Reboot Your Life: Tampa Student Loan and Bankruptcy Attorney Blog
Defaults Increasing: More borrowers are entering default because they are choosing to either wait out ED and the uncertainty of SAVE, are tired of dealing with their servicers and the constant changes or they simply do not have the ability to make IDR payments. Default on federal student loans is never a good idea however as the penalties can be quite severe including garnishment, credit impairment, tax refund seizures and debt collection.
Consolidation and Rehabilitation to Cure a Default: While the Fresh Start Initiative has expired, borrowers can still cure a loan default by a consolidation or rehabilitation. There are significant differences between the two options. Borrowers should beware of consolidation without understanding exactly what will happen and why.
Consolidation is a new loan versus a rehab of an existing loan. Consolidation is basically a new loan where prior IDR credit is invalidated. For instance, if someone has several years of IDR forgiveness credit under their belt, they may not want to lose that. A rehab of existing loans would be better than a consolidation if someone wants to continue building off that IDR credit to eventual forgiveness.
Repayment options may change. If someone consolidates their loans after July 1, 2026, the IDR repayment options dwindle to only RAP. Consolidation now will convert all FFEL loans to Direct loans which is necessary for PSLF. One consolidation is necessary for a Parent Plus Direct loan to be eligible for IBR after an initial enrollment in ICR (before July 1, 2026).
A rehab is usually better for credit. A rehabilitation will remove all the late pays, while a consolidation will not.
Consolidation is faster at two -three months. A consolidation is faster than a nine month rehabilitation.
Finally, you cannot cure a loan default by consolidation if you already have a Direct Consolidation loan.
Do you need help in figuring out a plan (or someone to look over your shoulder on the plan you think you’d benefit from)?
