Consolidating student loans is a strategic option to get out of federal loan default. You mix federal loans into one new direct student loan with its personal rate of interest.
It’s one of many 3 ways the federal authorities permits you to get out of default — together with full reimbursement and loan rehabilitation. And it’s the quickest option to do it in case you can’t pay your stability in full.
How to consolidate your defaulted loans
Make three full, on-time consecutive month-to-month funds on the defaulted loan. The quantity you pay is decided by the loan holder, however it could actually’t be greater than what’s reasonably priced in your monetary circumstances. (Under this selection, you may enroll in any reimbursement plan.)
If the loan in default was already consolidated as a direct loan you may nonetheless reconsolidate, however you could additionally embrace a minimum of one different eligible loan within the consolidation. Without an extra eligible loan, the one option to get out of default is to pay in full or by way of loan rehabilitation.
Borrowers with a defaulted FFEL Consolidation Loan could be reconsolidated, however provided that you conform to repay below an income-driven plan.
For these whose defaulted loans are topic to wage garnishment or different collections, you may consolidate provided that the wage garnishment order has been lifted or the judgment is vacated.
Never pay to consolidate defaulted loans
If your loans are in default, you could really feel stress to get out of the opening rapidly. When you’re determined, you’re extra more likely to fall prey to rip-off corporations asking for fee to consolidate or forgive your debt into a brand new federal consolidation loan.
But consolidating your debt by way of the federal authorities is all the time free. You can achieve this by logging in to your Federal Student Aid account and finishing an utility.
There are authentic non-public lenders that refinance each federal and personal loans into a brand new non-public loan, however you’ll lose federal reimbursement choices. It’s additionally extremely unlikely that personal lenders would conform to consolidate defaulted loans. Previously defaulted loans could qualify, however it would rely on the lender’s coverage.
Benefits of consolidating defaulted loans
Once your loans are in good standing, you’ll see a number of advantages restored, together with eligibility for:
Income-driven reimbursement plans.
Loan forgiveness applications.
Federal monetary assist in case you return to highschool.
What to do after you consolidate defaulted loans
Once you consolidate loans, take into account enrolling in an income-driven reimbursement plan to assist keep away from future default. It units your funds at a portion of your earnings and extends your loan time period. That fee could be as little as $0.
If you’re dealing with different monetary difficulties, like a job loss, you may request an unemployment deferment or a forbearance to pause funds till you get again in your ft.
Even whenever you get out of default, the standing will stay in your credit report. The solely option to get a default eliminated out of your historical past is thru rehabilitation.