Federal student loans:
- Rehabilitation. Rehabilitation means that your loan will be taken out of default status after you make a series of consecutive (generally, nine) on-time, reasonable, and affordable payments. You can typically only rehabilitate a loan once.This is the only way to remove the default notation from your credit history. If you chose to go back to school, you’ll be eligible for federal student aid again after you make the sixth of nine monthly payments.
- Repayment. If you can afford to pay off your defaulted federal loan, this is the fastest way to settle your debt. Under certain circumstances, your debt collector may be authorized to waive some of your outstanding fees and other collection costs. For some borrowers, this can be the cheapest way to bring a federal student loan out of default.Even after you’ve repaid, the debt will continue to appear on your credit report as a defaulted loan that was repaid. You’ll also be eligible for federal student aid again, if you chose to go back to school.
- Consolidation. Through consolidation, your defaulted loans are paid off by a new loan with new repayment terms. If you can’t afford to repay your loan in full, consolidation is the fastest way to get out of default and enroll in one of the U.S. Department of Education’s alternative payment plans. If you can’t afford to pay off your loan in full, it’s also the fastest way to get out of default and be eligible for federal student aid again. Consolidation will not undo the negative effect on your credit report caused by your default.
- TPD Discharge. Your federal student loans can be discharged if you provide information to the U.S. Department of Education to show that you are Totally and Permanently Disabled. ED will evaluate the information and determine if you qualify for a TPD discharge. You can submit certification from a physician that you are totally and permanently disabled, show you are a veteran, or receiving Social Security Disability Insurance (SSDI) benefits.
Private student loans:
- Forbearance. Limited availability. Here, the borrower only has to make interest payments for a period of time approved by the lender. While this strategy may provide some short term relief, it actually increases the amount the borrower will pay back over time, because the principal remains unchanged and interest continues to accrue.
- Deferment. Limited availability. here, the borrower makes no payments for a period of time because of proven undue hardship. For private loans, deferment may or may not be an option depending on the terms of the loan, and in the cases that it is available, interest continues to accrue and is added to the principal.
- Negotiate with the lender for a lower, lump sum payout. Lenders will happily take a lump sum,but most people don’t have a lump sum—that’s why they are in default.
- Bankruptcy: Prove undue hardship. (1) that the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for herself and her dependents if forced to repay the loans; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) that the debtor has made good faith efforts to repay the loans.”
- Conventional Debt Collection Defense Litigation Tactics – A private student loan is in many ways similar to a credit card debt (except its nondischargeable in bankruptcy.) Both have the same defenses and counterclaims like Debt Collection Harassment. If they can work in credit card cases, it may also work in private student loans collection cases.