Dear Debt Adviser,
I’m 26 years old. Due to the bad job market, I didn’t work steadily for two years. I took temporary work when it was available, but I was unable to make planned debt payments. The result: My student loans are in default. I have three loans — for $10,000, $3,000 and $20,000. Is it possible to get the loans out of default? I just found a steady job making $40,000 per year. It has health benefits and is enough to keep me afloat. If I can’t get these loans out of default, will making payments on time to the collectors reflect positively on my credit rating? My credit rating is in the dumps, with a credit score of 520.
— P.G.

Dear P.G.,
It looks as though your luck is changing for the better. It’s great that you have a steady job, and the $40,000 salary is a super place to begin. I can’t tell from your question if your loans are private, federal or a combination. I’m going to let you know the steps to getting your federal loans out of default. You have several options to choose from.

The first thing to do is contact the collection companies. Find out what you owe and what the interest rates are. If you have a defaulted federal student loan — Stafford, PLUS or Consolidation — you can enter into a rehabilitation agreement with the agency that guarantees the loan.

This also may help you begin to rebuild your credit history, as one of the benefits of rehabilitation includes the default status being removed from your credit report. That will improve your credit score.

You may also be eligible for other benefits. One possible benefit is deferment, or a temporary suspension of payments. Another potential option is forbearance, which is a temporary postponement or reduction of payments for a period of time because you are experiencing financial difficulty. If your wages are being garnished, a rehab will end that. And the Internal Revenue Service will no longer withhold any tax refunds from your new job.

To take advantage of rehabilitation, you’ll need to make nine consecutive on-time payments of an agreed amount to the collection agent, in full. You can only do this once. So whatever you do, don’t skip a payment or be late or be short. In other words, make this your priority payment over all others for the next nine months. At that time, your loan could be eligible for repurchase by a lender.

Another option you should investigate is consolidating your Stafford, PLUS, Perkins and other federal student loans under the U.S. Department of Education’s Direct Consolidation Loan Program. This may extend the original terms of your loan and give you a lower monthly payment. Consolidating your loans will bring your other loans out of default because they’ll be paid when you are issued the consolidated loan. You will have a single lender — the Department of Education — and a single monthly payment, which may be lower than what you are now paying.

For your $20,000 loan, the loan term could be extended to 20 years. (The repayment period depends on how much you owe on your education loans.)

Borrowers can choose from multiple repayment plans with various terms to repay their consolidation loans. Among the options are standard repayment, with fixed monthly payments; graduated repayment, where monthly payments rise over time; and income contingent repayment, where your monthly payment is based on adjusted gross income (and your spouse’s, if married), your family size and the total amount of your direct loans.

You can get more information regarding the Direct Consolidation Loan Program at or (800) 557-7392.

If your new job is for qualified full-time teaching or with the military, you may be eligible for loan cancellation under programs authorized by Title IV of the Higher Education Act.

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