Defaulting on student loans can be terrifying, damaging, and costly. Federal student loan lenders have enormously powerful tools to pursue student loan borrowers in default. For example, the federal government and federally-backed guaranty agencies can garnish a borrower’s wages, offset a borrower’s Social Security benefits, and intercept a borrower’s tax refund, all without a court order. Private student loan lenders don’t always have the same powers, but they can file lawsuits against borrowers in state courts, and then try to attach assets to satisfy any resulting judgments. Defaulting on both private and federal loans can lead to financial penalties and significant credit damage, as well.
But it’s not all doom and gloom. Borrowers in default on their student loans have legal rights and options. And they may ultimately have the ability to fix their defaulted student loans.
Federal Student Loan Rehabilitation
Federal law allows borrowers in certain circumstances to enter into a rehabilitation program – a temporary payment plan, at the conclusion of which the student loan is brought out of default and restored to good standing. There may be other benefits as well, including reversal of some credit damage or a reduction in some penalties and fees. Typically, payments can be tied to the borrower’s financial circumstances.
Federal Student Loan Consolidation
In some cases, federal student loan borrowers can cure their defaults by consolidating their loans through the U.S. Department of Education’s Direct consolidation program. This can be particularly useful for borrowers who have multiple defaulted loans with multiple lenders. Just like with rehabilitation, there can be some credit benefits or reduction in fees. However, consolidation can also have downsides, such as restarting a repayment term.
Student Loan Settlement
Both private student loans and federal student loans that are in default can sometimes be settled by paying less than the full balance due. Typically settlements are paid in a lump sum, although in some cases (mostly for private student loans) settlements can occasionally be paid in installments. Federal student loan settlements are governed by fairly strict federal guidelines which can limit the reduction in the amount owed through a settlement, but private student loan settlement negotiations can be more open-ended. One potential downside to a settlement is that there can sometimes be tax consequences.
Student Loan Discharges
Federal student loans can sometimes be completely discharged, depending on the circumstances (although these circumstance are typically quite narrow). For example, if the borrower is completely disabled and can no longer maintain gainful employment, their federal student loans are potentially dischargeable. School misconduct can also give rise to a basis for a discharge, such as if the school closed before the borrower could complete his or her degree, or if the school falsely certified the borrower’s eligibility to complete the degree program.
Defenses to Student Loan Defaults
In some cases, borrowers can dispute an improper student loan default or even the validity of the underling loan itself. Typically this is done through litigation, and these issues can be raised as defenses to a collections lawsuit or counterclaims against the lender. There are a variety of defenses that can be raised such as forgery, fraud, duress, unconscionability, failure to provide adequate proof the debt’s validity, or failure to comply with applicable state or federal consumer protection statutes. Private student loan borrowers may also be able to raise a defense based on the statute of limitations – a finite period of time within which a collections suit would have had to been filed against the borrower.
Get Help — And Be Careful
If you have a student loan that’s in default, it’s critical to understand your legal rights, your options, and the pros and cons of any particular approach. The best default resolution option for someone else may not necessarily be the best option for you. You want to make sure that you maximize your shot at resolving your student loan defaults, without unknowingly making your situation worse (and yes, that can happen). Seek the services of a qualified, reputable professional, and never hire an unlicensed, unregulated company, given the number of student loan scam operations that have arisen during the past several years.