When you fall behind on your federal student loan repayment, it feels as if there’s no good news. Collectors call day and night, and the threat of wage garnishment looms large.
Each month, the payment amount due soars. Finally, you throw up your hands and figure there’s no sense in fighting the federal student loan monster.
Once you’re past due 270 days, your federal student loan slips into default. And with that, the government ramps up collection efforts.
The IRS sends your tax refund to the US Department of Education. Your employer withholds part of your income and sends it to the student loan people too.
Then you find out about rehabilitation, and how it can fix the default on your federal student loans. You feel the weight lift from your shoulders as you realize there’s hope for your student loan troubles.
But you get only one shot at rehabilitation, so make sure your don’t screw it up.
Make one mistake and you’ll find that your federal student loans fall back into default. Here are some tips to help make your rehabilitation a successful one.
Enter Into a Verbal Rehabilitation Agreement
When you decide to rehabilitate your federal student loans, the debt collector will likely try to get you to agree to it over the phone.
That’s a huge mistake because if there’s a disagreement later, you’ve got the old, “he said, she said,” problem.
The US Department of Education has a written application used by all the student loan collectors. Use it to make sure you keep the lines of communication clear between you and the debt collector.
Make Mistakes on Your Written Application
The rehabilitation application is just a few pages long, and it seems pretty simple. You may think you can breeze through it.
That wouldn’t be a good idea.
The application determines how much money you’ll pay each month for your rehabilitation. Make a careless mistake and you could find yourself with a failed rehabilitation.
Accept The Payment Amount Without A Fight
By law, your monthly rehabilitation payment has to be set at a reasonable and affordable amount. That’s usually the same as the amount you’d pay under one of the federal income dependent repayment plans, but not always.
For example, if you’ve recently experienced a change in your income or expenses you need to let the collector know.
Use the application as a starting point, but don’t accept the payment amount if you can’t afford it.
Fail To Review The Collection Costs In Advance
Federal regulations allow collection agencies to add their collection costs to the loan amount. But the regulations don’t force the collector to add them.
In fact, you may have some leverage when it comes to negotiating collection costs on your federal student loans.
When you rehabilitate your loans it counts towards the collector’s performance ratings. It also means the collector has one less person to call for money each month.
If you negotiate with the collector before your rehabilitation, you may get them to lower the collection costs.
Keep Incomplete Records
Under federal guidelines you need to make 9 monthly payments under your rehabilitation agreement. If you do then your loan comes out of default and the government brings it back into good standing.
If you miss a payment or make a late payment then the money will be gone but your loan will still be in default.
The collection agency can also make a mistake by not crediting your account the right way. If that happens, you won’t get the benefit of the doubt – your loan will sink back into default and the money you’ve spent will be gone.
The simple fix is for you to keep copies of your cancelled checks or bank statements showing the payments. If there’s ever any doubt about your payments, you can breathe easy because you’ve got the paper trail.
Make Fewer Payments Than Required
Under the federal student loan rehabilitation guidelines, you must make 9 monthly agreed-upon payments.
You’ve got to make those payments on time.
If you don’t follow the rules then your loans will remain in default. Your rehabilitation will fail, and that’s a shame.
Make all your payments on time. Period.
Ignore Your Credit Report
One of the major benefits of rehabilitation is the fact that your credit report will get cleaned up. The government will remove the default, and it will be as if you were never past due.
But mistakes happen, and it would be terrible to find out about it after a creditor denies you a mortgage or a car loan because of the default.
Take the time to pull your credit reports every six month to make sure that there are no errors. And if you find an error, don’t panic – just use the process to have it investigated and fixed.
Elect Standard Repayment After Rehabilitation
The Department of Education will transfer your loan to a new servicer when you finish your rehabilitation. When that happens, you’ll have the option to choose a repayment option.
If you choose not to select a repayment option then the servicer will place you into the standard 10-year plan.
You should look into the other options, including income dependent plans, that may save you money each month. Those programs may also set you up for a discharge of your unpaid balance after a period of time.
If you’re lazy and go with the standard repayment plan then you’ll end up costing yourself more money each month.
Miss Payments After Rehabilitation
You get one shot at rehabilitation during the life of the loan.
If you miss payments after your rehabilitation then you may go back into default.
Your only option for getting out of default a second time is consolidation under the Direct Loan Program. If you’ve already consolidated, that’s off the table as well.
If you go into default a second time then you’re at increased risk of wage garnishment, tax refund offset, and more.
If you think you’re going to miss a payment on your federal student loans then you need to look into your options fast. But if you do the hard work, you won’t have to worry about that ever again.
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