In an age where we can’t hear enough about the virtues of paying off debt responsibly, some borrowers are getting a hard lesson in reality, being made to face the grim fact that sometimes, once debt is accrued, getting rid of it isn’t as easy as simply paying it off.
Student loans going into default have long been among the most dreaded of all forms of bad debt because of the stigma attached and the obstacles that such a debt imposing upon the acquisition of federal funds of any kind. However, there has always been something of a failsafe measure built into student loans to prevent borrowers who have a few bad months from having their credit histories permanently destroyed. This failsafe measure, unfortunately, has at last begun to fail, leaving thousands of borrowers stranded.
It used to be the case that when a student loan went into default, the guarantors of that loan would remove the default status from one’s account, and consequently, from one’s credit report, as soon as nine monthly on-time payments were made consecutively.
In today’s climate, however, many who once defaulted are finding that, even though they’ve paid on time for nine months or so, they remain stuck with the default status that is preventing them from acquiring new credit – in many cases, a vicious cycle that renders them less capable of making payments on time in the future.
How exactly is this happening? Basically, the way that a student loan becomes “rehabilitated” is that, once the nine payments are made, the guarantor would sell the debt off to a new lender, thus “resetting” the status of the debt as far as all agencies are concerned. However, as a result of the current credit freeze, those lenders who typically buy up the rehabilitated loans just can’t afford to do so.
The bottom line is that defaulted loans are now sitting in limbo with guarantors who wish to sell them off, but are unable to do so, forcing thousands of borrowers to live with a black stain on their credit reports despite taking all the right steps to have it removed. In fact, last November saw what may be the permanent death knell of student loan rehabilitation as the very last firm that was still purchasing rehabilitated loans announced that it would no longer do so and shut down operations.
It seems likely that those who are currently living with an unfair default status on their credit are condemned to do so for the duration.
In a very real way, this is an example of the system failing to live up to its own standards, but despite how unfortunate it is, there’s very little that can be done about it for the time being. This is something that all borrowers need to be aware of. You must take care, when borrowing and investing, to make sure that control of your finances remains in YOUR hands and rests upon YOUR ability to make things happen. Once you let the control of your credit leave your hands, it becomes less likely that it will ever be repaired again.
There are plenty of companies out there who, once you go into debt with them, just can’t be bothered to send a positive report to a credit agency, and with even well-meaning lenders such as these student loan guarantors having their hands tied by the crippled economy, this is a more important lesson than ever.
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There are several types of loans that are available further you should credit carefully and reason about your options before taking out a loan. However, if this is the only method you have for baldachin the cost of your tuition it will be money well spent once you’ve managed to repay the debt.
Excellent article! This issue needs to gain some serious attention sooner rather than later, especially if we wish to turn the economy around. Just look at the housing market…we’d have a lot more buyers if this huge flaw in the system was fixed, as many people with otherwise flawless credit are being doomed because of this.