If you’re thinking you can settle your student loan debt for 40% to 60% less than what you currently owe, think again. Student loans are nearly impossible to discharge in bankruptcy and therefore just as difficult to settle. If you’ve defaulted on your student loans, your best option is to figure out how to get caught up. Otherwise, you could be sued for the debt.
Consequences of Student Loan Default
Student loan default happens after you’ve fallen behind on your student loan payments. The default goes on your credit report and will stay there for up to seven years. You’ll likely have a hard time getting approved for other credit cards and loans as long as your student loans remain in default.
After a student loan default, you may realize the government is bigger than you think. Defaulting on federal student loans could result in having your tax refunds taken by the IRS. Yes, these government agencies may work together to collect your student loan payment.
The government can take more than just your tax refunds. They could garnish your wages or levy your bank account and may not even have to go through the court system to do it. Part of your Social Security benefits could also be taken to pay back your student loans.
Rehabilitate Your Student Loans Out of Default
Once a home has been foreclosed, it’s almost always foreclosed. Once a vehicle has been repossessed, it’s usually repossessed forever. Student loan default doesn’t work the same way. You can get out of a student loan default status by catching up on your payments, but you generally have to make the catch up payment on your own, not through garnishments.
As your finances improve and you’re able to consistently make your payments each month, contact your lender to talk about your options. They could put you on a rehabilitation program that will take you out of default status after you make 9 consecutive payments. The good news is that the default status will likely also be taken off your credit report.
This is the rehabilitation process for federal student loans. You may have to take some different steps to rehabilitate student loans from private lenders. Each lender may have different requirements for rehabilitating your loans, so you’ll have to talk to your lender about the steps you must take to get your loans back in good standing.
Consolidating Defaulted Student Loans
Consolidation may be an option for dealing with student loans you can’t afford to repay. Through consolidation, you may be able to lower your interest rate or lengthen the repayment period so that your payments are reduced and the loan is more affordable.
You have to be careful about how you consolidate loans that have already defaulted. If you don’t talk to the lender before the consolidation happens, your old loan may continue to be reported with a “default” status because you technically didn’t bring it out of default before you paid it off. If you have control over the way the consolidation happens, try to get the default status taken care of first. That may mean paying your account for several months before you consolidate.