Good morning good people!
So, I'm trying to determine the best option to get my husband's loans out of default. And when I say best, I mean the fastest. I thought I had the rehab process started last year after the US Department of Education and IRS hijacked our tax refund. But I digress.
Can anyone give me any tips on either the rehab process versus consolidation. Currently browing the studentaid website now.
Thanks in advance for your help.
I'd echo was @Sabii said.
Why do you need this done the fastest?
It's definitely not the best for FICO reasons (particularly on older scores, like the more conservative mortgage ones).
Hi @calyx and @ sabii. My husband would like to return to school to complete his degree in accounting, and the defaulted loan is hindering that. In addition needing to have the loans out of default to avoid a tax offset. Can you elaborate on the FICO and mortgage effect? Thanks.
If you start rehabbing immediately, you might be able to avoid the tax offset. Some companies require a certain number of payments, some are more lenient (mine would stop garnishment/not do the tax offset as soon as you made your first payment), so you can contact them about that.
For FICO scoring purposes - defaulting not only means that there is a collections account, but a string of severe derogatories (90/120/150 lates), that will stay on your credit report for 7 years from the date of first delinquency*.
IF the default happened long enough ago (as in the DOFD is more than 7 years), the negative information would "fall off" of the credit report once the rehab or consolidation is successfully completed.
Rehab removes the default. What that means is that the loans will keep their original open date (so he could have nice, long tradelines), which helps with FICO scoring - longer tradelines = longer/higher average age of accounts (and possibly a higher age of oldest account - since in many cases, student loans are people's oldest tradelines).
The mortgage scores are older algorithms, and they put a much heavier emphasis on the age of accoutns - older = better.
In addition, you get a penalty if your youngest account is less than a year.
If you consolidate, it starts a brand new tradeline (whether the old one remains will be a product of that 7 year exclusionary period*), so you will drop your aging metrics (AOYA, AAoA).
The utilization on your student loan is not having a big impact on scoring, so the 100% utilization of a new consolidated loan isn't a problem, the newness is.
IF you are looking at buying a house in the next year (or refinancing), rehab would be the way to go, because it will significantly help your mortgage/FICO numbers over consolidation whereas consolidation would actually hurt your mortgage scores with the new loan, which is why I mentioned them. I'm a "finances over FICO" gal, but in this case, they line up, and since mortgages are typically large and long term, those points truly matter. But, if you're not going into refi or to purchase in the next year after consolidation, it might not matter as much.
* I keep putting the asterix in as a caveat: According to the HEA, federal student loans are not subject to the 7 year exclusionary periods, however the reality is that they seem to behave that way with the bureaus - likely because the system is pretty well automated and they don't seem to differentiate federal student loans from other kinds of debt with their treatment.
Rehab is usually better overall, for a number of reasons. I have a consolidated loan, and there are plenty of reasons to do that as well. It's going to be a personal decision. But, out of default is out of default, and either will ultimately get you there.
I wish you the best with whatever path your pursue. They'll both work, and I'm glad your husband is getting his loans out of default.