Student Loans in Default: How to Fix Your Credit

Depending on whether you have federal or private student loans in default, you will have to take different steps in order fix your credit. You will need to take a pragmatic approach in order to fix credit damage. Here are just a few options available to fix your credit and recover from your student debt.

Federal Loan Forgiveness

A number of federal loan programs offer forgiveness options. One popular option is the forgiveness initiative for public service. You will need to elect this option before your loan actually enters default, so if you are afraid that may happen, it is important to act quickly. The public service option allows you to have your loans forgiven if have already made 120 payments on your loan. You must be employed full time by a public service employer. This offers some students the ability to solve two problems at once. If you are out of work or having trouble getting a job, you can enter the public service arena. Even if the pay is low, your salary will be compensated by the loan forgiveness option. Public service jobs include:

  • Emergency management,
  • Government
  • Military service,
  • Public safety and Law enforcement
  • Public health
  • Public education,
  • Public interest legal services
  • Public librarians

Federal Loan Consolidation

You can consolidate and refinance your federal student loans, but only with other federal student loans. This is a good option for students who have had to take loans for multiple degrees, such as an undergraduate degree and a medical degree. This is also a good option for families who have taken loans for more than one child. Again, this option is only available before a loan enters default. The government will allow you to consolidate and refinance at a lower rate, immediately lessening your debt burden and making your payments more manageable each month.

Hardship & Repayment Options

If you are having difficulty locating employment after college, you may be eligible for a hardship extension on your loan. In a down economy, it is easier to achieve this goal. You will have to show you are actively seeking employment. This option is popular among recent graduates who have had their employment deferred due to changes in company hiring needs. You may also be able to change the payment structure on a private loan in accordance with your income. Income-contingent plans take your ability to pay into account when deciding monthly fees. If you lose your job, you may not have to make payments in the interim, or your payments may go down.

Refinancing, Settling or Consolidating Private Loans

Altering the terms of a private loan is much different from doing the same with a federal loan. You can contact a settlement agency to assist you in the process. With most loans, the first step will be agreeing on a lump sum settlement for your current student loans. If you have other sources of debt, you may settle all your debt at once. Then, you will need to arrange the terms for the lump sum loan that will allow you to pay all of the settlements. The goal is for this loan to have a lower interest rate than your existing debt.


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