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Nine Low Payments to Heal Student Loan Default

Posted By:  |  June 20, 2014  |  0 Comment(s)

Beginning July 1st, graduates who defaulted on their Federal student loans will have a chance to redeem themselves, get back on track and even heal any damage already suffered on their credit report. It’s the best news – and the biggest change – in student loan programs since graduate’s trillion-dollar debt burden became headline news.

The “rehabilitation” program is based on present income, and can be as little as $5 a month. Borrowers must agree to make nine payments in a ten-month period. The monthly amount is calculated using the Federal loan program’s Income-Based Repayment formula already in place. After ten months of successfully meeting the program’s requirements, a request for reinstatement from default to repayment status can be submitted. Income documentation will be required for those requesting payments under the 15% rule. This will ease the pressure on borrowers whose negative credit report has threatened wage garnishment, or impacted their chances for government jobs and qualifying for graduate school loans, or prevented them from obtaining licenses in certain professional occupations.

The change comes about because the “reasonable and affordable” standard was simply not uniform across all loan guaranty agencies. Agencies were free to decide what “reasonable and affordable” meant to them. Borrowers were subjected to a program that at times seemed arbitrary and even predatory. One student who owed the same amount as another might pay $200 a month, while his or her friend paid just $95 a month.

Sometimes it’s difficult to avoid default in the first place. Those not already in default may be able to switch to a new extended payment plan or take an allowed break if experiencing a temporary hardship. Borrowers should check with loan servicers or with Federal loan agencies to get more information. For some student loan, changes in payments may not be available until December 2015.  Once on the rehab plan they should be sure to renew it each year, as income-based payments can change. The new changes offer a new lease on life, as it were, giving graduates a better chance at building lives and careers.



  • How important is it to you for a debt consolidation company to offer financial education resources?
  • Takes your existing debt and try to settle with your creditors for a lower amount. If you pay off the settled amount, your debt will be considered paid in full.
  • Negotiates with your creditors on your behalf.
  • Fee based on a percentage of your total starting debt or a percentage of the debt they save you.
  • Most settlement companies have you create a separate "escrow" account where you will make monthly contributions over a certain amount of time to contribute to your settlement. Once there is a substantial amount of funds to show your creditors, the settlement company will try to negotiate a lower amount of debt.
  • Combines all your debts and creditors into one monthly payment.
  • Allows you to pay one monthly payment to the consolidation company, instead of multiple payments to different creditors.
  • You no longer owe your original creditors; instead you pay one monthly payment to your consolidation company.
  • Consolidation companies can help negotiate lower interest rates on your debts and help lower your total debt payment in the long run. A lower interest rate will lower the amount you owe in the end.
  • Allows you to consolidate all your different debts into one personal loan that can be paid off over time.
  • Can offer borrowers a lower interest rate with a longer payback term (compared to high-interest credit cards or medical bills). This will lower the amount of money required to pay off the loan over time.
  • Personal loan debt consolidation can be an effective way to raise your credit score quickly (within 3-6 months).
  • Borrowers can receive funds from their loan within only a few days.

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