Q: Can I consolidate defaulted student loans?

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Stanley tate

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You can consolidate defaulted student loans. The one restriction is that you can't be under an active wage garnishment for the defaulted student loan. A wage garnishment becomes active as soon as the garnishment order is sent to your employer.

Once the garnishment is sent to your employer, a new Direct Consolidation Loan is, in most cases, no longer an option to get out of default.

I say in most cases because I've had some success in consolidating loans for student loan borrowers that have been under an active wage garnishment for 12 months. So far, this has only worked with education loans owned by a guaranty agency. Almost always, these are going to be for federal loans made under the Federal Family Education Loan Program (FFEL).

Other than that narrow exception, the only way to get a federal student loan out of default if student loan consolidation is no longer an option is to enter into the student loan rehabilitation program.

How to consolidate defaulted student loans

The easiest way to consolidate defaulted student loans is to use the U.S. Department of Education's website, studentaid.gov.

This website allows you to consolidate your defaulted loans, choose a repayment plan, and choose a student loan servicer directly through the Department of Education.

The application itself is free, and there's no cost to consolidate your student loans into good standing.

There is, however, one huge cost.

When you consolidate, the collection fees and interest will be added to your principal balance.

This process can increase your overall student loan debt dramatically.

So if your goal is to pay off your student loans quickly, student loan rehabilitation may be a better option.

One other way to consolidate your defaulted loans is to work with the collection agency. The Department of Education's Default Resolution Group and guaranty agencies like Ascendium, Trellis, ECMC, etc. have dedicated representatives that will help guide you through the consolidation process.

The one drawback to working with these companies is that they'll force you to make 3 monthly payments under an income-based repayment plan before they consolidate your loans.

If you go through studentaid.gov, you don't have to make the 3 income-based repayments. You can consolidate right away, so long as you choose to repay your loans under an income-driven repayment plan (Revised Pay As You Earn, Pay As You Earn, Income-Based Repayment, Income-Contingent Repayment).

Click here to read more about How to Consolidate Defaulted Federal Student Loans

How to enter into the student loan rehabilitation program

You can enter into the student loan rehabilitation program by contacting the collection agency that has your defaulted student loans.

Here's how to find out who that is.

First, check studentaid.gov to see which of your student loans are in default status.

Specifically, you want to check the loan servicer.

For most student loan borrowers, the loan servicer is going to be Debt Management and Collections System/Default Resolution Group.

Some of you, however, will have another company listed (NYSHESC, KYHEA, MOHELA, etc.).

If one of those other companies is listed, you'll need to contact them to get the rehabilitation process started.

For everyone else, call DRG at 800-621-3115. The automated system will tell you which private collection agency has your loan and give you their contact information.

Once you find out which agency has your loan, contact them and ask them if you're eligible for the student loan rehabilitation program. You should be eligible so long as you haven't rehabilitated your loans once before. You can't rehabilitate a student loan twice.

If you're eligible, you'll then go over your financial information to come up with a monthly payment amount based on your discretionary income.

And once you have that amount, you'll sign the loan rehabilitation agreement letter and start making your 9 monthly student loan payments to get out of default.

Click here to learn How to Qualify for Student Loan Rehabilitation

Can I consolidate a consolidation loan?

You can reconsolidate a consolidation loan in a few instances.

If you have an FFEL Consolidation Loan, you can consolidate it into a Direct Consolidation Loan.

I advise my clients to do this if they're trying to qualify for the Public Service Loan Forgiveness Program or if they want better repayment options.

Only loans made under the Direct Loan program, qualify for the PSLF program and the Revised Pay As You Earn plan.

Another instance when you can consolidate a consolidation loan is when you have a Direct Consolidation loan and other loans to consolidate it with.

For example, if you have a Direct Consolidation Loan, a Direct Parent Plus Loan, an FFEL Parent Plus Loan, and a Perkins Loan. You can consolidate all three of those into a new consolidation loan.

I would be careful doing this, however. When you combine Parent Plus Loans with non-Parent Plus loans, you lose out on some of the better repayment plans (e.g., IBR and REPAYE).

What happens after you get out of default

After you bring your student loans back into good standing, three things happen.

First, you regain eligibility for federal student aid, income-driven repayment options, and your tax refund is no longer at risk of offset.

Second, your credit report will be updated to reflect the change in your default status. If you consolidated, the default status would remain on your credit report, and the late payments will stay on your credit history. But if you rehabilitate, the default status will be removed from your report (the late payments will remain).

Looking at the difference in how the default status is reported, it's only natural to wonder, "Should I consolidate or rehabilitate my defaulted loans?"

In my experience, both have about the same effect on your credit score. So you shouldn't base your decision on one is better for your credit score than the other.

The last thing that happens after you get out of default is that your loan holder will send your loans to a new loan servicer to handle your repayment options.

When your loans first get there, they'll be placed into a deferment/forbearance until a new monthly payment is calculated.

Coronavirus/COVID-19 considerations

From now through September 30, 2020, the Department of Education has placed federal student loans they own into forbearance. Also, they set the interest rate on those loans to 0% and have agreed to give student loan borrowers credit towards various student loan forgiveness programs.

These benefits only apply to federal loans owned by the Department of Education. It doesn't apply to federal loans held by a guaranty agency or private student loans.

Some private lenders have agreed to place their private loans into deferment due to COVID. You'll have to check with your servicer to see if you're eligible.

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I'm a student loan lawyer that helps people like you with their federal and private student loans wherever they live.

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