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credit & debt

What to Do If You're Delinquent on Your Student Loans

Advice on how to select a repayment plan that better fits your budget.

My son has fallen behind on his student loan payments. How can he get back on track?

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Have him contact the loan servicer immediately. Even one missed payment is considered a delinquency, and federal loans that have been delinquent for at least 90 days are reported to the three major credit agencies. If your son acts soon enough, he can select a new repayment plan that better fits his budget, or he may qualify to delay loan payments through deferment or forbearance. After 270 days, the loan generally goes into default, and the entire balance, including interest, is due immediately. The borrower also loses eligibility for federal loan benefits, including a choice of repayment plans and the opportunity for loan forgiveness.

If the loan is already in default, your son has two options: rehabilitation and consolidation. Under a rehabilitation agreement, the borrower agrees to a reasonable payment (typically 15% of his or her discretionary income, as defined by the loan program) and must make nine on-time payments during a consecutive 10-month period before the loan comes out of default. The borrower regains eligibility for federal loan benefits, and the default is taken off the borrower’s credit history. Be aware that loans can be rehabilitated only once.

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The second option is to consoli­date defaulted federal loans through a federal direct consolidation loan. This allows you to replace one or more federal loans with one new, fixed-rate loan. To consolidate a defaulted loan, a borrower must either agree to one of the federal income-driven repayment plans or make three consecutive on-time full monthly payments on the defaulted loans. Consolidation is faster than rehabilitation and restores access to federal loan benefits, but it doesn't remove the default from the borrower's credit history.

For private loans, your son should work with the lender to set up a payment plan. If the debt is already in collection, have him try to negotiate a settlement with the agency.

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