Everyone knows that when you take out student loans, ultimately, you have to pay back the lender. But what if you start missing a series of payments? It happens more often than you might think. In 2017, the U.S. Department of Education announced that after five years of declines in student loan defaults, the amount of people missing payments on their student loans within three years of departing college had climbed. In other words, almost 11.5 percent of borrowers who started repaying student loans on Oct. 1, 2013, defaulted by Sept. 30, 2016, up from 11.3 percent in the previous year.
Fortunately, if you find yourself in this scenario, you have some options. Below are some smart solutions for mitigating financial repercussions, including diminished credit or steep interest rates.
[See: 12 Simple Ways to Raise Your Credit Score.]
Catch up on those late and missing payments. For most borrowers, this strategy is impractical. If you fell behind, you fell behind because you didn’t have enough money to pay the loans — and so unless you just won the lottery or received an inheritance, paying all of those late payments at once, or within a short amount of time, may be impossible.
Ask for a deferment or forbearance. Both federal and private lenders will sometimes allow borrowers to do a deferment or forbearance, enabling you to either stop making payments or see the payments reduced for a temporary period. The main difference between a deferment and forbearance is that with a deferment, you may be able to get the interest waived on your loan when you aren’t making payments. As for the criteria for a deferment or forbearance, chances are, you qualify for something. There are numerous types of deferments and forbearances that are tied to various situations, such as being unemployed, in school or simply dealing with an economic hardship.
Whatever your situation is, if you’re behind on your student loans and can’t catch up, contact your lenders, urges Leslie Tayne, founder and managing director of Tayne Law Group, P.C., a debt relief law firm based in New York.
“While [lenders] may not be able to offer you a forbearance or temporary halt in payment, they can list your options and help you with your next steps. Your lenders can tell you if your loans have been sold to debt collectors and how much you owe,” she says. “It can certainly be intimidating and stressful, but making this call is the first step to get the ball rolling.”
You could opt for a loan rehabilitation. This is a possibility if you have federal student loans in default that have gone to a collections agency (which would happen after you’re 270 days late on your payment) and you’re looking to catch up on your loans and clean up the late and missed payments that have made it onto your credit report. “A rehabilitation program can be a great way for borrowers to get back into good standing with their lenders,” Tayne says.
[See: 12 Habits to Help You Take Control of Your Credit.]
In this case, you would talk to someone in customer service about getting a loan rehabilitation, which is a plan that would require you to make nine monthly payments on time. The payments are often low. In some cases, if your financial situation is dire, you can get as low as $5. As long as you make the payments on time, the default is removed from your credit history. That said, the late payments will still stay there until they’re seven years old and fall off.
So a loan rehabilitation won’t make your credit report pristine by any means, but after your rehabilitation, if you’re still floundering, you will be eligible for other strategies, such as a deferment or forbearance, which may help you delay payments or get them reduced.
With that said, there is another major downside: A loan rehabilitation often comes with fees, sometimes as much as 16 percent of the unpaid principal and accrued interest at the time of the sale of the loan.
Consolidate your loans. This is another option for federal loans. You can pay off your debt by combining your federal loans into a consolidation loan. Before the new consolidated loan becomes official, however, you will be required to make three consecutive on-time full monthly payments.
There are numerous types of payment plans, including what are called income-driven repayment plans, which base your payment on your income and family size, and there are pros and cons to doing this. For instance, you may get a much longer period of time to pay off a loan. But on the other hand, all of that extra time can translate to a lot of extra interest.
Refinance your loan. If you have a private loan, this could be a wise option. Unfortunately, you’ll need good credit to get a better loan with more favorable terms, and if your loans are in default, often your credit has been through the wringer. This can, however, be a practical strategy if your credit is still good and you believe defaulting is in your future. You could also ask your parents to co-sign a refinanced loan. But keep in mind that co-signing any loan is a huge risk to the co-signer, who will be legally responsible for your debt, if you somehow can’t make your payments.
Settle your student loan debt. This can be done with private loans and federal loans once they’ve gone to debt collectors. While this is typically a last resort, it’s ideal if you’re looking to restore your credit and finally pay debt off once and for all. Generally, with private student loans, you’re going to need at least half (and probably more) of what you owe.
As far as federal loans are concerned, settling is possible, according to Mark Kantrowitz, the publisher of PrivateStudentLoans.guru, an educational website about private student loans based in Skokie, Illinois.
“If a federal student loan borrower has been in default for a long time, they can make an offer to settle the debt for less than what is owed. This will involve a lump sum payment, not a new payment plan,” he says, citing three standard offers that collection agencies may accept without getting permission from the U.S. Department of Education.
You can get the collection agency to agree to waive the collection charges. You may get the amount you owe reduced by 10 percent, according to Kantrowitz. And a third option waives half of the interest that has accrued since the loan went into default, Kantrowitz says.
[See: What to Do If You’ve Fallen (Way) Behind on Your Credit Card Payments.]
If that sounds measly, that’s because it is. “The government never accepts less than the loan balance when the loan went into default, so there is no benefit to strategic default,” Kantrowitz says.
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What Are Your Options After You Default on Student Loans? originally appeared on usnews.com
