Want to know how to consolidate defaulted student loans?
Many times, student loan borrowers reach out to me to find out the best way to get out of default loan consolidation, settlement or rehabilitation.
Without knowing more about them, it will be almost impossible to say what’s the right decision for them. Before I answer that question, I’d like to know the age of the borrower, what’s their loan balance, whether they’re under an active wage garnishment, what federal loan type they have, etc.
But what if the loan borrower is 25 years of age with a USD30,000 student loan debt. Then settlement is best if they can come up with 85 percent of the loan balance in 30-90 days. And if they can’t, loan rehabilitation makes more sense than consolidation because rehabilitation may allow the borrower to have their collection fees forgotten.
In between these two cases is a bunch of other people trying to decide whether to consolidate out of default or not.
In this post, I’ll reveal to you factors you need to consider to help you make the most of your situation.
But first, let’s examine a few things.
You Consolidate Federal Loans Out Of Default…Not Private Student Loans
Generally speaking, loan consolidation involves taking one federal student loan and combining it with another federal student loan to create a new consolidation loan.
While it is true that you can make a combination of one private student loan with another private student loan, that process isn’t known as consolidation. Rather, it’s known as private student loan refinancing.
Loan consolidation is a means to get federal student loans out of Default that is not based on your credit worthiness. This means you can consolidate your federal student loans regardless of what your credit score looks like.
So, if you’re still searching for – how to consolidate my defaulted student loans, this might be the answer to your problems.
How To Consolidate Defaulted Student Loans In 5 Easy Steps
The process of how to consolidate defaulted student loans is quite simple.
Create An Fsa Id
You should already have your Federal Student Aid ID if you are logged into the National Student Loan Data System.
However, if you don’t already have it (or forgot the password) you can simply create an FSA ID by visiting fsaid.ed.gov.
IMO, the simplest means to consolidate defaulted student loans is to submit the consolidation application online at studentloans.gov.
As soon as you login, you will be taken to this screen:
From there, click on the tab that says “Apply for Loan Consolidation”.
You’ll then be taken to the start screen.
Pick Which Loans To Consolidate
Choosing which loans to include in your consolidation can be a complicated decision if you work for non-profit or the government or have Parent Plus Loans.
Consolidation invents a brand new loan with its own payment history. So if you’re a teacher or a non-profit and you’re trying to get your loans forgiven under the Public Service Loan Forgiveness program, consolidation will cause you to lose months you’ve earned toward loan forgiveness.
And if you have defaulted Parent Plus Loans, consolidating your Parent Plus Loans with your non-Parent Plus loans will exempt you from the best student loan repayment plans. This is because a Direct Consolidation loan that paid off a Parent Plus loans is eligible only for the income-contingent repayment plan. It is not eligible for IBR, REPAYE, and PAYE, all of which lead to lower payments.
Another factor to put into consideration if you have federal loans that you’re close to paying off is to include those federal loans in your consolidation or if you should just keep them where they are and pay them off.
Choose Your Loan Servicer
As earlier stated, Consolidation is the one time you get to pick which loan servicer you want to work with.
So, if you didn’t like your experience with FedLoan or Navient choose Great Lakes, Cornerstone, or Nelnet.
Public Service Employees
For as many of you who work for the non-profit or the government, your servicer is already picked for you – FedLoan. They’re the only servicer authorized to take care of the Public Service Loan Forgiveness Program.
From experience, they’re pretty much the same. While I have found Navient easy to work with and their written communication to be somewhat clear, I’ve discovered that their representatives sometime give misinformation. And that’s true of my experience with other loan servicers.
Complete The Loan Consolidation Application
Now that you’re sure of which loans you want to include in your consolidation, it’s time to complete the application process.
To execute that, you’re going to require:
- Your driver’s license number
- 2 references (name, address, number, and relationship)
- Your employer’s name, address, and phone number
About Your References
You need not worry about them being called about your loans being in default.
The DOE wants two references to call in case you default again.
After you provide that information, you’ll be asked to get your adjusted gross income from the IRS website.
If you filled a tax return in the past two years, you’ll be able to get your AGI so long as you remember your address and filing status. However, if you haven’t filed a recent tax return or you do not remember your status, then you’ll have to submit your income information to your new loan servicer.
Submitting Your Income Information
I recommend paying stub with the income-driven repayment application or fax your tax return to the servicer handling the consolidation and then following up 2 days after to confirm if they got it. The last thing you need is for your consolidation to get rejected because they didn’t get your income information.
Dangers of Federal Student Loan Default
As a reminder, you default on federal loans after 270 days of missed loan payments. Once you default, the government can garnish your wages, offset your tax refund, offset your Social Security Benefits, and deny you financial aid. And they can do those bad things to you without a court order.
On the other hand, private loan refinancing generally isn’t an option for private student loans that are in default.
This is because private lenders typically look at the credit score of both you and your co-signer to decide whether to refinance your loans or not. If you’re delinquent on your student loan payments, your credit score will be dented, and it will be extremely hard to locate a lender willing to refinance your loans.
The Cons Of Consolidating Defaulted Student Loans
I know your search for how to consolidate defaulted student loans brought you here, it is also vital to educate you about the risk of consolidating defaulted loan:
- Collection Fees are Added to Your Student Loan Debt
- Lose Credit Towards Public Service Loan Forgiveness
- Lose Eligibility for Income-Driven Repayment Plans
Let’s go through each danger in more detail.
Collection Fees Are Capitalized During Consolidation
The instance you defaulted, the government adds collection fees to your account.
When you look closely at your loans on the National Student Loan Data System, you won’t see the collection fees added in your loan balance. To discover the amount of collection fees that have been added to your account, you’ll first need to contact the collection agency handling your loans. They’ll send you a letter showing the “actual” breakdown of your loan balance.
Consolidation takes those accrued interest and collection fees and adds them both to your existing principal balance. This process is called capitalization.
Capitalization can lead you to owner twice or triple what you initially borrowed.
This can be avoided by entering into a loan rehabilitation agreement. Generally, at the end of your agreement, the government will forget the collection fees.
Consolidation Restarts The Public Service Loan Forgiveness Clock
A consolidation loan is a new loan with no history of payment. And because it has no payment history, you forfeit all credit you’ve already earned towards student loan forgiveness under the Public Service Loan Forgiveness program or one of the income-driven repayment plans when you consolidate.
Loan rehabilitation just pauses the credits you’ve earned towards forgiveness. As soon as your loans are out of default, you’ll continue from where you paused in terms of the number of payments you need to get loan forgiveness.
Avoid Consolidating Defaulted Parent Plus Loans
If you have defaulted federal student loans you borrowed for your kids and federal loans you borrowed for your studies, avoid consolidating those loans together.
Combining defaulted Parent Plus Loans with other federal student loans leads you to lose eligibility under the income-driven repayment plans that comes with the lowest monthly payments.
The wisest thing to do in that situation is to get 2 consolidation loans: one for your other defaulted federal student loans and the other for defaulted Parent Plus Loans.
The Benefits Of Consolidating Defaulted Student Loans
Consolidating defaulted student loans lacks dangers, but it also features lots of benefits.
Here are 6 of those advantages.
Federal Loans Get Out Of Default Quickly
It is no news that consolidation frees you from default about 3x faster than loan rehabilitation. Therefore, if you need to get out of default fast to keep your tax refund or to raise your credit score to purchase a home, then consolidation is the way to go.
From start to finish, the consolidation process takes about 2-3 months to finish.
You can fasten the process by doing 2 things. First, after you submit your consolidation application, call your servicer to make sure they get your paperwork, including your income information.
Second, a couple of weeks into the process, your servicer will send you a loan summary statement. That statement explains which loans will be included in the loan consolidation, an estimate of your loan payments under various repayment plans and your new loan balance.
You have up to 10 working days to review that statement. You have the permission to waive that review period. To do this, kindly contact you loan servicer and let them know that’s what you want to do.
Make Progress Towards Loan Forgiveness Faster
Any payment you make on your federal loans while they’re in default is not counted towards any of the loan forgiveness program.
This prohibition also features payments you make under the loan rehabilitation program. Those 9 months of payment only counts towards moving out of default. They do not count towards loan forgiveness.
So, if you’re going after forgiveness under the PSLF Program, consolidation will get you earning credit faster than loan rehabilitation. But remember, consolidation also makes you lose any credit you might have already earned.
Get One Loan Servicer For All Your Federal Loans
About 60% of my blog readers, who started college before 2011, have loans with various loan servicers.
They have some loans with Nelnet. Some with Navient. And still others with their school.
Keeping up with their loans is a pain in the butt.
In reality, it really is, that it often causes them to default. They just don’t have the time to keep up with who their loan has been sent to.
Consolidation rids you of the problem.
Once consolidation is complete, you’ll have 1 loan servicer for your loans.
You Get To Pick Your Loan Servicer
Do you dislike the loan servicer who had your loans before you defaulted?
Pick a different servicer when consolidating.
Consolidation offers you the chance to pick which company you want to work with to make your payments.
You’re probably wondering which servicer we’d recommend.
Truth be told, no loan servicer is perfect. They each come with some fair share of headaches. That being said, I like Great Lakes and Nelnet. But that’s because I think the messages they send borrowers are much more informative than the other servicers.
Raise Your Credit Score Faster
Note: I cannot guarantee your credit score improving quicker with consolidation than with loan rehabilitation.
All I have are the comments I derive from clients. My clients who escaped the depths of default via loan consolidation agreed that their credit scores improved about 2 months after the consolidation completed.
My loan rehabilitation clients also stated that they don’t begin seeing improvements until after they make the last of their monthly payments.
Now, that you know how to consolidate defaulted student loans, let’s check out what happens to your CR after consolidation of defaulted student loans.
What Happens To Your Credit Report After You Consolidate Defaulted Student Loans
A consolidation loan clears away student loan debt for the loans added in the consolidation and includes a new loan to your credit report.
Your credit report should reveal a $0 balance for each included loan. And those loans should show they were paid completely. The default status and the late payment history, will remain.
Types Of Student Loans Eligible For Consolidation
Many of the federal student loans around you are eligible for consolidation.
And some of those loans have the added bonus of not requiring combination with other student loan debt in order to consolidate.
Confused? Let me explain better.
Let’s say the only federal student loan you have is a consolidation loan made under the FEEL program.
You work for the government and want to qualify for the Public Service Loan Forgiveness Program.
Currently, the FFEL consolidation loan doesn’t qualify. (Only Direct Loans qualify for the PSLF program.)
To qualify, you only need to consolidate your FFEL loan into a Direct Consolidation Loan.
True, you’re not combining student loan debt. But you are using the consolidation process to turn your non-Direct Loan into a Direct Consolidation loan so you can get your debt forgiven for working in a public service job.
This process works great for other types of non-Direct Loans as well.
What do you need to know about your student loans to apply for consolidation?
Let’s break this into two steps:
- finding out who has your loans and then
- finding out what’s going on with your loans
How To Find Out Who Has Your Defaulted Student Loans
Knowing everything about your federal student loans is the safest, wisest and first thing you should do.
The simplest way to achieve this is by visiting the National Student Loan Data System.
The NSLDS website will tell you:
- How many federal student loans you have
- How much you owe in interest and principal (it won’t tell you what you owe in collection fees)
- The interest rate on your loans
- The payment history and status of your loans and
- Which company has your loans currently
As soon as you have that information, the nest thing to do is call the company that has your defaulted loan(s).
For many individuals, the loans will have likely been sent to the Department of Education’s Default Resolution Group.
You can contact the DRG by calling them at 800-621-3115.
When you call, the automated system will ask you for your SSN and DOB.
From there, the system will tell you which collection company has your defaulted loans.
Call that company and confirm they have your loans and, more importantly, which loans they have.
On some occasions, I have discovered that they may not have all of your defaulted student loans.
If this is true for you, call DRG one more time and this time skip the automated system by pressing “0”. The live attendant should be able to tell you who to contact about your other loans.
Discover What’s Going On With Your Defaulted Student Loans
With your loan holder already tracked, you want to know the status of your loans.
Here’s the list if questions I ask the collection agency rep:
- What’s the current balance
- What’s the borrower’s account number
- Is the borrower eligible for loan rehabilitation and
- Has a garnishment order been sent to the employer? If not, has a notice of proposed garnishment been sent to the borrower?
The answer to the last question is most important.
If a garnishment order has been sent to your employer, then you most likely won’t be able to consolidate the loan out of default.
The government has a rule that says you can consolidate federal loans only if their not under a current garnishment.
Consolidate Defaulted Student Loans Under Garnishment
A couple of time I have been able to successfully consolidate federal loans while the employer was processing the garnishment order. The key ingredient here is to move fast!
In practice, you’re under a current garnishment as soon as the garnishment order has been sent out to your employer. And that’s true even if your employer hasn’t taken the money out of your pay yet.
Your only option to get out of default at that period is filing a chapter 13 bankruptcy or the loan rehabilitation program
When Do Monthly Payments On Defaulted Consolidated Student Loans Start?
Your consolidation should complete in approximately 2 months. Your monthly payments on your new consolidation loan should begin about a month or 2 after that. Until then, your loan will be in an administrative forbearance. You won’t have to make any payments during this period, but interest will be accumulating.
When is the student loan default status removed from my credit report after consolidation?
The time you consolidate, the default will remain on your credit report.
This is because consolidation doesn’t take away the default status or any other negative information from your credit report.
Rather, the consolidation loan will be added to your credit report as a new loan. Your old student loan debt will report as paid off.
Consolidation Loans And Credit Reports
After consolidation, your credit report will likely show 2 new loans in your name. Relax, and do not fear, it’s just one loan broken into 2 portions: the subsidized portions of the loan. The government pays some of the interest on the subsidized portion; The government does not pay interest on unsubsidized loans. That’s your responsibility.
So if you’re worried about fixing your student loans to improve your credit score, explore the loan rehabilitation program.
What are The Benefits Of Working With An Attorney To Help Consolidate Defaulted Student Loans?
The truth of the matter is that you can consolidate your student loans by yourself FREE OF CHARGE. You don’t need to hire anyone to complete and submit the application for you. As I’ve explained and revealed in a step-by-step guide above, for federal loans that’s easily done at studentloans.gov.
But the reason why you’d want to get professional help is to make sure consolidation doesn’t put you in a worse position — especially if you’re a public service employee and you’re seeking loan forgiveness.
From my knowledge and experience, student loans have too many tripwires to try and handle on your own without an experienced guide.
We hope you now know the ups and down about the process of how to consolidate defaulted student loans and we have answered the question – how to consolidate my defaulted student loans.