How to move student loans out of default
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.
Ask a question.
'Opening Credits' stories
Dear Opening Credits,
My student loans were
sent to a collection agency. I have been trying to get a reasonable payment
plan, but the collection agency keeps denying what is affordable to me. I have
even sent them a payment and they sent the money order back to me. How do I
take care of this and make them accept my payment? -- Trisha
Hollywood is missing out
on a blockbuster horror movie: Student loans gone bad. It would be a real scream-fest.
Because when these obligations go into default, the process of trying to get
them on back on track can make the most well-intentioned borrower shriek with
It is frustratingly true that when a defaulted student loan lands with a collection agency, making amends can be far
more difficult to do in real life than it is on paper. Some of these collectors
are very hard to deal with and they're getting tougher, too. According to a
2012 National Association of Consumer Bankruptcy Attorneys survey, 65 percent
of bankruptcy attorneys said that student loan provider debt collections have
become "much more" or "somewhat more" aggressive in the past 18 months.
You do have rights, though. If your
student loans were federally guaranteed, you're allowed to set up a "reasonable
and affordable" payment plan to "cure" the loan, which is what it sounds like you're tried to
According to the law, you have to make nine, consecutive, "full" payments. But "full" is defined in a way that benefits you. The law says, "payment in the full amount required means payment
of an amount that is reasonable and affordable, based on the borrower's
total financial circumstances, as agreed to by the borrower and the
Expect to negotiate, and expect to have to provide documentation and a budget. The good news: After nine
consecutive installments of these same fixed payments, your loan should be
rehabilitated. Your loan should then revert back to a financial institution and
the notice of the default lifted from your credit reports.
Under the law, you only have one shot at this
deal, Trisha, so don't falter again.
See related: Student loan debt: the next time bomb?, Can I go back to college if student loans are in default?, Steps to make good on a defaulted student loan
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: March 28, 2012
Three most recent Opening Credits stories: