How to Handle Default Student Loans to Improve Your Credit Scores.

student loans

If you're wrestling with default student loans, you're not alone. As a credit attorney I would estimate that about 95% of the credit reports I review have defaulted student loans.

One client had paid approximately $12,000 against an original student loan debt of about $24,000 before she became unemployed. She soon began to receive threatening collection calls from debt collection companies. Sound familiar?

After exhausting her unemployment deferments, she tried to negotiate a payment plan or a debt settlement agreement. However, the debt collection companies simply resorted to unfair debt collection practices by threatening her with wage garnishment of her unemployment benefits, even though they may not be permitted to do so. Federally guaranteed student loans are usually exempt from wage garnishment of unemployment benefits.

If your situation is similar, you should know that debt collectors are usually very aggressive in collecting student loan debt because they know that most government backed student loans are almost never dischargeable in bankruptcy and usually have an unlimited statute of limitations.

To make matters worse, a notice of default student loan can remain on your credit report until cleared and they can pursue wage garnishment without filing a law suit or judgment. Finally, your tax refund may be garnished. As a result, debt collectors may not be eager to discuss any type of debt settlement offers.

But there is hope. As a borrower in default, The Higher Education Opportunity Act arms you with the right to negotiate a "reasonable and affordable" payment plan to cure your defaulted federally guaranteed student loans. Here's the best part. You get to define what's reasonable and affordable!

You get a one time opportunity to make 9 consecutive reasonable and affordable monthly payments to rehabilitate your defaulted student loans. Sure, the debt collection agencies will try to persuade you to pay what they deem reasonable and affordable, but at the end of the day, they have to accept your determination. So don't let them intimidate you.

How to Rehabilitate Your Defaulted Student Loans

Here's what you need to do...

  1. Make a budget to determine how much you feel you can pay against your default student loans.
  2. Let the debt collection company know that you intend to set up a "reasonable and affordable" payment plan as permitted by The Higher Education Opportunity Act.
  3. Send the debt collection company your proposed payment plan. They will probably require you to complete a U.S. Department of Education Financial Disclosure Statement to prove you have a financial hardship. Also beware that the debt collector may aggressively try to persuade you to pay an amount that you may not agree with. Don't worry about it; ultimately they have to accept your determination of what's affordable for you to pay.
  4. Make sure you document your request for a reasonable and affordable payment plan and include any supporting documentation to justify your proposed payments. Send the documents by certified mail, return receipt requested, and keep copies of everything!
  5. Review the final approved payment plan to make sure you are in agreement with all of it's provisions and then sign and return the plan. Then start making payments.

10 Year Repayment+ Plan

Once you complete 9 consecutive monthly payments, you should receive a notice that your default student loan was rehabilitated and resold to a lender. But keep in mind that your new payments may be higher than the 9 consecutive payments you made under your repayment plan.

That's because the new lender will place you on the standard 10 year repayment plan. However you may qualify for the Income Based Repayment (IBR) plan or a graduated repayment plan to make your payments more affordable.

Finally, your student loans should no longer be reported as delinquent accounts. However, I cannot over emphasize the importance of keeping copies of your documents. Because in many instances you may have to use them to file credit disputes with the credit bureaus to fix your own credit; or if you hire a reputable credit repair organization to help you legally improve your credit.

If you need help regarding your defaulted student loan, here's a really good resource for Student Loan Borrower Assistance.

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