Almost all of us have been subjected to that mysterious 800 number. You know, the one where you answer the phone, they ask if it’s you, you reluctantly affirm, and then you almost go into cardiac arrest when you hear, “Calls wills be monitored and recorded. This is John calling for….” *click*
Student loans can be a pain.
But there is hope! In fact, there’s a lot of it. Consider this a crash-course into navigating through some of the options available to you as a Borrower. Yes, a Borrower is what you are considered. Or consumer. A lot of you are probably like, “You’re right. I was a consumer. I consumed a hefty turd of an education and here I am stuck with thousands of dollars in debt that I don’t know what to do with because the payments are absurdly high and I’m in my mid-twenties with nothing accomplished and all of the prophesies of the 2006 comedy “Idiocracy” are coming to fruition and god has basically abandoned us all.”
In all seriousness though, pay attention because we’ll unfortunately need to navigate through this sewage wasteland of student loans by understanding some of the basics:
Default: What is it and have I, in fact, defaulted?
Defaulting is very similar to a bankruptcy in terms of how it hits your credit. The negative tradeline (big red flag) on your credit report will reflect “defaulted” for upwards to 7 years if unresolved, and you will subsequently not be eligible for Financial Aid if you choose to go back to school and further your education. Also, you lose eligibility for any deferment, forbearance, or income-based repayment plan options that your student loan servicer gives you prior to defaulting.
Your defaulted loans then get sold off, or “transferred,” from your student loan servicer to a Guarantor. The Guarantor is basically the insurance company of student loans. If somebody doesn’t pay their loans for up to 1 year after their grace period, the Guarantor then assumes responsibility for it—they guarantee it, hence the name, “Guarantor.” The Guarantor will then utilize either an in-house collection agency to collect on the debt or outsource collection activity to a third-party collection agency, which explains why you may receive calls from “Joe Schmoe Collection Agency.”
There are two options when you’ve gone so far past due that you’ve defaulted on your loans:
Option 1) Loan Rehabilitation. This is a payment arrangement made between you and the collection agency and is generally 6 months of on-time payments. The monthly dollar amount is usually determined at the collection agency’s discretion. If you miss a single payment under the rehabilitation program, you have to start the program over— even if you’ve made 5 on-time, consecutive payments and missed your last, 6th payment.
“What!? But I just said I can’t afford any payments right now! Literally, zero, nada, nothing.”
Option 2) Direct Loan Consolidation. No matter how far past due you are—even defaulted—you are always eligible for a free (yes, free!) consolidation through the government for all of your Federal loans (excludes any private loans!). And you don’t even have to have any contact with the collection agency that is collecting on your loans. Here’s the link to the Direct Loans application:
Rehabilitation vs Consolidation:
Long term, rehabilitations are better for your credit as it will reflect on your credit report that you were past due, then defaulted, started making payments again, and worked it back into good standing, in which case a reverse of the above happens—It gets transferred back to the original student loan servicer where you now have access again to all of the income-based repayment plans, deferments, etc, that got taken away from you before you defaulted. And after you rehabilitate your loans, that negative tradeline—remember, that big red flag?—on your credit report will be removed, subsequently helping repair your credit. Those red flags are nasty in terms of hitting your credit and lowering that hallowed credit score.
Consolidation, on the other hand, is the “quick and easy” fix with no payments required to get your loans back into good standing. When you consolidate, however, that negative tradeline stays on your credit report but will be updated as “paid in full” through the consolidation, and you’ll have a brand new tradeline right below that one with your newly consolidated loans reflecting in good standing. Example:
$10,000 Collection Agency – Defaulted 11/1/2016 – Paid In Full 12/1/2018
$10,000 Direct Loans – Good standing 12/2/2018
In terms of long term decisions—which may include maintaining good credit—you’ll have to do some reflecting on which option best suits your life-goals. Both options are good in their own way. One is a quicker fix that can allow you to, perhaps, get back to school quicker and/or not worry about forking out money to get your loans back into good standing, while the other option may take 6 months or so with some payments but can be beneficial long-term in terms of helping rebuild your credit.
Lastly and most importantly, don’t allow any collection agency to convince you that rehabilitation is the only option available to you. Know your rights. The only exception to that is if you have private loans or loans that have already been consolidated. You can’t consolidate private loans into a federal consolidation. And if you’ve already consolidated your federal loans, you can’t consolidate them again.
Okay, so you haven’t defaulted on your loans but you’re severely past due. What now?
My best advice? Pick up your phone and talk with your student loan servicer. They are calling to not just inform you of being severely past due, but to discuss options in helping you manage your loans. You are entitled to a plethora of flexible payment or postponement options before you default on your loans. They’ll place a Deferment—if you qualify—or Forbearance on your account to bring your loans current right there over the phone (yes, without you having to pay the past due amount), any past due dollar amount will be rolled into your principal balance, and then they’ll discuss your financial situation with you to see what kind of income-based repayments plans you qualify for. A lot of consumers qualify for $0 monthly payments under repayments plans such as “Pay As You Earn.” But that’s just one of the many repayment plans available that you may qualify for. You’ll never know what you qualify for without talking to your student loan servicer about your options.
For more information on repayment options and federal loan consolidation, visit: www.studentloans.gov . If you also want to check to see the status and balance(s) of every single one of your federal student loans—also known as your Student Aid Report (SAR)—visit: https://studentaid.ed.gov/sa/fafsa . Your SAR will also list every single one of your student loan servicers servicing your loan (prior to default) or collection agencies collecting on your loans (post default).