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Rehabilitating student loans

Question: My fiancée has a student loan that defaulted but is now paying on it every month. She has been told that it can't be rehabbed because of the default (even though others that have defaulted can rehab a second time). She doesn't make that much money, and she is filing bankruptcy because of various debts. She knows she can't bankrupt the student loan. What are the options other than making regular monthly payments, or not paying? Brian, Waterville, ME

Answer: Not paying the student loan isn't a genuine option. A default exposes her to a number of risks, including garnishing of her wages.

I wouldn't give up on getting her loan rehabilitated, especially if we're dealing with federal student loans. I'm not sure why she has been told it can't happen, but the federal government has every incentive to work with her and get her back on track, hopefully with a realistic payment plan. She's showing good faith by making monthly payments, a critical first step toward rehabilitation.

She should go to the federal Department of Education website and click here for its information on dealing with loans in trouble. She can learn the basics of how to get a loan rehabilitated here. If none of this works -- once she's exhausted all the suggested remedies -- she can appeal to the Department's ombudsman.

The situation is more difficult if it's a private student loan. She has much less room for maneuver. Despite the "student" label, from the lender's point of view, the loan is simply an unsecured debt.

However, you mentioned that she's filing for bankruptcy or perhaps she's consulting with an attorney about bankruptcy. I would strongly recommend that she work with the attorney to help her devise a realistic repayment plan during the bankruptcy process. The attorney is her advocate with lenders and the court. If it's a private student loan, this is the time to deal with it -- when she has some negotiating leverage. I wouldn't wait.

Last, since you two are planning on getting married, I would establish now the habit of a weekly money meeting. It should be short, and it's best to hold it at the same time and the same place every week. It's a good way to prevent money problems from festering.

Almost everyone runs into financial difficulties at some point. What's important is how you deal with it and what you learn from the experience.

About the author

Chris Farrell is the economics editor of Marketplace Money.

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