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Options to Deal with Defaulted Federal Student Loans

By Jonathan Leiderman, Esquire

Generally, if your federal student loan is between 1 and 270 days late, it is “delinquent” (other than Perkins loans, which are in “default” after the first day of non-payment). After 270 days of non-payment, your federal student loan is in “default”. If your federal student loan is close to being in default, then you should make every effort to keep it from actually going into default.

Once your federal student loan is in default, you can be subject to collection charges of up to 25% of the amount due, your wages can be garnished under an administrative wage garnishment, your tax refund can be taken away through a tax refund intercept, you can have your social security benefits offset, or you could soon be served with a lawsuit. Other possible consequences are that you could be ineligible for federal employment or your federal or state licenses could be in jeopardy. If your federal student loans are in default solutions may include:

  • Forbearance or non-curing payment plans (to avoid administrative wage garnishments)
  • Settlement
  • Consolidation and rehabilitation.

By consolidating one or more of your federal student loans, you can pay off their outstanding balances by creating a new single loan. To qualify for loan consolidation, you typically are required to:

  • make at least 3 consecutive, voluntary, and timely payments or
  • you must immediately enter into an income-based repayment (IBR) or
  • income-contingent repayment (ICR) plan.

IBR/ICR plans generally last 25 years (with the balance of the student loan forgiven thereafter) and are based on what you can afford, given your income, and household size.

Curing a default through consolidation is not available if you are currently in an administrative wage garnishment. Additionally, if you decide to consolidate your loans, it is important to understand that the late payment notation will remain on your credit report. To avoid this, you may wish to consider loan rehabilitation.

Rehabilitation requires you to agree to a repayment plan. Typically, you must make 9 payments within a 10 month period. Your student loan will only be considered rehabilitated after you have voluntarily and timely made the agreed-upon payments and your loan has been purchased by a lender.  It is important to understand that payments that are involuntarily taken from you (through an administrative wage garnishment or other collection actions) do not count toward your rehabilitation payments.
Some of the benefits to rehabilitating a student loan include:

  • Removal of the default status on your loan
  • You regain eligibility for benefits such as deferment, forbearance, consolidation (if you previously had an administrative wage garnishment prior to the rehabilitation), repayment plans, and loan forgiveness
  • Removal of the default notation on your credit report
  • Administrative wage garnishment will stop after a certain number of payments
  • Any income tax refund from the IRS will no longer be withheld
  • You may be eligible to receive additional federal student aid

Please keep in mind that every student loan matter is different.  If you are facing default on your federal student loans, or you are interested in learning more about consolidation or rehabilitation of defaulted student loans contact a qualified attorney.

Jonthan Leiderman, Esq can be contacted at Leiderman Shelomith, P.A. 2699 Stirling Rd Ste C401, Fort Lauderdale, FL 33312 954-920-5355, info@lslawfirm.net