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Student Loan Law Series: Curing Default through Consolidation

In our last blog in the series we discussed the consequences of being in default from not paying student loans off in a timely manner. There are ways to cure default, one being consolidation of student loans. One can consolidate defaulted student loans into a direct consolidation loan with a repayment plan that is tied to income each month.

Through consolidation borrowers are no longer seen as in default on their credit records; therefore, they are free from the consequences that follow default, such as: garnishment, tax intercepts, and others.

Direct consolidation loans are available to all federal loan borrowers; however, they must at least have one Federal Family Education Loan (FFEL) Program Loan or a Direct Loan to be considered for consolidation.

Borrowers, in order to qualify for a Direct consolidation loan can either make 3 consecutive reasonable and affordable payments based on their financial standings, or select, based on an agreement, an income-contingent repayment plan (ICRP) or income-based repayment plan (IBR). With whichever payment plan they agree upon, a borrower needs to consent to the IRS disclosing taxes to the Department, so that they can calculate a monthly repayment amount.

Most federal student loans, such as loans received through Direct Stafford loans program, supplemental loans for students (SLSs), Perkins loans, Health Education Assistance loans (HEALs), etc. can be consolidated. Loans that are not valid for consolidation are loans that are not federally guaranteed: law, medical, graduate loans, etc.

Not every borrower qualifies for consolidation as an option to cure default. This is due to several limits on which loans can be consolidated. One limit being that for a loan to be consolidated it must be accompanied be one FFEL or Direct loan. Another limit is that borrowers in default on a Direct consolidation loan are not permitted to re-consolidate that loan and must seek other solutions.

There are times when borrowers choose to leave certain loans out of their new consolidation loan. For example, if a borrower consolidates a Perkins loan they will lose out on Perkins cancellation rights, due to consolidation with Direct loans.

Consolidation is a cure to gain relief from default; however, it is not the only cure. When curing default the borrow needs to make sure they qualify for consolidation, and if not they should look towards other solutions, such as, rehabilitation which will be the topic in our next blog in the series.

Works Cited

Loonin, Deanne, and Geoff Walsh. Student Loan Law. Boston, MA: National Consumer Law

Center, 2010. Print.

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