Can you consolidate delinquent student loans?

If you’ve defaulted on your federal student loans, there are several ways to get out of default, including consolidation. The Direct Consolidation Loan Program combines existing federal student loans into a new loan with a new repayment term, and student loans in default are eligible. There are, however, a few caveats to keep in mind before proceeding.

Can I consolidate an overdue student loan?

If you have federal student loans, you are officially in default if you have not made your scheduled student loan payments within 270 days or if you have missed a Perkins loan payment. At this point, your entire balance plus interest and fees will be due, and your loan officer may also add a collection fee on top of that.

Fortunately, there are several ways to get out of default: You can rehabilitate your federal student loans or consolidate them through the Direct Consolidation Loan Program. You can choose to consolidate any federal student loan in default, with one exception: defaulted direct consolidation loans can be consolidated again only if you add another loan to the consolidation.

Remember, this only applies to federal student loans; private student loans cannot be consolidated in the same way, and the specific rules for getting out of default depend on your lender.

Consolidating your defaulted federal student loans is a relatively straightforward process, making it a good option for getting out of default.

Benefits of Consolidation

  • You can get a more affordable repayment plan.
  • Your student debt will no longer be entirely due.
  • You can prevent the default from further hurting your credit score.
  • You may be able to reduce your collection costs.

Disadvantages of Consolidation

  • Unlike rehabilitation, the default will remain on your credit reports after you consolidate them.
  • This may not help you if you were previously on an income-driven repayment plan.
  • You may still owe collection fees.
  • Unpaid interest and fees will be capitalized and added to your student loan balance.

How to consolidate delinquent student loans

If you have federal student loans, you will apply for loan consolidation through the Federal Student Aid website. Before you begin, however, you must meet one of two requirements (although you can choose both):

  • Agree to repay your new loan under an income-driven repayment plan.
  • Make three consecutive, voluntary, timely, and full monthly payments on the delinquent loan.

Although the first option is much simpler, it is also more restrictive. By enrolling in an income-driven repayment plan, your repayment period will be 20 or 25 years. By making all three installments, you will be able to choose from a wider variety of repayment options.

In addition, although consolidating your federal loans prevents you from defaulting, you will still be liable for collection costs. If you choose the income-contingent repayment plan option, you’ll pay $150 or up to 18.5% of the principal and outstanding interest. If you choose to make all three installments, you will pay 2.8% of the principal and unpaid interest.

How long does it take to consolidate delinquent student loans?

The delinquent federal student loan consolidation application process may only take a few minutes, but it may take 30-45 days to complete the consolidation process. And if you want to make three payments before you start the process, you’ll need to add three more months to your schedule.

While you’re waiting for the consolidation process to complete, it’s important to keep making payments on time to show that you’re committed to avoiding defaulting again in the future. This will also ensure that you no longer incur late fees.

How Consolidating Delinquent Student Loans Affects Your Credit

When you consolidate, you won’t have to worry about a thorough investigation of your credit report or any other major damage to your credit. However, unlike rehabilitation, consolidating your defaulted federal loans will not remove the default from your credit reports, so the damage already done will remain. Default and late payments will remain on your credit reports for seven years from your first missed payment.

Also, when you consolidate your federal loans, it creates a new loan account, which can impact the average age of your accounts. It probably won’t do much damage to your credit score, and it’s more important to focus on making on-time payments in the future.

The bottom line

Consolidating defaulted federal student loans can be a good way to avoid having to immediately pay the full balance of what you owe, and it can also prevent your credit score from further damage from your payments. missed.

However, it’s important to consider all of your options, especially if rehab is on the table. Although it requires more work on your part, rehabilitation can remove some of the damage done to your default credit score.

If you decide to go ahead with consolidation, consider whether you can make three monthly payments before consolidation or if you need to enroll in an income-driven repayment plan; Making all three payments up front will save you money and give you more flexibility in your payments, but an income-driven repayment plan may be better if you need lower payments in the future.

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