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Defaulting on student loan debt is increasingly common in the United States. As of December 2017, close to 4.6 million Americans had stopped paying their federal student loans long enough that they had gone into student loan default, according to Business Insider, citing Department of Education data. This federal loan statistic doesn’t take into account the number of borrowers defaulting on their private student loans.
Although one or two months of missed payments will still affect one’s credit score, it takes significant time to go into delinquency or finally into default. A debt typically goes into delinquency after 90 days of missed payments, and into default approximately after 270 days, depending on the loan.
Going into default is a burden for the American economy because it places the federal government on the hook for the roughly $84 billion in student loan debt currently in default. It is also extremely detrimental to your own credit, with long-lasting financial ramifications including:
- Wage garnishment
- Restrictions on your school transcripts
- Restrictions or denial for deferments
- Increasing interest payments
- Restrictions on asset purchases and sales
It’s impossible for you to refinance defaulted student loans at all. It essentially takes all options off the table until you are back in good standing. Understanding the repercussions of going into default is critical to prioritizing student loan payments in the first place. Student loans are often one of the first bills to go into default because unlike other debts, they are unsecured.
What It Takes to Refinance Student Loans
Lenders consider credit history, credit score, and income levels (among other things) before approving anyone for a refinanced student loan. The underwriters want to know, with as much certainty as possible, that you are financially responsible and fully capable of making every payment on time and in full.
A past default leaves a serious mark on your credit score. If relatively recent, it’s a big risk for most potential lenders to ignore. If you have defaulted before, it can reduce your refinancing options, because not every lender will consider you. But there are ways forward, even if you are still struggling in the depths of default.
Steps You Need to Take if You Have Defaulted Student Loans
For anyone currently in default on their student loan, refinancing is not an option under almost any circumstance. You must first get your credit score back into good standing before applying for any new loans, even a refinanced loan.
If you’ve recently come out of default and can start making monthly payments again, there are three main options to get back into the good books:
- Consolidate your student loan debt
- Rehabilitate it
- Pay it all off
While the latter option is a rather obvious one, paying off tens of thousands of dollars’ worth of student loans in one go is not always a valid option.
But what about consolidation? To consolidate is to combine multiple student loans under one. It also usually reduces the monthly payment. Once you’ve successfully made three on-time payments following a default, you can apply for a Direct Consolidation Loan through the federal government. Only federal student loan holders can apply, however.
Rehabilitation is another option. To rehabilitate a loan means to enter into a 10-month agreement with your lender. Once nine full payments are made in the 10-month period, your loan will no longer be under default status. The default will also be removed from your credit report.
The monthly payments during rehabilitation are directly linked to your income level. There are also often steep fees associated with rehabilitation, but it restores your ability to refinance, request a deferment, or renegotiate the loan terms.
How to Refinance Your Student Loans After Default
Defaulting on a student loan does create challenges, but it doesn’t make it impossible to bounce back. The first step is to get back on your feet and start making payments again. The second step is to consider consolidating your student loans or start the rehabilitation process.
Once a loan is rehabilitated, there are ways to lessen the overall financial burden. What if you’re still struggling with the same medical bills or loss of income? If your financial situation has not improved, a rehabilitated loan lets you apply for payment deferment. A deferment is of great assistance for the short-term, although interest still accumulates during this period.
Another option is to refinance your student loans. Refinancing is a way to pay off all previous loans with one single loan from a new lender. Look for lenders that take more than income and credit score into consideration.
Combining all loans under one simple monthly payment can make managing the debt much easier than trying to pay down multiple debts at once. Also, refinancing typically comes with a much lower interest rate. Refinancing can save student loan borrowers thousands of dollars in the long run on interest payments.
Author: Jeff Gitlen