money instead of the old creditor. There are costs associated with student loan debt when the account goes to collection agency. In addition to the principal loan amount, you must pay the collection fees which increases the total amount you owe.
Curing Defaulted Student Loans (Federal)
In lieu of trying to get student loan debt discharged or to get federal loans back in check you can rehabilitate or consolidate them.
To rehabilitate defaulted federal loan(s):
- You must make nine (9) monthly payments within 20 days of the due date, and
- Make the nine payment during 10 consecutive months
The U.S. Department of Education services federal student loans. If the current collection agency is not eligible, you will need to take steps to have the loans moved to a qualified servicer.
The voluntary payments are approximately 15% of your discretionary income. You will need to make these payments in addition to any wage garnishments already in place if the loans have gotten to this point. These payments will not count toward the 9 monthly payments.
Once you rehabilitate the student loans, the creditor will remove the default status from your loan and your credit report. Any late payments will still remain on your credit and can still affect your score. Also, once you rehabilitate your loans, you can take out additional loans for education and qualify for both forbearance and deferment.
To consolidate a defaulted loan(s):
- Repay the loan based on income-driven repayment plan. The servicer will require income documentation
- Make three consecutive payments, they must voluntary, on time and full monthly payments before consolidation
To consolidate Federal Perkins loans in default you must also consolidate a Direct Loan or FFEL Program loan. PLUS loans in default are eligible for consolidation only under the income-driven plan, Income-Contingent Repayment Plan (ICR).
You can find out your total outstanding debt and who is currently servicing loans from the National Student Loan Data Systems of Students (NSLDS). This database shows information on federal loans only.
Private Student Loans
Private student loans are not federally funded. Instead they come from private lenders such as banks and credit unions. The student’s or parent’s credit worthiness determines the ability to borrow, the rate and the loan terms of private loans. Private student loans usually have variable interest that can increase the amount of the payments. There are fewer options to postpone and/or reduce payments but, like federal loans there are usually options to postpone payment while the student is enrolled in school. With the increase in college tuition, students have to take out bigger loans. Because the federal student loans have lending caps based on class level and amount already borrowed, students and parents are turning to private loans.
Defaulted Student Loans (Private)
Having private loans discharged for bankruptcy is very difficult but not impossible. However, if your parent or someone else co-signed the loan for you, negative payment history and/or filing for bankruptcy can have detrimental effects on the co-signers credit. To have the student loan discharged you must prove “undue hardship”. There are several tests that a court can use to test whether you are actually facing undue hardship. If you are trying to get student loans discharged you absolutely need the help of lawyer. Getting school loans discharged is not part of the usual bankruptcy process.
Other Options for Defaulted Student Loans (Private)
The reason you do not find much information on rehabilitating private student loans on the internet is because there is no one right way to complete this process. On the federal level there are specific guidelines the department of education servicers must follow. But, on the private level the lenders can make their own rules.
The private lender will generally follow a similar path, but you must understand they are under no obligation to work with you on the same level that a federal lender will work with you. For this reason, many borrowers try to only borrow federal money or at least keep this portion of the loan separate. The best thing you can do is work with the lender before the loan gets transferred to a collection agency. If the loan has already been sold to a collection agency then, that’s who you are going to have to work with.
You cannot consolidate private loans and federal loans with a federal lender. However, there are some private lenders that will allow you to consolidate all loans. There private lenders will check your credit and decide if you qualify for consolidation based on your credit. Therefore, if you have private loans in default right now, your credit score has likely suffered and you will probably not qualify for consolidation under these private lenders. Click here for a list of private student loan consolidation lenders.