You will be eligible to receive additional federal student aid as well. Late payments reported before the loan defaulted will not be removed from your credit history. Loan consolidation allows you to pay off one or more federal student loans with a single, new loan that has a fixed interest rate. You can also select an income driven repayment plan. To consolidate a defaulted federal student loan into a new Direct Consolidation Loan, you must either:. If you choose the first option, when you apply for the Direct Consolidation Loan, you must select an income driven repayment.
If you choose the second option making three consecutive, voluntary, on-time, full monthly payments , you may repay the new Direct Consolidation Loan under any repayment plan you are eligible for. However, consolidation of a defaulted loan does not remove the record of the default from your credit history. One caution is that you may lose benefits extended to you by your lender or servicer. These benefits may include the right to cancel loans or special interest reduction programs.
The other con of consolidation is that you may pay more for your loans. If you are extending the time you have to repay the debt you are, most likely, going to pay more in interest.
Finally, understand that any default or delinquent entries on your credit bureau reports will not be removed through consolidation. The accounts will be closed and you will have at least one new entry from the consolidated loans.
There are many positive reasons for consolidating student loans. As you can see there are options for bringing a student loan out of default. Some options are fast and others are time consuming. Remember that information in the credit report, no matter which option you select, will heal.
If you need assistance with your student loans, call American Financial Solutions today. We work to help you find the plan that fits with your budget and your financial goals. Federal programs like Pell Grants and William D. Ford Federal Direct Loans provide general assistance for low and middle-income applicants. Select, economically disadvantaged students are eligible for additional loans through the Perkins program. The aid is designed to increase college access for the neediest groups of students.
Perkins Loans fill gaps left after other financial aid is expended. Funding is limited, so your best bets for securing a loan are to file early, and meet federal financial aid eligibility requirements. Perkins borrowers may have multiple outstanding loans, but many students also carry federal Stafford Loans , and others issued through the Direct Loan Program.
Students with multiple federal loans are increasingly concerned about how they will meet repayment obligations after graduation. The good news for college students, and graduates carrying multiple individual student loans, is that the Department of Education operates an established program allowing more than one loan to be bundled together under a single, renegotiated repayment contract.
Unlike most other kinds of loans, you have the right to get out of default on your federal student loans through rehabilitation or consolidation. To rehabilitate a defaulted student loan, you must make nine payments within 20 days of the due date over the course of ten months. The servicer will set the amount of the payments. Under the payment suspension, if you were already in a rehabilitation agreement, suspended payments starting March 13, , will count towards the rehabilitation.
If you enter into a new rehabilitation agreement after that date, suspended payments that would have been made from the beginning of your agreement until the end of the suspension will count. You must submit information about your income, and the servicer will calculate a "reasonable and affordable" monthly payment based on that information and the federal poverty guidelines.
Then, the servicer will then determine your "discretionary income" by subtracting the amount from your adjusted gross income AGI in your most recent tax return. If the amount is still more than you can afford, you may submit documentation of your expenses. The servicer can determine a lower payment by deducting reasonable expenses.
Once your payment has been set, your servicer will send you documentation of the payment amount and may require a rehabilitation agreement. Collection fees usually will continue to accrue on your loan as long as it is in default and can be as much as These fees are in addition to the interest, which will also normally continue to accrue. After you complete your rehabilitation payments, the loan will no longer be in default.
The servicer will remove all reference to the default status from your credit report. But late payments will continue to be reported. Nearly all defaulted federal student loans can be consolidated into a Direct Consolidation Loan. Combining your student loans through consolidation is a faster and cheaper way to get out of default on federal student loans than rehabilitation.
You don't have to pay fees to consolidate your loan, and consolidation should be completed in fewer than six months. So, collection fees will accrue for a shorter amount of time than under a rehabilitation plan. If you consolidate into a Direct Consolidation Loan before the end of the suspension, the new consolidation loan will automatically be placed in a forbearance payments are suspended until it ends.
To consolidate or to start a loan rehabilitation arrangement related to your defaulted federal student loans , even during the coronavirus crisis, contact the Department of Education's Default Resolution Group, or call them at TTY for the deaf or hearing-impaired for assistance.
Learn more at StudentLoans. Though, be sure to consider the pros and cons of federal student loan consolidation before taking this step. When you consolidate, you must choose a servicer for your loan. This opportunity can be an advantage if you've had a bad experience with your current servicer. You will also select a repayment plan. If you're married and applying for an income-based repayment plan, your spouse must usually also sign the request.
Also, keep in mind that you will have to submit income verification each year that you're enrolled in an income-based repayment plan. The default status of the previous loan, as well as late payments, will remain on your credit report for the full amount of time allowed under the Fair Credit Reporting Act. A few other options for getting out of default are getting a discharge, repaying the full loan amount, or refinancing the loan.
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