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  • Rafael Ulloa

Consolidating your Student Loan debt

Consolidating your Student Loan debt

College is a great experience ‐ one when you begin forging a path in life that is unique to you. You are faced with loads of fun as well as many big decisions without parental supervision. Among those decisions are your financial choices ‐ and many students opt to accept loans to pay for that education.

However, Student Loan debt has surpassed Credit Card Debt in America and is now the second largest source of personal indebtedness.

Millions of American's graduate college but do not make the amount of money they need right away.

When you default on federal student loans, the consequences are severe and can affect several areas of your life. You may experience consequences that include:

Wage garnishment: The Department of Education can garnish up to 15 percent of your disposable pay. Unlike private collectors, the Department of Education does not need a judgment to garnish your income.

Your balance increases: Your remaining balance immediately becomes due once you default. Unpaid interest and collection fees may also be added to your balance. The latter is especially true for borrowers with FFEL loans.

Reduced credit score: Loan servicers will report you to the three credit agencies if your loans remain delinquent for too long. You are also reported to the three credit agencies after defaulting. This can significantly lower your credit score. Having a low credit score can make it more difficult to secure employment, housing or other lines of credit.

You lose eligibility for financial aid: You are not eligible for federal financial while your loans are in default. Defaulting on your loans may cause problems if you plan on returning to school.

You lose eligibility for repayment plans: One of the major benefits of most federal student loans is that you can take advantage of income-driven repayment plans. You lose these options after defaulting on your student loans. In addition, you also no longer qualify for economic hardship deferments or forbearance.

Can I Get My Student Loans Out of Default?

Depending on your situation, it may be possible to get your federal student loans out of default.

Borrowers generally have two options available ‐ the Education Department's loan rehabilitation program or converting your loans into a Direct Consolidation Loan.

Both options may have pros and cons that are dependent on your individual situation.

If you choose loan rehabilitation, Loan rehabilitation requires you to make a series of installment payments. You must make a minimum of 9 voluntary, qualifying installment payments on time for the full amount due. And to be on time, the payments must be received within 20 days of the due date. Additionally, to qualify for the loan rehabilitation programs, you are required to provide the Education Department with supporting financial documentation.

The payments must be made within a period of 10 consecutive months, beginning with the month of the first payment due date. However, if you are trying to rehabilitate a Perkins loan, the 9 payments must be made within 9 consecutive months.

You can only use the loan rehabilitation program once. Once your loans are taken out of default, you may qualify for repayment programs. In addition, records of the default can possibly be removed from your credit report.

Your second option is to consolidate your defaulted loans into a Direct Consolidation Loan. This will consolidate your loans into a single loan with a fixed interest rate. By consolidating your loans, you can exit default within a period of months instead of years.

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