Resolving student loan defaults

Once you default on your student loan, you may feel you have no options. As one of my readers said, you might feel like a "hamster in a wheel."  
You can't sit back and hope the problem will go away. It will not.  
Interest continues to accrue, and collection costs of up to 25 percent of the loan balance can be added to if your loan goes to a collection agency.
If you are in this situation, ask your lender about "rehabilitation."
Through rehabilitation, you can come to an agreement to make payments that are affordable to you and acceptable to the lender.  
If you live up to your part of the bargain, the loan comes out of default status.
That's significant. Rehabilitation stops wage garnishments and other offsets (which we discussed in last week's column) and reinstates eligibility for forbearance and deferment. And, importantly, your credit report is adjusted to show that your loan is no longer in default after the rehabilitation.  
Let's focus on rehabilitating three types of federal student loans: FFEL, Direct Loans and Perkins.
- FFEL loans. When Federal Family Education Loans default, they are assigned to a guaranty agency for collection. A guaranty agency administers the FFEL program in the state in which you live. FFEL loans are Federal Stafford, Federal Consolidation and Federal PLUS loans.


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On Your Side: Federal student loans offer flexibility, low-interest

"I know a lot of kids that have that and need that to get through college."

He and his family prepared for Augusta State by looking into student loan options.

"I have a Parent PLUS loan, which my mom gets, roughly about $10,000, because the differential between in-state and out of state is huge."

Without it, he may not be going for a degree in business.

"I'm not sure I'd be back in school, actually."

He admits it will be expensive later, but he doesn't have to pay now. Some other federal loans provide payment flexibility without the burden of high rates.

Subsidized Stafford Loans: A low-interest option for students who qualify based on income. The government will pay interest until 6 months after graduation, when students must pick up the amount of the loan plus interest. No credit check.

Unsubsidized Stafford Loans: For any student. You won't have to pay interest until 6 months after you graduate, when you'll also be responsible for the amount of the loan. No credit check.

PLUS Loans: For parents or graduate students who qualify.

Consolidation Loans: Allow you to combine many loans into one monthly payment.

All loans are low-interest loans and also promise a greater flexibility than private loans, which usually carry higher interes rates.

Even though Jerelle will be paying the $10,000 later -- he says education will pay off more.

"I think it will be worth it. I'd have gotten my education, got a good job, made my family proud."


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