Dealing with default
November 4, 2007 8:34 PM   Subscribe

I defaulted on my student loans and I want to know the best way to pay them back.

My student loan is in default. I have a job. I also have enough money saved up to pay it all back right now in one payment. (I know this is a pretty dumb way to pay off a loan but I'm just trying to work with my present situation since I can't go back in time.)

What do I need to know before paying it back? I'm wondering if I'll be able to negotiate some sort of deal to lessen the damage done to my credit report. Is this avenue worth pursuing or should I just send them the money ASAP? If so, what resources do I need to consult to get more information? Is there someone I can pay to act as my advocate in dealing with the lendor?

(Anon contact -
posted by anonymous to Work & Money (9 answers total) 9 users marked this as a favorite
They can retroactively take you out of default if you have any deferments or forbearance periods left. You just have to call the lender and discuss this. Once they have retroactively taken you out of default, pay it all off.

I suggest this because it seems that it would be advantageous to pay it off when you are not in default. (Otherwise you might have the "default" mark on your credit history for some time.) Others may have better, more straightforward suggestions.
posted by jayder at 8:44 PM on November 4, 2007

I am familiar with someone's similar situation. You can have your loan bought out and consolidated through the government. Go here.

I believe with this, there is an option that will allow you to pay it either in one shot or in installments and subsequently, the default will be completely removed from your credit report after a year or sooner.
posted by cmgonzalez at 8:55 PM on November 4, 2007

I am not a financial expert. At all. I had a student loan in Canada go to collections as well, though. I suggest you pay it off completely tomorrow, since you have the money at hand, and place a note on your credit report saying that the debt was paid in full as agreed as soon as you were notified.

The reason I say this is because I know from experience that the torment of being in default and dealing with collection agents on top of the typical mental burden and stress of being in significant debt is not worth shouldering for even a moment longer than you should. Life is just too short. Your peace of mind is so much more important than having a wad of cash in the bank. And you never know what might happen to that money in a month or a year -- you may really regret using it for some other reason while you're still under the dark cloud of debt.

You are in a fortunate position -- most people who end up in your situation don't have the cash right there to pay it off and be done with it. I didn't, so I got a line of credit to pay the loan off, and I'm still paying the line of credit, but it's in good standing, so at least now my credit is getting better and better.

Whatever you do, for godsake, don't run and hide from it. Trust me, it just doesn't feel any better and it will never just go away.
posted by loiseau at 9:11 PM on November 4, 2007

Some guarantors will work with you to put your loans in Rehabilitation. This is cool, if you can get this, because once you show that you can make a certain number of payments (and then, in your case, pay it off), you can get it off your credit report. If you can do this (in the U.S.), this would be the way to go! Often, that's the only way to do that.
posted by ugf at 9:28 PM on November 4, 2007

Go here to find out who is guaranteeing your loans: NSLDS - this is a government site that tells you where your loans are.
posted by ugf at 9:32 PM on November 4, 2007 [1 favorite] takes a little time to figure out but exists to help people with credit issues and is full of people who have similar problems discussing the outcomes of different strategies. I believe there's a forum devoted just to student loan issues. Worth checking out.
posted by salvia at 9:36 PM on November 4, 2007

You may want to start with the Dept of Education; ask them (and/or whoever now owns your loan) about defaulted loan rehabilitation, as ugf suggested. You get put on a payment plan for a set number of months, then if you manage to make those payments on time, they take your loan out of default and may eliminate a hefty chunk of fees and interest. I've done it with two loans (hey, I was stupid in my 20s), one of which took 9 months of payments and the other 12 months, I think.

Can't imagine they wouldn't let you do it in one payment, but who knows the ways of bureaucracy. Also, if you know a financial attorney, you might want to run this by him or her.
posted by mediareport at 12:33 AM on November 5, 2007

What will happen is probably nothing for a couple of years, and then you will get a call from the a federal loan rehabilitation agency that will offer you two options: 1. Have your wages garnished, or 2. Get into a payment program. The latter gets it wiped from your credit report after something like nine months of concurrent on-time payments. Of course, if you can pay it all in one lump sum, that's even better.
posted by Civil_Disobedient at 4:43 AM on November 5, 2007

I just JUST JUST came out of default. Here are your answers:
-They aren't going to "retroactively" take you out of default. You MUST make 6-9 monthly, on time payments to rehabilitate your loan. Even if you offer a one time payment that is equal in size to what you could afford in 6 to 9 months, they won't take you out of default.
-They've tacked on at least 25% in fees to your original amount. Any amount you pay towards rehabilitating your account is LOST, as it comes off the new total, NOT your original amount owed.
-Rehabilitating your account will take it back to pretty status, showing on your credit as though it was never defaulted, and back to the original amount.

What should you do? Depends on how much you owe. Right now you are accruing interest on the defaulted amount MONTHLY, so it shoots up fast.

Usual best bet is to offer to pay something each month. When you call, work out a budget FIRST with rediculous expenses so you don't have to pay a stupid amount, they'll take whatever you can afford, whether it's $50 or $500. Make the agreement with them to pay that much each month, you can even do automatic withdrawal and save a couple points of interest. Then, as SOON as you're rehabed, pay it off. Why not pay if off now? Because you'll be paying 25% or more extra.

Although, if you only owe a little bit, like 5-10k, you might be just as ahead to pay if off now, as 25% isn't so much, and making payments for 6 to 9 months might actually overpay that new fee. If you owe more like 20 or more, I'd do as I mentioned earlier.
posted by TomMelee at 5:17 AM on November 5, 2007

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