Best Way to Handle a Defaulted Student Loan
In a down economy it’s sometimes tough to make student loan payments and in extreme cases this can lead to a defaulted student loan. Needless to say, defaulted student loans are not good for your credit report or for your peace of mind – you probably don’t need more debtors calling you 10 times a day looking for more money. So here’s the best way to handle a defaulted student loan:
First of all, if your student loan has been in default for a matter of months or even years, you will most likely already be getting your employment checks garnished to pay back the student debt. This is normal, but if you are unemployed and receiving unemployment checks, it is currently against the law to garnish those checks; So make sure that this is not happening.
Know that while your student loan is in default, your credit report reflects this so it may be tough – or impossible – to receive any other type of loan (i.e., car loans, mortgages, etc…). On the bright side, once you get your loan out of default, your credit report will no longer say that it is. That being said, your credit report will still reflect the fact that you had late payments on your student loans, and that could remain on your credit report for the standard 7 years.
To get your student loan out of default, there’s a simple procedure in place. According to the Higher Education Act, students have the right to cure their defaulted student loan by making a total of 9 consecutive payments to the creditor, at which point the loan will no longer be considered in default. The best part is that you get to chose what the monthly payments will be during this 9 month period, and they must be within your means, meaning that the payment has to be an affordable amount based on your financial situation.
To get this process started, you must contact the creditor and let them know that you understand your legal right to cure your defaulted student loan and that you would like to exercise this right. You should put your proposal on paper and mail it to the creditor (always keep copies for yourself), making sure to include your financial situation and what a reasonably affordable payment would be. If your offer is reasonable – hint: $1/month is not reasonable! – the creditor must accept your offer. They may have you fill out a form that documents your current income/expenses, but that’s pretty standard.
Upon completion of 9 consecutive payments on the defaulted student loan, it will then be removed from default status on your credit report. Keep in mind that this is a one-shot deal, and if you fail to make timely payments during this 9 month period, you’re out of luck in the future.
Your best bet is to avoid defaulting on a student loan by filing for forbearance or deferment before the student loan is defaulted. You may do so if you are facing financial hardship or return to college as a part-time (6 credits) or more student.
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