If you fall behind on student loan payments, your loan won’t default immediately. Instead, you’ll default if you fail to make full payment for 270 days, just under nine months. 

Once this happens, you may face serious ramifications, including wage garnishment and the offset of your federal tax refund and Social Security benefits. Additionally, this will hurt your credit report. If the lender sells the loan to a collection agency after you default, you’ll also face additional fees and higher interest rates. 

Fortunately, you’re not out of options after defaulting. After failing to make sufficient payments for 270 days, you have the option to settle, rehabilitate, or consolidate your student loan. In this blog, you’ll learn about these important options for getting your loan back in good standing. 

What Are My Options After Defaulting on Student Loans?

The majority of those with a student loan default will either rehabilitate or consolidate their loans. Student loan settlement is also an option, but this means that you’ll pay your outstanding debts in a lump sum. Often, people negotiate to pay only a percentage of the money they owe, but the majority of defaulted borrowers don’t settle because the lump sum will likely be costly.

Instead, rehabilitation and consolidation offer borrowers an easier option for overcoming their defaults. Both of these options have distinct pros and cons, so you need to know the differences when deciding which is best for your unique financial situation. 

How Do Student Loan Consolidation and Rehabilitation Differ?

Student loan consolidation refers to when you consolidate all of your existing student loans into a single new loan. You can consolidate most types of federal student loans, and your new single loan will be in good standing as long as you make on-time payments. 

With student loan rehabilitation, you complete a repayment plan to rehabilitate the loan. Your payment plan is based on your discretionary income rather than the amount that you owe, and you’ll make nine payments over the course of nine or ten months. Once you complete the repayment plan, your loan will return to good standing.  

Once you go through the student loan consolidation or rehabilitation process, you’ll gain access to valuable loan repayment benefits, such as deference or forbearance of the loan payment and repayment plans based on your income. 

What Are the Benefits of Student Loan Consolidation? 

One great part of student loan consolidation is that it’s incredibly easy to apply for and consolidate your federal student loans. Unlike student loan rehabilitation, there are no negotiations in determining one’s repayment plan, meaning that it’s an almost instant process, but once you submit your application, it could take up to 30 days to consolidate your loans.

Another distinct benefit is that the process is simpler than student loan rehabilitation because you consolidate all of your eligible federal loans. If you have multiple federal loans and choose to undergo rehabilitation, you’ll need to rehabilitate each individual federal loan. With consolidation, you wrap all of your loans into a single new one, making things far less complicated. 

The consolidation process is also much faster than rehabilitation. Student loan rehabilitation takes ten months to complete while consolidation takes between six to eight weeks. 

Like with student loan rehabilitation, student loan consolidation can prevent your wages from being garnished, and it can avert the offset of your tax refund and Social Security benefits. It also allows you to pick a new loan servicer if you’re not satisfied with your current lender. 

What Are the Disadvantages of Student Loan Consolidation?

Although there are many benefits to student loan consolidation, you need to be aware of important drawbacks. 

You cannot consolidate your loans if your wages are already being garnished, and if it appears your wages will be garnished within the next month, consolidation is likely not for you. It takes up to 30 days for your loans to be consolidated after submitting your application, and if your wages are garnished during that time, you’ll no longer be eligible. 

Another disadvantage of consolidating is that your default will remain on your credit report for seven years. 

Consolidation will also increase your total loan amount because your new loan will include the accrued interest and collection fees. 

What Are the Benefits of Student Loan Rehabilitation?

One great advantage of student loan rehabilitation is that you can halt your wage garnishment after it’s already started. You’ll also be able to remove most collection fees once you complete the rehabilitation process. 

Student loan rehabilitation is also a great option for those needing to remove the defaulted loan status from their credit reports. Unlike with student loan consolidation, your defaulted loan will be removed from the credit report. Unfortunately, late payments will remain on your report. 

What Are the Disadvantages of Student Loan Rehabilitation? 

Student loan rehabilitation offers defaulted borrowers great benefits, but there are certainly some disadvantages that you need to be aware of. As mentioned above, the process takes at least nine months, a much longer period than student loan consolidation, and the rehabilitation process will only return one of your loans to good standing. If you’ve defaulted on multiple loans, you’ll need to rehabilitate them separately. 

Additionally, you’ll need to communicate with the collection agencies who are in possession of your loans, and you cannot redirect your loans to a new lender. 

Finally, it’s important to note that the payments you make during your repayment plan often don’t lower the balance of your loan. These payments go toward collection fees and interest.

Contact Indianapolis Student Loan Lawyers

If you require assistance in determining your best course of action in overcoming student debts, contact the Indianapolis student loan rehabilitation attorneys at Sawin & Shea, LLC. 
We offer FREE consultations to help you get started on your journey to becoming debt free. Call us today at 317-759-1483, or click here to contact us online.

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In August 2022, the Biden-Harris Administration initiated a $10,000/$20,000 debt relief program for those with federal student loans earning less than $125,000 annually, but even with this debt relief plan, numerous Americans will continue to struggle with overwhelming student loans. 

The total collective amount of federal and private student debt is around $1.75 trillion, and according to Forbes, 7% of borrowers will never pay off their loans based on the current rate of repayment

Tragically, many of those student loan borrowers have defaulted. According to the Education Data Initiative, 7.8% of all student loans are in default as of December 2021, and over a million borrowers will default each year. 

There are now 7.5 million borrowers in default for federal student loans, but fortunately, borrowers have the option to remedy certain federal student loans through the student loan rehabilitation program. If you’ve defaulted on a federal loan, this could be your best option to return to good standing on your loan. 

Here’s what you need to know about student loan debt defaults, the rehabilitation process, and how long it takes to rehabilitate your federal student loan. 

Consequences of a Federal Student Loan Default

When a borrower fails to make full payments on a loan for a period of time, the loan defaults. With private student loans, a borrower will default after 120 days of failing to make full payments, and with federal student loans, borrowers have 270 days. 

If you default on a federal student loan, you can face serious consequences that negatively impact your finances and other aspects of your life. Federal loans charge high-interest rates, and if you default, the government could sell your loan to a collection agency. 

Debt collectors may charge an additional 18% to 40% on your defaulted balance, making repayments even more challenging. If you owe $20,000 in student loans, you could face an additional $8,000 capital on your debt. This can seriously hurt your credit score and can cause other significant challenges. 

When you default on a federal student loan, the government can garnish up to 15% of your wages or social security income without a court order. They can even intercept your federal tax refund.  

What Is Student Loan Rehabilitation? 

Fortunately, federal student loan borrowers may qualify for student loan rehabilitation after defaulting, and they can even rehabilitate the loan after it goes to collections. 

It’s important to note that this option only works for certain federal student loans, and this solution cannot remedy defaulted private student loans. Instead, private loan borrowers need to consider other options, such as discharging the loan during bankruptcy. 

Student loan rehabilitation allows borrowers with federal student loans to return to good standing. Specifically, the process rehabilitates federal direct loans, Perkins loans, and loans that came from the Federal Family Education Loan (FFEL) Program. 

The process erases the default from your loan and credit history, but late student loan payments will remain on your score. 

Another great benefit is that it removes collection costs on Perkins loans and FFEL loans. With federal direct loans, you may need to pay collection costs, but the collection cost fees are not capitalized or added to your total loan balance. 

The rehabilitation program will also stop collection agencies from garnishing your wages and engaging in other aggressive tactics. Once you finish rehabilitating your loan, you’ll once again be eligible for other helpful ways to reduce or eliminate your debt, including student loan forgiveness programs, repayment plans, federal student aid, and deferment and forbearance. 

It’s critical to note that you can only rehabilitate your defaulted federal student loan once. If you default on your loan at a later time after rehabilitation, you will not have this option. 

How Long Does the Rehabilitation Process Take?

When undergoing the rehabilitation process, borrowers make payments from nine to ten months. If the borrower makes the payments on time, the loan will be rehabilitated, removing the default status from both the loan and your credit history. You can then return to making regular payments on your loan until you pay off the balance. 

With direct loans and loans made under the Federal Family Education Loan Program, you’ll need to make nine payments over the course of ten months. If you have a Perkins loan, you’ll make monthly payments for nine months. 

Applying for Student Loan Rehabilitation

To get started with the student loan rehabilitation program, you must first contact the federal student loan holder. This may be the U.S. Department of Education, a student loan servicer, a collection agency, or another company. In order to find out who holds your loan, you can visit studentaid.gov and log into your account. 

When applying for rehabilitation, you may need to submit your most recent tax return or tax transcript to your loan holder. 

The loan holder will then mail you a rehabilitation agreement that includes your payment amount, options, and agreement terms. It’s important for the loan agreement to be reasonable, which means paying around 15% of your discretionary income. If you can’t afford the payment plan, you can request another plan. 

Once you come to reasonable terms with your loan holder, you’ll sign the rehabilitation agreement. You’ll submit the agreement, and once the program officially starts, you’ll make voluntary payments within the agreed amount of time.  

If you make all of the full payments on time, you’ll rehabilitate your loan and return to good standing. From there, you’ll resume making your normal payments, and you can apply for additional debt relief programs. 

Contact Indiana Student Loan Attorneys

If you’re struggling to pay off private and federal student loans, consider contacting an attorney. They can assist you through the process of overcoming student debts so that you can get your finances back on track. For student loan support in Indiana, contact the lawyers at Sawin & Shea, LLC at 317-759-1483. You can also click here to schedule a free consultation.

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