In the early 1990’s, the student loan default rate skyrocketed. Lenders added so many extra charges when a loan went into default, such as collection costs and compounded interest, that many debtors stopped repaying their debts. In 1992, Congress passed laws allowing debtors who defaulted on their student loans to have a new chance to get their loan out of a default status. Since the new law was passed, the default rate has dropped significantly.

 

A loan generally defaults when payment has not been made for more than 180 days and no payment arrangements have been worked out with the lender. If you have a federal student loan, the most common way to get out of default is to request a reasonable and affordable repayment plan. Under this plan, the debtor asks the institution that holds the loan, such as a guarantee agency, the Department of Education or a collection agency, to allow payment that is reasonable and affordable. According to Robin Leonard, author of Take Control of Your Student Loans, published by Nolo Press, you should request a plan by saying one of the following:

 

  • I want a reasonable and affordable repayment plan to renew my eligibility.
  • I want to rehabilitate my loan.
  • I want to qualify for loan consolidation.

 

Different lenders may use slightly different lingo but one of these should be understood by your lender.

 

The lender considers several factors in deciding what amount is reasonable and affordable for a particular debtor. These factors include the debtor’s disposable income (how much money you are left with after deductions like Social Security, taxes, child support, etc.) and necessary expenses (food, housing, utilities, etc.). There are no formal rules specifying what amount is considered reasonable and affordable. Payment plans are designed to fit the particular situation of the debtor requesting it.

 

When requesting a plan, you want the lender to be sure to have an accurate picture of your finances. Therefore, you may want to attach copies of documents showing your expenses each month. Often, the agency will have a form on which you record and submit this information.

 

Within a few weeks, the lender will consider your request and will let you know the amount it expects you to pay each month. If you can’t pay that amount, you should contact the lender immediately. You are only given one chance to get out of default. If you agree to make payments and then fail to pay, you probably will not have another opportunity to get out of default in this manner.

 

After you have made six consecutive on-time payments in the correct amount, you will be eligible to apply for new federal loans. To bring your loan out of a default status, you will need to make 12 consecutive timely payments. Once your loan is out of default, you can then apply for a deferment. Throughout the repayment period and until a loan or deferment of some type is granted, you will need to continue to make payments.

 

After your student loan is no longer in default, you should obtain a copy of your credit report. If there is still an entry indicating that your loan is in default, you may want to file a dispute with the credit bureau. After you make 12 consecutive payments, you are entitled to have the default status removed from your credit report. (This is very unique though, and is the only example we know of where the government supports and engages in “credit repair.”) Attach a copy of any documentation you have proving that your loan is no longer in default. The credit bureau must investigate within 30 days and must remove derogatory information from your credit report about your student loan that is inaccurate.

 

Defaulting on your student loans is serious business. Lenders and the Department of Education spend significant resources trying to locate people who have loans that have gone into default. If you are given an opportunity to repay your debt and remove the default status, you should make sure you make each and every payment exactly according to the terms the lender has given you. Otherwise, you will have squandered your chance to get rid of the default.