Legally, a default occurs the first time you fail to make a payment when it is due. But if you fail to make your student loan payment for 180 days, your loan will enter the “official” default status and take on a life of its own. This is the point at which the lender will report your student loan as defaulted to the credit bureaus. It is also the point at which a long list of bad things can start to occur. Your tax refund checks can be seized and your wages can be garnished.
Why are student loans so different from all other debts? Well, prior to 1991 the U.S. Department of Education was empowered to collect delinquent student loans for only six years. But in 1991 an amendment to the Higher U.S. Department of Education Act lifted all time limits for collection. And the amendment was retroactive; student loans that were past the statute of limitation for collection prior to the amendment became collectable again. And to further reinforce the longevity of student loan debt, a 1998 change in federal law made it virtually impossible to discharge student loan debt in a bankruptcy.
The Reason for All This
The theory behind making sure that student loan debt can be collected forever is simple; the cost of student loans can be kept low by minimizing the number of borrowers that don’t repay. And since education, and the availability of low cost education loans, is always a political priority, it was not all that difficult to enact these changes.
The Ultimate Collectors
There is simply no way to escape the U.S. Department of Education and their army of private collection agencies that collect on their behalf. In addition, Sallie Mae, the nation’s largest student loan lender, has been purchasing collection agencies to track you down. So, what if they find you and you say you have no money? Well, the U.S. Department of Education now has the right to garnish wages, grab your tax refunds, and even seize your Social Security Checks (you read that right!), all without a court order. And, although Sallie Mae does not wield the same powers, they have started to turn over hard cases to the U.S. Department of Education to get the job done. Anyone attempting credit repair must realize that student loans must be dealt with head on, and the sooner the better.
Credit Repair Options
There are two great solutions that are designed to solve all of your student loan problems. Both of these options can stop all collection activity, lower your interest rate and payment, and reinstate your right to borrow more money for school (in case you want to go back to school). There are no qualification requirements and you are not punished for having bad credit. Everyone gets the same low interest rate. These two options are consolidation and rehabilitation. Both are a good fit with any credit repair process.
Student Loan Consolidation
Just contact the lender or collector and tell them that you would like to consolidate your defaulted loans. You will be required to make three monthly payments on time. Once you have done this you will qualify for consolidation. If you are attempting credit repair you should note that after consolidation your credit report will be updated to show the consolidated status, but the default notation will remain, like most derogatory information, for seven years. If you are in a rough patch the consolidation program allows for up to three years forbearance. Ask your lender for details. My focus has been on defaulted student loans, but it may be handy to note that you do not need to be in default to enjoy the benefits of consolidation.
This is a slightly longer process, but has the extra benefit of removing the default status notation from your credit report. To rehabilitate your loan you need to make nine to twelve consecutive on-time payments (depending on which type of student loan you have). Once you have completed this process your loan is considered “seasoned” and is sold to a new lender, and the default is wiped off of your credit. Once done, it is like it never happened. If you are attempting credit repair you should note that your payment history, including any late payments that you made, will remain, but your credit score will benefit from the removal of the default. Borrowers are allowed to rehabilitate a defaulted student loan one time only. As always, contact your lender to discuss the details.