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I can certainly understand why issues surrounding student loans seem like an unknown foreign language for many people. While the information is out there it seems that nobody knows what to make of it.
Almost the worst place to turn for advice seems to be the student loan debt collectors. In all fairness it just might not be their job to provide good advice and instead focus on collecting the debt. But that does leave the average student loan debtor out in the cold.
Today I’d like to talk about a little explored option when dealing with unmanageable federal student loan debt.
Through a quirk of policies and procedures the federal government has some amazing options to help those in default to deal with their debt.
People who pay attention to this advice should never find themselves letting their federal loans get so delinquent they end up with an Administrative Wage Garnishment or getting their Social Security benefits garnished.
The Government Will Lend You the Money to Get Out of Default
Through the U.S. Department of Education Direct Consolidation Loan program you can combine all your individual government student loans into one single loan. This has some great benefits. One little known benefit is if for some reason you ran into money troubles in the future, then your wages can only be garnished up to 15% rather than 25% if you have multiple outstanding loans.
By consolidating all your eligible federal student loans you will experience the following benefits.
- You will only have only one payment to make each month.
- You’ll be able to elect to repay your new loan under one of the available income based repayment plans or other flexible payment programs.
- There is no fee to consolidate your loans. It is a totally free process.
- There is no minimum or maximum amount you can consolidate.
- The new minimum monthly payment may be less than the combination of the individual loan minimums.
Here is the Magic Wand
Under the Direct Consolidation Loan program, the U.S. Department of Education will allow you to consolidate your loans out of default if you agree to repay your new Direct Consolidation Loan under the Income Contingent Repayment Plan or Income Based Repayment Plan. If you’d like to calculate what your new reduced payment might be, click here.
There are Some Nasty Issues to Avoid
For anyone who has had their head in the sand and allowed their student loans to get to a point where they were sued over them and received a judgment, those loans are not eligible to be consolidated.
If your credit report is showing a default status, just consolidating the loans will not change that status. You must first rehabilitate your defaulted loan. For more on loan rehabilitation, see this article.
Keep in mind that even if you rehabilitate your student loans successfully, that will not remove any credit report notations of late payments reported before the loan defaulted.
Once your loan is rehabilitated the current default status will no longer be reported to the credit bureaus. You can then consolidate your loans and be reported current.Then again, consolidating a defaulted loan will result in your credit report bearing the notation that the loan was in default but then “paid in full.”
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That is a fine point but not one I would worry too much about if you want to consolidate your loans into one lower payment loan as quickly as possible. Either way, your past late status will be reported, but with a rehabilitation, just not the default.
Being a Day or a Month Late is Not a Default
Being in default with your student loans is entirely different than being late on a credit card bill. Typically we think about being a month late as a really bad thing.
However, according to the U.S. Department of Education you are technically not in default until your payment is more than 270 days past due. So even if you’ve not made a student loan payment for the last six months, you are still eligible to consolidate your loans and reduce your payment.
Once you complete your direct consolidation loan application online it will take 60-90 days for it to be processed. After it is approved, you generally will not need to make your first payment for another 60 days.
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