When a student fails to pay his or her student loans for over a year, he or she is said to have defaulted on those loans. Going into default is a very serious matter and can greatly damage a student’s credit, and yet, some individuals are unable to avoid the result. In those situations, there are some means for settling defaulted Federal student loans.
LoanConsolidation
The first option that students should pursue is loan consolidation. Debt consulting companies and several banks and loan companies will agree to take all of a student’s loans across many sources and consolidate them into a single payment with a single interest rate. This can help save students money and a good deal of hassle as they only have to pay attention to a single small payment rather than an assortment of payments.
Filing for Bankruptcy
For the most student loans, filing for bankruptcy does not make any difference. While most other forms of debt are discharged in bankruptcy, Federal student loans are exempted from this process. However, some private student loans will be completely wiped clean. Bankruptcy is an extreme response, though, and if students have any other options, they should definitely pursue them before declaring bankruptcy.
Making a Single Lump Payment
If the amount cannot be discharged or consolidated, students have only a few options available for settling that debt. Most loan companies will sell the debt to a debt collection agency, which may be willing to settle the debt for a lump sum. The payment amount will rarely be the full amount of the loan owed, so the company is operating at a loss but the payment is often still much larger than most, students are able to pay even if they have already gone into default. This payment must also be received by the debt collection agency within 90 days of notification, or else the student can be sued for the full amount owed.
Setting up Payments
If the large lump sum is too much for the student to handle, the company may be willing to set up a new payment plan in consultation with the student. Such a plan may take into consideration the student’s current income and a reasonable monthly payment over the course of several years. The plan may directly address the amount owed, but more often than not, it is merely an agreed portion of the student’s income for an extended period of time. After 20-25 years, whether the owed amount is paid off or not, the debt is considered settled and no more is owed.
Defaulting on a federal student loan can have very serious effects on an individual’s credit and negatively impact their ability to get car or home loans in the future. If at all possible, students should attempt to stay on top of their monthly payments or work out an agreement with the student loan company before default occurs. If this is not possible, though, any of the above options may protect them from greater financial ruin.
