Monday, November 4, 2013

What You Should Know And DO About Student loans And Your credit Score.

What You Should Know And DO About Student loans And Your credit Score.

You should be aware that student loan guarantors have the right to garnish wages without informing the consumer. Incidentally, this is unlike regular collection agencies which are bound by the Fair Debt Collection Practices Act and cannot simply take whatever they feel is theirs. Even more disturbing, perhaps, is that student loan guarantors can add interest, collection fees, and late penalties once the loans have defaulted. For that reason, it will benefit you to take action sooner than later even if you and your wife change your mind about buying a house.

Whatever you do, don't consolidate loans, which have defaulted. Although there are bankers who will indeed create a single loan to replace your separate loans, such consolidation loans can be problematic. First, you may find that you have replaced a previously low interest rate with one that is significantly higher, a probability that is much increased by the fact of your terrible credit rating. Second, when loans are consolidated, the new lender actually repays the previous loans, then folds those amounts as well as new costs into the new loan. For that reason, you will likely find that you owe even more now than you did before. Finally, when previously defaulted student loans are paid off, they are no longer eligible for what the Department of Education calls "rehabilitation," which is a program that can literally erase ALL student loan negatives on credit reports after just one year.

Whoa, you say! Why in the world would the Department of Education is motivated to remove all that derogatory information long before the seven year reporting period has expired? Simply put, it's because legislators who wrote the relevant laws understood that, unlike all other types of credit, student loans are "guaranteed" (i.e., awarded on the basis of need rather than creditworthiness) and that many students may acquire and subsequently begin repaying the loans before fully realizing that they could very well wreck their lives with them. In this regard, current and former college students with student loans in repayment get a bit of a break. That said, there is a particular path that must be followed in order to "rehab" previously defaulted student loans:

First, contact the Office of the Ombudsman at the Department of Education and let them know you are interested in rehabilitating your defaulted student loans. Use the word "rehabilitation" specifically because that refers to this specific program. You can call their toll-free number at 1-877-557-2575 or visit their website. This office will provide the necessary forms for beginning this process.
Second, send letters to current loan guarantors regarding your wish to begin rehabilitating the loans in accordance with federal law. Send such letters certified mail with return-receipt requested so that, if documentation is ever requested, you can prove that you did indeed register that request on a particular day.

In a nutshell, after you have officially entered the rehab process, you will be required to make 12 consecutive on-time monthly payments, after which the Department of Education will see to it that all financial penalties are reversed and that the affected loans are marked as "NEVER LATE" with the bureaus. After rehab completion, and assuming that your reports are clean otherwise, you may well see your credit scores soar by a couple of hundred points! Once the loans are rehabilitated, only then should consolidation be considered.

Finally, don't make the same mistakes twice because rehabilitation is only offered as a one-time dispensation. Good luck with the new home. 

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