Student Loans – Rehabilitation vs. Consolidation vs. Pay As You Earn

Debt and Collections


It has been estimated that as many as 40 million Americans have student loan debt with an average balance of $29,000 [Source]. Being able to pay the debt has become problematic. Many loans are in default due to job loss, lack of disposable income, and skyrocketing penalties and fees on the loans themselves. If you’ve defaulted on a student loan, you’ve seen a negative impact on your credit score just as you would with other types of debt. The looming cloud of paying student loan debt is dark but there are options available including rehabilitation, consolidation, and a pay as you earn program. Rehabilitation of Student Loan Debt Rehabilitation is a one-time only option that can when requirements are met:

  • Stop wage garnishment
  • Make the loan current
  • Remove all default notations on your credit reports
  • Discontinue withholding of IRS tax refund

You must agree to a payment amount and actually pay that amount for nine months in a row under the program. The amount is determined using an Adjusted Gross Income (AGI) calculation. Only federal loans are eligible for this program. Should you default on the new loan repayment amount after the rehabilitation, the default will remain on your credit so it’s important to be committed and able to pay the debt. If your loan qualifies, rehabilitation is the option that Go Clean Credit would recommend because it restores your positive credit history. Consolidation of Student Loan Debt If you’ve been paying multiple lenders on student loans, this option is especially appealing but it comes at a cost. You may opt to consolidate student loan debt into one loan through a bank or directly with the Department of Education (DOE). Take into consideration the type of student loan.

  • Federal debt can be consolidated with DOE or privately. The better terms may be with the DOE but that’s not always the case.
  • Perkins loans can be consolidated with Stafford or PLUS loans.
  • Perkins loans have forgiveness options so a consumer may be able to eliminate the debt without consolidating. Joining the Peace Corps, enter law enforcement, deploy with the military, or become a teacher.

Consider the terms of the consolidation and interest rate. You don’t want to end up paying more for the convenience of consolidation. The bad news? If you’ve defaulted on the original loans, the default will still appear on your credit report, even when the consolidated debt has been paid. You may be better served by choosing the pay as you earn option, especially if you’ve chosen a career that offers increasing income as you advance. Pay As You Earn for Student Loan Debt Pay as you earn is a student loan modification that stretches the term of the loan and in some cases may reduce principal. It is a relatively new program and many people are not aware of its existence. There are income requirements but it can lower payments significantly. Your maximum monthly payment is 10% of discretionary income. Discretionary income is the difference between your AGI and 150% of the poverty guideline for the size of your family and state in which you reside. Your student loan payment adjusts with your income. The term can last as long as 20 years. Pay as you earn is a good option especially if you’ve chosen a career known for its increasing income as you advance. While you may be paying for a longer term, it is designed to be an affordable option. The downside is that any delinquent payment history will remain on your credit report. Whatever student loan repayment option you choose, we want to make sure you’re fully informed. Contact Go Clean Credit today to learn more about student loan debt repayment.

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