Ask The Money Coach

By Lynnette Khalfani-Cox, The Money Coach

In this tough economy, an increasing number of college graduates (and college drop-outs) are falling behind on their student loans.

Federal student loan defaults are up to 6.9% in 2009, well above their year-ago level of 5.2%, according to the Department of Education. For those people carrying private loans, defaults hit 3.37% in 2008 versus 1.47% in 2006, according to Sallie Mae, one of America’s largest providers of private loans.

As you probably already know, defaulting on a student loan is a very serious matter. A federal college loan falls into default status if you are supposed to make monthly payments, but have not done so for 270 days. For those whose student loan payments are less frequent, a default occurs once you haven’t made payments for 330 days.

If you fall into default on a federal student loan, the government can seize money from you to pay your bill. The government has the right to:

• take your federal tax refund check
• garnish up to 15% of your disposable pay

Defaulted student loans also negatively impact your credit.

To help you avoid default status, you can follow my 7 Smart Ways to help you pay of your student loans fast, but if you do find yourself in default there are other steps you can take.

Four Options to Cure a Defaulted Student Loan
Now, in order to get your student loan(s) out of default, you have four options:

• Consolidate the loan(s)
• Enter a loan rehabilitation program;
• Pay the loan(s) off completely
• Get the loan(s) totally discharged or canceled

The last two are probably not realistic options. I know you don’t have the money to pay off the loan(s); that’s why you’re in this predicament; and loan cancellations are rare (though they can be obtained).

You’ll likely have to “rehabilitate” your loan(s) or consolidate them. To learn whether rehabilitation or consolidation is better for you, read my article “Should You “Rehabilitate” Your Loans or Consolidate?”

Other Relief
You can also get help from a financial aid ombudsman. See my article “Get Help from an Ombudsman” for more information.

My article “Appealing a Wage Garnishment” tells you more about that option.

No matter what economic challenges you’re facing, you don’t have to live with wage garnishments and blemishes on your credit report because of defaulted student loans. Reach out for help today, and start the process of turning that college debt problem around.

For more information on paying off your student loans, check out my book Zero Debt for College Grads: From Student Loans to Financial Freedom. Get the book now at Amazon.com.

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 Lynnette Khalfani-Cox, The Money Coach is a personal finance expert, speaker, and author of numerous books on personal finance. She appears frequently as an expert commentator on television, radio and in print.

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