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How To Go Back To School With Defaulted Student Loans

You have 5 options for returning to school after defaulting on federal student loans:

  • Apply for a Direct Consolidation Loan to lower your monthly payments.
  • Enter into the loan rehabilitation program.
  • Pause student loan payments through forbearance or deferment
  • Make a federal student loan settlement negotiation.
  • Declare bankruptcy to discharge student debt in bankruptcy.

These 5 alternatives don’t apply to delinquent loans, only defaulted ones.

If your student loans are in default, you can return to school. However, you won’t be eligible for financial assistance to pay for it.

Can You Return to School With Defaulted Student Debts?

Yes, The best approach to return to school with defaulted student loans is to have them eliminated first, or pay cash for your education.

Your school is the only private lender that can prevent you from attending school.

Before you can enroll at all, you’ll need to remove yourself from default on a private student loan that was obtained directly from your institution.

The good news is that once you’ve been approved for student aid again, you may re-enroll in school.

Then you’ll be eligible for an automatic in-school deferment if you’re enrolled in school at least half-time.

COVID-19 Effects on Student Loan Default and Going Back to School

Most federal student loans have been placed into deferment/forbearance until Aug. 31, 2022.

It also eliminated all student loan interest rates, so your loans in deferment or forbearance won’t increase.

The COVID-19 suspension also put a halt to all collection activities, such as wage garnishments and tax refunds.

Even with COVID-19 procedures in place, you’ll still need to pay off your student loans if you want to return to school and have defaulted.

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How Long Will It Take for Me to Recover From Default?

A student loan settlement is the quickest way to assist you to get out of default and qualify for additional federal student aid.

The settlement procedure for federal student loans takes roughly 2 weeks. However, a student loan settlement is not cheap.

You’ll save 10-15% of the loan amount, and you’ll have to settle it in 30-90 days.

The next quickest way to qualify for financial aid to get out of default is through a Direct Consolidation Loan.

With consolidation, most student loan borrowers can exit default in around 6 to 8 weeks.

The loan rehabilitation program is the most time-consuming option for getting out of student loan default, allowing you to resume your education.

Each one of these choices will allow your student loans to be removed from default and restore your eligibility for future federal student assistance.

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Option 1: Consolidating Your Student Loans Debts

To build a new Direct Consolidation Loan, you can combine your defaulted federal student loan with another good-standing loan.

This makes you have one single loan with a simple payment.

When you consolidate your loan, the interest rate on your new loan will be determined by the average of the consolidated loans and weighted-down obligations.

Consolidation loans have several advantages:

  1. It may help you save money by extending the time it takes (up to 30 years) to pay off your debts.
  2. You’ll be out of default in no more than two months if you don’t miss a payment.
  3. You don’t need excellent credit to be eligible.

Consolidation loans have several disadvantages, too:

  1. Any payments you make toward income-driven repayment plan forgiveness or Public Service Loan Forgiveness will be disregarded.
  2. Because your repayment term has been extended, you will almost certainly pay greater interest over time.
  3. Your employer won’t receive an administrative wage garnishment.

You may not want to combine your Parent Plus Loans with other student loans you took out for school.

As you won’t be eligible for the best repayment options based on your income.

Option 2: Rehabilitating your defaulted student loans

Rehabilitation is a process by which you can exit default status. Within 10 months, if you make 9 on-time payments, you will be released from default.

If you make your payments on time, within 20 days of the due date, they will be accepted.

Perkins loans, on the other hand, have their own set of guidelines.

You must make 9 monthly payments in 9 months.

Your loans will be back in good standing after your ninth payment, at which time the default status will be removed.

The most successful approach to getting your student loans out of default is to apply for loan rehabilitation.

The following are just a few of the benefits of rehabilitation:

  • After you’ve made 6 monthly payments under your repayment plan, you can re-enroll to qualify for additional federal student assistance.
  • Your credit report will remove the default status.
  • You don’t have to wait 9 months before being eligible for student aid again.
  • You’ll have to make low monthly payments.

The following are some of the disadvantages of student loan rehabilitation:

  • It takes the longest amount of time to get out of default.
  • You may be charged expenses, but these can usually be avoided.
  • Each defaulted loan must be individually rehabilitated.

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How to Get Started With Loan Rehabilitation

To begin the student loan rehabilitation procedure, you must first:

  1. To learn who owns your defaulted loans, contact the Department of Education’s Default Resolution Group.
  2. Contact the agency that holds your default loans and request to join the rehabilitation program. Based on your disposable income, they will compute your monthly payment amount.
  3. You can begin making your payments immediately by using a debit card or providing your checking account information.
  4. My advice is to make your payments using your checking account. You won’t have to worry about changing the collection agency if your card is lost or stolen since you’ll be making them from your bank.
  5. After that, you can sign your student debt rehabilitation agreement letter and return it to the collection agency.
  6. The terms of the rehabilitation program and your responsibilities under it are all spelled out in this contract.

Finally, All you have to do is make your payments for 6 months, and you’ll be able to apply for student loans in that time.

Option 3: Forbearance or Deferment Can Help You Stop Making Repayments on Student Loans.

You can suspend your payments if you’re eligible for a deferment or forbearance.

If you use a deferment or forbearance, remember to pay the interest that builds up during the period so that you can avoid some of the ramifications.

The impact of forbearance may be seen in the following scenario:

If you have a loan balance of $50,000 and an interest rate of 6% and take out forbearance for a year after entering repayment, $3,000 in interest will be added to your debts.

If you do not pay that interest, it will accrue (be added to your principal amount).

Because of the impact on interest and potential loan forgiveness, you may wish to look at alternate payment options before applying for deferment or forbearance.

For instance, Your monthly loans payments could be lower if you switch to an income-driven repayment program.

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Option 4: Settle Your Federal Student Loan

The most popular choice for borrowers with federal student loans is student loan settlement.

If your case is resolved in your favor, you will be eligible for financial help again as soon as your settlement payment is received and processed.

The advantages of student loan settlement include:

  • Your credit will be restored, your credit report status will be updated, and any negative consequences of the default will end.
  • Any collection efforts (such as wage garnishment), will be halted.
  • You’ll have a lower debt-to-income ratio when it comes time to borrow again.
  • Your defaulted loans will be erased rapidly.
  • Your interest and late payment costs will be waived.

The following are the disadvantages of settling student loans:

  • You may have to pay income tax on the part of the student loan debt that was forgiven in the settlement.
  • Your credit report will show that you did not make full payment on the debt.
  • You’ll need a sizable lump sum of money to pay back the loan holder.
  • To settle your debt, you must be in default, which will damage your credit.

How to Negotiate a Student Loan Settlement

The U.S. Department of Education is frequently willing to negotiate your Federal Family Education Loan Program (FFEL), Direct PLUS Loans, and Perkins loans if you default on your federal student loans.

To receive a loan settlement on your federal student loans:

  1. To find out the status of your federal student loan and discover the loan servicer and debt collection agency, go to
  2. Call the collection agency and tell them you’d want to settle your student loan.
  3. Determine the lump sum you may afford to pay based on your student debt settlement rate.
  4. Send a letter to the collection agency, asking for the agreement in writing.
  5. Pay the settlement amount you agreed on with the lender on time.
  6. After the payment has cleared, send a letter requesting written confirmation that the student loan is paid off.

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Option 5: Consider Student Loan Bankruptcy

Due to a requirement of demonstrating that the debt causes an undue hardship, it’s nearly impossible to discharge federal student loans in bankruptcy.

Because federal student loans have safety nets in place, (such as income-driven repayment plans), it’s tough to make a case for extreme need.

However, you may be able to discharge your private student loans.

You’ll still need to show that you face an exceptional situation, and you’ll have to pay a lawyer to defend you, which might be expensive.

Defaulting on Your Student Loans Can Have Other Consequences

If you default on your student loans, you will lose access to a variety of benefits.

You will not be eligible for things like deferment, forbearance, loan forgiveness, and even additional financial aid.

After you have missed payments for 270 days or 9 months, your federal student loans will enter default.

After 120 days of no payments, private student loans will enter default.

The penalties for failing to repay student loans (defaulting) include:

  • Lost income: If the government owns your defaulted loans, it can garnish your wages, seize tax refunds, and reduce Social Security payments as a result of outstanding debts.
  • Trouble getting a mortgage: This might make it more difficult to purchase a house.
  • Damaged credit: Regardless of the result, your credit score will suffer as a result of missed payments.
  • Increased loan balance: Accumulated interest and collection costs might cause your loan to grow.
  • Ineligibility for other student loan features: You will lose access to forbearance, deferment, loan forgiveness programs, and other modifications if you default on a student loan.

Frequently Asked Questions