As college enrollment continues to increase at a rapid pace, the student loan debt load carried by the average American student similarly continues to grow exponentially. According to Finaid.org, the average student graduating in the 2007-2008 school year carried a debt burden of $23,186. As such, many college graduates who struggle to find employment default on these loans.
Consequences of Defaulted Loans
A defaulted student loan is more serious than defaulted credit card bills. While a defaulted loan will negatively affect your credit and your options when seeking employment, a defaulted student loan may also result in wage garnishment and a decrease in your tax refunds. Defaults may also cancel any other government programs to which you may be entitled---like VA and FHA benefits.
Cleaning Poor Student Loan Credit
A default on a student loan is any account more than 270 days past due. After this point, your credit rating will drop significantly, your wages could be garnished and you could be sued. In order to bring your defaulted loan to a point at which consolidation is possible, you must make at least three consecutive on-time payments (including paying any delinquent charges and back interest).
FFEL
FFELs, or Federal Family Education Loans, are one way to consolidate your delinquent debt. To check your eligibility, review the government's student aid webpage. Loan officers will review your defaulted debts on a case by case basis and determine if you are a worthy candidate for a FFEL loan. Choosing a federal consolidation loan is preferable, as the terms are more favorable than private loans.
Other Options
Before consolidating all defaulted loans into one monster loan, you should exhaust all other methods. Most government-held student loans offer both deferment and forbearance options to struggling students. While these options should be exercised before a loan has defaulted, if you can bring your accounts close to current, you may have luck deferring or placing loans into forbearance.
Private Loans
Choosing the private sector to refinance your student loans is dangerous. Private lenders need only adhere to loose regulatory lending standards, unlike the federal student aid standards. As such, private lenders may charge exorbitant fees and interest rates on huge sums of money, leaving you in a worse situation. Before signing any private consolidation loan, be sure to review the paperwork with both an attorney and CPA to ensure you are going to benefit from the consolidation.
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