Next to credit cards, a student loan is usually the first experience most of us will have with a line of credit. Some may not be ready for such a responsibility and may default on the loan.
Defaulting on a student loan can have a major negative impact for years to come, harming your ability to qualify for an auto loan or a mortgage and possibly even hurting employment prospects.
It can be quite easy for students who are inexperienced with handling a major line of credit to default on a student loan. You might get behind on payments and feel too embarrassed about the situation to contact their lender. It could be you didn’t understand the terms of the loan and felt you could miss payments as long as they eventually brought the loan current when you could afford to.
Whatever the reason, it’s important to understand that the damage to your credit doesn’t have to be permanent. A process known as loan rehabilitation ensures that students can pay what they owe and remove that damaging default from their credit records.
What the Student Has to Do
To engage in rehabilitation after a default, you must first contact the lender and formally request loan rehabilitation. This should be done in writing to establish a record. The lender will send you a rehabilitation agreement that you need to read, sign and return to them.
At this point, you are in the rehabilitation period. This period lasts ten months and should be considered a “probationary” period where it is vital that nine out of ten payments are made in full and on time. The good news here is that the amount to be paid is negotiated with the bank and can’t be high enough to be unaffordable. The bank has its own responsibilities in the process and that is one of them.
What the Bank Has to Do
If you’re in default on a student loan, the first thing you need to remember is that the lender must by law accept the rehabilitation option if you request it. The bank can offer both rehabilitation and consolidation, explaining both, but they must accept the option that you, the borrower, choose.
If you select rehabilitation, the lender must negotiate the payment amount according to what you can afford. They cannot simply enforce a certain payment amount of their choosing. During this process, the lender may ask you for income documentation in order to determine a reasonable, affordable payment amount. When payments begin, the lender must change your status to reflect that regular payments are being made.
Finally, when the rehabilitation period has been successfully completed, it is the lender’s responsibility to contact the credit reporting agencies to remove the default from your credit records.
It’s not hard to make a few mistakes and end up in default on a loan, especially if you are new to the whole concept of repaying loans. Fortunately, rehabilitation options are available so one mistake doesn’t have to result in ruined credit for years to come.