You are subject to various collection enforcement methods, such as wage garnishment and back account or tax refund seizure, if your student loans are in default. Default occurs when you do not pay on a federal student loan for a period of 270 days, or a private student loan for 120 days. You cannot defer, or freeze the payments, on a defaulted student loan, but you may be able to consolidate the loans to get out of default.
Function
You can consolidate (combine all of your outstanding loans into one loan) a defaulted loan through the Federal Direct Consolidation Loan Program. You must have a least one direct loan---generally a federal subsidized or unsubsidized loan, such as a Stafford loan---or one Federal Family Education Loan, a federal loan your parents took out for you, to qualify.
Effects
Your overdue loans are no longer in default once you successfully consolidate; collection actions cease and you are once again eligible for financial aid if you wish to go back to school. The original loans are paid off with the proceeds from the new loan, and your payments start over. The amount of money you pay per month on the consolidated loan depends on your income. You may be eligible for a deferment or forbearance---the halting of your loan payments because you are back in school---after consolidation.
Considerations
You must either make a repayment agreement with the defaulted loan creditor or select the Income Contingent Repayment Plan for the consolidated loan to use the federal consolidation program. The Income Contingent Repayment Plan bases your repayment amount on what you make. The second repayment option, Income-Based Repayment, is not available to you until after you consolidate. IBR bases your payment on both your income and family size, resulting in lower payments for those with dependents.
Misconceptions
Student loan debt is rarely discharged in bankruptcy, the federal filing that allows you to wipe out debt, or make a repayment plan with your creditors under court protection. A defaulted student loan affects more than just your finances. Any applications made for a professional license can be denied because of a defaulted loan. Persons with defaulted federal loans are not permitted to enlist in the armed forces until the loan is addressed.
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