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Student Loan Law Series: Advantages and Disadvantages of Consolidation and Rehabilitation

In the few past blogs in this series we have discussed how to cure defaulted student loans through consolidation of loans or rehabilitating loans. Also we have touched upon the importance of knowing which option is best for each person who is facing default. There are many advantages and disadvantages to both consolidation and rehabilitation that collectors fail to mention, due to monetary incentives for themselves. It is important to know what the pros and cons of each are before deciding on a cure that suits a borrowers situation.

Consolidation has its advantages and disadvantages. A positive to consolidating student loans is that it is a much faster process than rehabilitation. This is mainly because the borrower does not have to make payments prior to qualifying for consolidation like they do for rehabilitation. Another benefit to curing default through consolidation is that a new loan is attained, whereas with rehabilitation you take the same loan and sell that to a new lender. Consolidation, because it is much faster process is good for borrowers looking to continue their schooling much sooner.

Along with not having to make payments to qualify for consolidation, this process allows borrowers to determine their payment via income-based repayments (IBR), which comes up with a formula to calculate payments, rather than with rehabilitation, where a borrower would have to negotiate for payments that are "reasonable and affordable".

However, even though consolidation has many advantages to borrowers looking for a cure on defaulted student loans quickly; both consolidation and rehabilitation have collection fees up to 18.5% on top of the principle amount.

Rehabilitation has its advantages also; the main one being that rehabilitation removes the default notation on a credit report completely, while consolidation results in a notation on a credit report that the defaulted amount was paid in full. With consolidation you can lose out on other rights you otherwise have, such as with a Perkins loan borrowers would lose their cancelation rights if they were to consolidate with Direct Loans.

Curing default is possible through multiple solutions; however, before that takes place a borrower needs to understand the advantages and disadvantages one might face by choosing a cure, such as, consolidation or rehabilitation. Borrowers should weigh the pros and cons of each option if facing default, and see which cure suits their situation best.

Works Cited

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

Center, 2010. Print

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