A reader of AskTheMoneyCoach.com wanted to know how to deal with a defaulted student loan. Her question and an answer are provided below.

Many thanks to Marlene Ware, of the National Foundation for Debt Management  for her expertise and providing the answer that follows.

Question: My husband’s Sallie Mae loan went into default and was just turned over to a collection agency.

If he wants to do the rehabilitation program, is that through Sallie Mae or the collection agency?

Also, who does he work with now: the collection agency or go back to Sallie Mae?

If he makes payments each and every month to the collection agency will he be fine, no matter the amount of the payments? As long as he makes payments to the collection agency can they still do him harm, ie garnishment, etc?

Answer:

This is a pretty complex area with a lot a variables.  Without knowing what preceded the default I will try to give you an answer that will hopefully clarify your situation.

If the Sallie Mae loan was in default for 270 days and any attempts by the loan holder have been unsuccessful the loan will be turned over to the ‘guaranty agency’ in your state.

Go to :  http://wdcrobcolp01.ed.gov/Programs/EROD/org_list.cfm?category_ID=SGA  for the contact information concerning the guaranty agency in your state.

After he jumps through the hoops required to bring the loan out of default, the collection company will search for a financial institution to buy the loan.

Your husband will begin a relationship with this new loan holder and continue to make the payments as requested.

While in rehabilitation, he must make 9 voluntary consecutive on-time payments to the collection agency holding the loan.  If he is able to do that, he will see the following benefits of his hard work:

• His loan(s) will no longer be considered to be in a default status.
• The default status reported by his loan holder to the national credit bureaus will be deleted.
• He will be eligible for the same benefits that were available on the loans before the loans defaulted. This may include deferment, forbearance, and Title IV eligibility.
• Wage garnishment ends and the Internal Revenue Service no longer withholds his income tax refund.

I hope this gives you some useful information.  There is a great deal of information concerning defaulted loans on the Department of Education website.  Good luck!