In the Penalty Box: How to Get Out of Student Loan Collections

Who hasn’t heard a student loan horror story? They all begin the same way: A hopeful graduate leaves their institution with big dreams and bigger loans. They land an entry-level job that just barely pays for their room and board, and somehow manage to make ends meet during their six-month grace period. When the period draws to a close, however, they scramble to make their meager budgets allow for the minimum monthly payments for the $80,000 they borrowed to afford tuition — and fail. As they fall farther and farther behind, they find themselves slipping into default and losing their savings, home, and sometimes even their jobs.

No graduate wants to consider becoming a cautionary tale for loan-eager students. That said, falling behind on student loan payments is a real and present danger for many grads, and can lead to default, collections, and even bankruptcies. According to statistics provided by CNBC, 4.2 million American borrowers were in default as of the end of 2016 — a full 1.1 million increase from the same time in 2015. In September, the Department of Education reported that the federal student loan cohort default rate for the graduating class of 2014 is 11.4%. Think about that: more than one out of every ten students in the class of 2014 has fallen into default on their federal student loans — and that number doesn’t take into account those borrowers who struggle to repay notoriously severe private loans.

A graduate falls into default once they fail to make payments for 270–360 days. If the borrower continues to avoid repayment and fails to reach out to their loan servicer to rectify the problem, they may then be sent to collections — at which point the whole balance of the loan comes due. The lump sum balance isn’t the worst of a borrower’s problems, though; an account in collections can accrue fines up to 40% of its balance and leave its owner with a years-long black mark on their credit report. Borrowers in default are also rendered ineligible for federal financial aid programs and loan deferment opportunities. However, all is not lost; while exiting collections can be difficult, the task is not impossible.

Rehabilitation

Many borrowers avoid their financial loan officers out of fear — but doing so is the worst course of action you could take! Borrowers in collections can reach out to the Department of Education and work with a representative to build a repayment plan. After a certain number of timely payments, the borrower may find their account rehabilitated and removed from collections.

Consolidate Your Loans

Loan consolidation combines a borrower’s loan into a lump sum with a single interest rate, which often makes the owed amount easier to repay. Loans in default can be combined, although a borrower may have to make a few payments before a defaulted loan is eligible for consolidation.

You always have options. Reach out to your loan servicer today to set a detailed payment plan!

*Originally posted on JasonSpencerStudentLoans.com