The first thing that cross your mind when comparing student loan rehabilitation vs consolidation might be that, “if I had a pile of cash laying around, I wouldn’t be in this condition, now would I?”\
Therefore, it might be safe and best to rule out the easiest means to get out of federal student loan default: paying off your debt totally, with one huge lump sum. Rather, we’ll consider 2 other, maybe more realistic, methods to remove the default status from your college debth: consolidation and rehabilitation.
Student loan rehabilitation and consolidation reach the same end but by different ways, so let’s review them to see which one might be most advantageous for your situation.
What Happens If You Go Into Default?
As soon as your loans into default, the complete balance is immediately due and payable; you need no longer have repayment options over time. Aside this, you’re ineligible for any other federal aid until that balance is paid, and your default is also reported to the three major credit bureaus.
>> Read More: Options If You Can’t Pay Your Student Loans
Your credit score will significantly drop, and you could find yourself unable to be hired for many different jobs, or face some hardship purchasing a house or even simply renting an apartment.
Default is not a small issue- and it can affect a lot of things in our lives aside just credit rating, including your federal income tax refund, which may be kept by the government to pay your debt.
If you’re already in default, however, there are options that can help you get out of your predicament easily. Two of the popular ones are student loan rehabilitation program and student loan consolidation program.
Dealing with student loan default
A default happens when you’ve allowed at least 270 days pass without making a payment on your federal student loan. At that stage, the balance “accelerates, meaning that it quickly becomes due in one big chunk.
Avoiding a default, if at all possible, is the best option, since it will sidestep other serious consequences, including
- Your loan servicer could place your loan with a collections agency.
- You could lose your driver’s license or other state-issued, professional licenses.
- Your wages could be garnished, or you could be sued in court.
- Your tax refund or Social Security benefits could be withheld.
Via a loan consolidation or rehabilitation program – or, yes, paying off the debt completely – you could eradicate the default and its consequences. This is what we examine in this student loan rehabilitation vs consolidation program.
For example, both consolidation and rehabilitation can allow you to regain past forfeited benefits, such as:
- Eligibility for deferment and forbearance
- Access to loan forgiveness programs
- Ability to switch repayment plans
Only via loan rehabilitation, however, would you be able to eradicate the record of default from your credit history. That’s where the differences between the repayment strategies begin.
Student Loan Rehabilitation VS Consolidation Program
Student Loan Rehabilitation
For student loan default, rehabilitation is the most difficult means to remove a default status becaue it’s the longest – but it’s also the most rewarding.
With the government’s student loan rehabilitation program, you would be permitted to make 9 loan payments within 10 months – that’s on top of, not in place of, wage garnishments or collection costs you might be forking over at the same time. (Perkins Loan holders are given only 9 months to play catch-up).
Your loan servicer would set the payments amount per month to no more than 15% of your discretionary income. If your income on the low end of the spectrum, or if you can prove you have other exceptional but necessary expenses, your payment could be as little as $5.
But before we check out the advantages and cons of this method, but, note that student loan rehabilitation programs are rarely offered by non-governmental lenders. With private lenders, you might to stop loan payments through forbearance, but you’ll first want to speak with your lender’s customer service to review all of your options.
Pros of student loan rehabilitation
Temporarily reducing your payment per month is a positive here, but what occurs after student loan rehabilitation?
Taking the default loan away from your credit report is the major benefit. But remember, that, any missed or late payments that occurred before the default will remain on your credit report for up to 7 years.
Yet, shedding the default from your report is a huge win. It would make your credit score better, making you a more viable candidate for student loan refinancing or a home mortgage, among other common forms of borrowing.
Student Loan Rehabilitation Problems
Apart from the cost and the 9-10 months it could take up to 9-10 months it might take you to achieve, loan rehabilitation comes with another unwelcome catch: It’s a 1-time deal. You can only rehabilitate a defaulted debt once.
If you default a 2nd time – and sadly, a lot of borrowers become stuck in a default cycle- you would need to resort to loan consolidation.
Now, before going for rehabilitation, confirm that you can afford the frequent monthly repayment that begins after your 9-10 month rehab. If the amount seems like too great of a burden, you might be wise to switch repayment plans.
Student Loan Consolidation
A quicker means to get your loans out of default is to consolidate them into one new loan that pays off your original debt. It takes less than 30 minutes to apply for a Direct Consolidation Loan, and there are no application fees.
To simply qualify, you should agree to repay the consolidated loan on an income-driven repayment (IDR) plan or make 3 full monthly payments before consolidating.
An IDR plan would tie your future monthly payments to a percentage of your discretionary income.
The three-payment approach, albeit more costly upfront, would allow you keep your present repayment plan. That might be a great idea; if for instance, you’ve already made headway toward Public Service Loan Forgiveness (PSLF) and don’t want to reset the clock, which would happen if you switched your payment plan.
Now, let’s check out the advantages of student loan consolidation in this student loan rehabilitation vs consolidation.
Pros of student loan consolidation
Consolidating is an attractive option for a lot of borrowers, not just those encountering a default. Among the possible advantages of this approach include but not limited to:
- Simplifying your repayment to a single monthly payment
- Gaining eligibility for IDR plans
- Picking your new federal loan servicer
- Lowering your monthly payment by extending your repayment term
In addition to this, if you default on your new Direct Consolidation Loan, you might re-consolidate it if you have another loan to pair with it. Otherwise, you’d have to go back to loan rehabilitation if payment in complete isn’t possible.
Cons of student loan consolidation
Cons of irreversible loan consolidation include:
- Lengthening your repayment term, which allows interest to accrue, making your loan more expensive
- Losing credit for past, qualifying payments toward PSLF
- Yielding benefits specific to your original loans, as they might not carry over to a Direct Consolidation Loan
There are also disadvantages of consolidation that are specific to existing a default. Most importantly, the default itself, as well as any late payments, will remain on your credit report for up to 7 years. That’s the most significant difference from what happens after student loan rehabilitation.
Plus, you would not be eligible to consolidate your defaulted debt until any wage garnishment or court order has been lifted – another big difference with loan rehabilitation.
Student Consolidation loan vs. rehabilitation: Which is right for you?
Let’s examine some huge comparison in this student loan rehabilitation vs consolidation program. You set? Let’s go!
Having your federal student loans in default is an urgent situation, but it can be solved. Short of a financial windfall that wipes away your debt, you can either take advantage of loan consolidation or rehabilitation to set things right.
Picking between consolidation and rehabilitation is the first task. To make the best decision of your repayment, ask yourself what matters most.
If your personal finance goals are ambitious, such as buying a home in the near future, walking through the longer path of loan rehabilitation might be worth the time and reward of cleaning up your credit report. Just be prepared for the long painful and challenging slough, plus the resumption of your larger, post-rehab monthly payment.
On the other hand, if permanently reducing your payments and simplifying your obligation per month is a priority, a Direct Consolidation Loan could be the better choice for ya. Your default would stick ti your credit report much longer, however, you’d have a more gradual path to ending your debt. Remember, that, you’d have to get out of collections before you can tap this option.
If after reading these student loan rehabilitation vs consolidation program comparison, you’re still not sure about the best path to follow, it never hurts to ask for guidance. The team at X11s would be happy to guide you. Reach us now for a free consultation service.