Defaulting on student loans, administered by the Federal govt. or by a private agency, can have serious repercussions. The borrower may get sued and the lender may obtain a writ from the court authorizing wage garnishments, that may withhold up to 15 percent of the erstwhile student’s disposable income. A default can show up on the credit report for 7 years from the date of default, and adversely affect the capacity to borrow money. Federal loan defaults result in diminishing a person’s ability to avail FHA and VA insured loans in addition to possible wage garnishments. Federal benefits like social security retirement and disability benefits and income tax refunds, may also be withheld in lieu of unpaid amount.
A loan rehabilitation program offers the facility of reinstating defaulted loans. When a student defaults on loans, the information gets conveyed to the credit bureaus that record the default status. Hence, the defaulter’s credit report, credit history, and credit score are adversely affected. Rehabilitation makes the borrower eligible for the benefits, that were available prior to the default, by wiping-off the blemish of default from the credit report. The penalties that were levied in the form of wage garnishments and the inability to avail further loans, become redundant. This facility is available for loans that have been disbursed by the Federal government either directly or indirectly. Private student loans can be rehabilitated, if the lender has such a program.
Rehabilitation is the process of reinstating defaulted student loans by making payments as specified by the lenders. Money procured by the lender through student loan wage garnishments does not count towards the required payments. Federal direct loans and loans administered under the Federal Family Education Loan (FFEL) program may be rehabilitated by delivering the agreed amount in 9 installments over a period of 10 months. Perkins loans can also be rehabilitated by paying the agreed amount in 9 installments to the entity concerned.
As mentioned earlier, private student loans can be rehabilitated provided the lender offers rehabilitation programs. Lenders, who offer such programs, can charge a collection cost on amounts not exceeding 18.5% of the unpaid principal and accrued interest.
A consolidation loan allows the borrower, who is straddled with a number of student loans, to combine different loans and replace those, preferably with an unsecured loan having relatively favorable repayment terms. This method thus helps to simplify repayment. A person with a single loan can also opt for debt consolidation. Consolidation should not be confused with refinancing, since the latter refers to discharging a secured loan by availing another loan, usually of the same size, collateralized with the same security. Private lenders and the Federal govt. provide consumers with the option of consolidating loans, that have been defaulted, under certain conditions. For instance, borrowers who have defaulted on their FFEL program, need to make 3 monthly loan payments in full, to receive a FFEL consolidation loan.
Federal Stafford loans, provided under the FFEL and the direct loan programs, can be consolidated by students after completing or dropping out of school. Students, who are enrolled in school with less than 50 percent attendance, can also consolidate their Stafford loans. PLUS loans, viz. Parent Plus loans and PLUS loans for graduates and professional degree students, can be consolidated once they have been disbursed.
Private loans can be consolidated by availing student consolidation loans from banks, with a maturity period of about 25 years. These cannot be consolidated using Federal consolidation loans. One cannot do away with the obligation of repaying student loans, since lenders can use one of the aforementioned techniques to recover defaulted loans.