Federal Student Loan Consolidation Even If You Defaulted
A recent spate of federal and state legislative enactments has spawned the emergence of many for-profit debt renegotiation firms. Tax liability for “forgiven” loan balances and inadequate legal safeguards make traveling these unofficial routes quite hazardous.
Although widely-touted as a perfect pecuniary panacea, this private “cure” for official financial default has several serious drawbacks. Extended principal repayment at exorbitant interest rates typically equates to multiples of the total amounts originally “cancelled out” by initial consolidation advance.
Various procedural technicalities and obscure legalities present insurmountable obstacles to obtaining legal relief from defaulted educational debts via this option.
Contact your student loan guarantor to request an application for federal student loan payment modification. After issuing final approval, the agency immediately transfers all defaulted loan(s) to another servicer/guarantor. You must then commence a series of at least nine (9) consecutive timely installments. After doing so, your loan is no longer in legal default and “active repayment” status resumes.
– Loan Rehab Dynamic Duo
- Maximum service fees are limited to 18.5 percent of total defaulted loan balance(s).
- Prompt deletion of all references to the prior default from your personal credit reports upon satisfactory rehab loan repayment completion.
– Dual rehab disadvantages
- Missing any of the initial nine installment(s) puts you back to square one by having to begin the entire process all over again.
- Federal student rehab loans originated after August 14, 2008 are not eligible for re-rehab if you subsequently default at any point during the entire duration of rehab loan repayment term.
You must first arrange to make three consecutive monthly installments directly to holder(s) of your current defaulted student loan(s) as a precondition of long-term consolidation. Like those of rehab loans described above, consolidation loan fees are limited to 18.5 percent of total outstanding balance(s). Although you may legally consolidate defaulted student loan(s) through any authorized lender, Uncle Sam himself is actually the biggest and best consolidator of his own defaulted student loan accounts receivable.
Basic eligibility criteria for direct consolidation of defaulted federal loans via the U.S. Dept. of Education are either:
- Prior execution of a written agreement to repay all outstanding loan(s) via an Income Contingent Repayment (“ICR”) plan*; or,
- Existing satisfactory modification arrangements with current defaulted student loan holder(s).
Rehabilitate or consolidate?
Total deletion of all derogatory credit file entries related to prior student loan default is the main advantage of completing rehab before beginning permanent consolidation repayment. Omission of this vital preliminary from your personal regime of economic recovery from federal student loan debt results in residual credit damage.
Indeed, committing this major strategic error can effectively negate years of hard work and sustained efforts to successfully conquer former financial foes with full repayment of all federal student loan obligations.
Avoid a worthless Pyrrhic win with an all-inclusive approach. A three-month “stay” in rehab really is a small price to pay for permanent victory and peace of mind.
Monthly ICR installments are based on a formula that factors in the borrower’s gross annual income, total defaulted loan balance(s), and household size. Any remaining unpaid principal is automatically forgiven upon expiration of maximum 25-year repayment term.