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If you are one of the 5 million borrowers who defaulted on federal student loans, the direct integrated loan program can get you on track. To qualify, you will need to make three consecutive payments or sign up for an income-driven repayment plan. Once approved, there is one default federal student loan.
The main advantage of integration is that you can receive low, affordable monthly loan payments and protect your credit score from further damage. However, you will need to decide whether to rehabilitate your federal student loans or consolidate it.
How to consolidate default student loans
If you have a federal student loan, you can apply for loan consolidation through the Federal Student Aid website. Before you begin, you must meet one of two requirements, but you can choose both.
- You agree to pay your new loan based on your income-driven repayment plan.
- Make voluntary, on-time, full monthly payments for three consecutive times with the default loan.
The first option is much easier, but more restrictive. By signing up for an income-driven repayment plan, the repayment period can be 20 or 25 years. With three full payments, you can choose from a wide range of repayment options.
Consolidating federal loans will help you get out of default, but you still earn collection fees. If you choose the income-driven repayment planning option, you will be paying $150 or 18.5% of your still-received principal and interest. After making three payments, you will pay 2.8% of your outstanding principal and interest. Regardless of the route you go, your new student loan interest rate will be the average for your current loan.
Pros and Cons: Default Student Loan Integration
By consolidating default student loans, you can get you through several hurdles. First, withdraw the loan from the default. This can be achieved within 30-90 days and can be reconstructed into other difficult programs. It can also stop even more serious consequences, such as the seizure of wage ornaments and tax refunds.
Integration is just part of the journey. It will bring your loan back to good condition, but you will still be owing the additional fees and there may already be damages already inflicted on your credit report. So, after consolidation, you can consider ways to improve your credit score and quickly repay your fees.
The application process to consolidate the default federal student loan may only take a few minutes, but it can take 4-6 weeks to complete the consolidation process. If you want to make three payments before starting the process, you will need to tack three extra months to the timeline.
While waiting for the integration process to complete, it is important to keep paying on time to demonstrate that you are serious about avoiding defaults again in the future. This also helps you avoid slower payment fees.
Conclusion
Consolidating your default federal student loans is a good way to avoid having to pay all the remaining outstanding payments right away. It also stops your credit score from causing further damage from missed payments. However, it is important to consider all options before making a decision.
The option to rehabilitate a loan requires more work, but you can remove some of the damages you have given to your credit. If you decide to consolidate your debt, consider whether you can make three payments per month, or whether you need to register in an income-driven repayment plan.
