How Defaults Rehab Affect Your Loans

Whether you are currently in default or on the brink, you need to know what the penalties are. This way you can contact your servicer to set up payments if you haven’t fallen off the cliff yet. If you have, you’ll need to contact your guaranty agency so you can bounce back from your default.
Based on information from www.studentaid.ed.gov, possible penalties for defaulting on a student loan include the following:

• Your college transcripts could be held.
• Student loan repayment program options become more limited.
• You may become ineligible for additional federal student aid.
• Your account may be turned over to a collection agency and you’ll have to pay additional charges, late fees, and collection costs, all of which become part of your debt.
• The default could show on your credit reports—and affect your credit scores—for years into the future.
• The drop in credit scores could cause you problems qualifying for credit cards, a car loan, a mortgage, or renting an apartment. 
• Federal and state income tax refunds could be withheld and applied to student loan debt on defaulted loans.
• Portions of your wages could be garnished.
• Employers who check credit may reject you as a job candidate.
• You could get turned down for a government job.

But what can you do you about it? Find out the status of your defaulted loans. According to Martha Holler from Sallie Mae, which services both private and federal loans, there are two initial steps you should take if you are delinquent and nearing default:

1. It takes 270 days of making no payments to default on your federal student loans. However, you could have a loan listed as seriously delinquent because you have missed a few payments but haven’t missed enough to reach default yet. If this is the case, talk with your servicer and arrange to start making payments again immediately. Whew! Crisis averted.
2. After 270 days of nonpayment, federal regulation says that your lender may consider your loan in default. At this point, your loan is transferred to a guaranty agency that works on behalf of the U.S. Department of Education to collect your loan. If you are past the 270-day mark but still in the first 60 days of the default collection stage, you can avoid the collection fee if you contact your guaranty agency and pay the balance in full.

But what if you don’t have a few thousand dollars lying around to pay off your defaulted loan immediately? Don’t despair. There are ways to rehabilitate your default.
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