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Steps to make good on a defaulted student loan

'Rehabilitating' a student loan isn't easy, but it's worth it

By

Opening Credits
Columnist Erica Sandberg
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.

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Question for the CreditCards.com expert

Dear Opening Credits,
I have an old student loan, long since defaulted, passed through a zillion "servicing" companies, but I don't know which company holds the loan right now. I want to make arrangements to get it out of default -- and I understand I can be in the driver's seat as to the terms if I initiate contact -- but I don't know who holds the paper du jour. I should mention that whoever 'they' are, they've been in contact with an ex who would suddenly, happily, send me up the river, and who has access to a pretty good bit of sensitive financial information. Not a good idea for me to contact her, so I'm in kind of a fix. -- Mike 

Answer for the CreditCards.com expert Dear Mike,
Nothing haunts quite like a defaulted student loan. Except, perhaps, a vindictive former mate. Combine the two, though, and you get a highly combustible situation, so let's cool this simmering disaster down.

Obtain a free copy of your credit report from AnnualCreditReport.com. One should do, but if you haven't seen all three in over a year, you may as well pull them from each of the credit reporting bureaus: TransUnion, Equifax and Experian.

Whoever is holding your loan today -- the Department of Education, a guarantee agency or a collector -- will be listed on the report as well as the amount owed. You may also find out who has them by calling (800) 4-FED-AID (433-3243). But even if you go this route, get your reports for comprehensive credit information anyway. You'll want to see how the accounts are being reported.

Then steel yourself for an unpleasant financial shock. Thanks to years of accumulated fees and interest, the current balance may be significantly larger than it was when you last looked at it.

When you know how much you owe and which entity to pay, get clear on what you're going to say before making contact. Do you have a big chunk of change to send that will cover the entire balance? That would be ideal because then you'd at least put an end to future finance charges. However, if you don't, figure out how much you can send each month. Why? Because you're now going to rehabilitate the loans:

  • Contact the loan holder and propose a fixed monthly payment. A negotiation discussion will likely ensue, but resist consenting to a sum you can't really afford. You may have to send in a breakdown of your income and expenses as well as supporting documentation if the payment is particularly low. Make all agreements in writing and keep copies for your records.
  • Send at least nine consecutive, on-time payments over a 10-month period of time. If your wages are being involuntarily garnished by the IRS for this debt -- you don't mention it, but it's a common collection practice -- you'll have to pay above that amount for it to be considered in rehabilitation.
  • After that, the loans will be out of default and the negative notation removed from your credit reports. Pull the reports again to ensure this happens. Also, any garnishments will be lifted, and you'll be eligible for deferments, forbearances and flexible repayment arrangements.

I realize this may sound fast and easy, but it's not. It will take time and effort, so set aside at least a day or five to deal with this. For further student loan rehabilitation assistance, I recommend you call -- at (800) 621-3115 -- or email the Department of Education.

Now about your ex-wife: Don't worry about her "sending you up the river." That statement means jail, and the only debts you can be imprisoned for are delinquent child support and taxes. Besides, as per the Fair Debt Collection Practices Act, collectors are prevented from discussing your loans with anyone but you. In short, you will deal with this problem and no one -- including her -- can get in the way of your success.

See related: Cure your defaulted student loan in six steps, 4 steps to settling privately funded student loans, Debunking a myth about wage garnishment and student loans

Erica Sandberg is a nationally renowned personal finance authority. She’s host of several financial web shows, and a frequent guest for media outlets such as Fox, Forbes, Nightly Business Report and NPR. Erica previously was affiliated with Consumer Credit Counseling Service and was KRON-TV’s on-air credit expert. Her book, "Expecting Money: The Essential Financial Plan for New and Growing Families," was published in 2008 by Kaplan Press.

Send your question to Erica.

Published: June 8, 2011


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