If you are in default on federal student loans, there are two principal ways to get out of default:
- consolidate your loans into a new loan, or
- rehabilitate your loan with good faith payments.
Each option has its advantages and disadvantages. Getting out of default is important if you want to qualify for certain federal repayment plans, borrow new loans to go back to school, or improve your credit rating.
Either method of curing a default -- consolidation or rehabilitation -- will increase your loan’s principal balance. When you default on a federal student loan, federal regulations allow the Department of Education to add up to 18.5% of your outstanding principal and interest amount to your loan balance as collection fees. The sooner you get out of default status, the lower those collection fees will be.
(If you are struggling with student loan payments, learn about your options in our Student Loan Debt topic area.)
How Student Loan Consolidation Works
You can consolidate student loans whether or not you are in default. Consolidation of student loans is a lot like refinancing a mortgage -- it creates a new loan with different terms. You can consolidate one loan or several. Beware of consolidating loans that have better terms with those loans that do not -- you may lose the preferential terms when the loans are combined. The Department of Education’s website at studentaid.ed.gov provides comprehensive information on consolidation. Also see Nolo’s article on Student Loan Consolidation.
Consolidation When You Are in Default: Additional Requirements
If you are in default, some additional requirements apply before you will be able to consolidate your loans. You must either:
- make three consecutive, reasonable, affordable payments on your loan, or
- establish a repayment plan under the Income Contingent Repayment (ICR) or Income Based Repayment (IBR) plans
For more information on ICR or IBR repayment plans, see What's the Difference Between ICR Plans and IBR Plans?
Loans Not Eligible for Consolidation
Some loans are not eligible for consolidation, including loans that have been reduced to a money judgment (a money judgment is issued by a court and declares that you owe a certain amount of money to a certain creditor). You also cannot re-consolidate a loan that was previously consolidated.
How to Consolidate a Defaulted Loan
To consolidate a defaulted loan, contact with the Department of Education’s Default Resolution Group at www.myeddebt.com/borrower. If that office refers you to a loan servicer, be aware that loan servicers may not mention consolidation as a default cure, and may refuse to assist you with a consolidation. That is because collection agencies are given financial incentives in their contracts with the Department of Education to resolve defaulted loans in certain ways—often through rehabilitation rather than consolidation.
If consolidation seems like the right option for you, attempt to start the process with your loan servicer. If your loan servicer will not assist you, you believe you qualify for consolidation, and you are not comfortable submitting consolidation paperwork on your own, seek legal advice or contact the Department of Education’s Ombudsman Group at studentaid.ed.gov/repay-loans/disputes/prepare.
As part of the consolidation process, you are required to sign a new promissory note. If you have any reason to question your loan balance or the validity of your loan, be very cautious about signing a new promissory note. If you re-obligate yourself with a new note, you will undermine any later claim that you do not owe the stated amount.
Student Loan Consolidation and Your Credit Report
Credit reporting agencies treat consolidation and rehabilitation differently for defaulted loans. If you consolidate a student loan after default, the fact that you were once in default will be noted on your credit report, with the additional notation that the loan was later paid in full. As explained below, rehabilitation removes all mention of default from your credit report.
How Student Loan Rehabilitation Works
You can also get out of default status on federal student loans by completing a loan rehabilitation process. With loan rehabilitation, you make nine timely voluntary loan payments over a period of ten months. The payments must be “reasonable and affordable" based on your total financial circumstances.” What is “reasonable and affordable” for you will depend on your personal circumstances—you will discuss an appropriate amount with the Department of Education or your loan servicer.
Rehabilitation payments must be voluntary -- that is, they cannot be payment towards your loan that comes from a garnishment or tax refund offset. If your payments are currently made through garnishment, you will have to contact your loan servicer and attempt to set up a voluntary payment plan.
As with consolidation, you cannot rehabilitate a loan that has been reduced to a judgment.
Rehabilitation and Your Credit Report
Rehabilitation can be better than consolidation for your credit rating. If you rehabilitate a loan, credit reporting agencies will remove any mention of the default from your credit report. However, any history of late payments before you entered default status will remain on your credit report.
How to Rehabilitate Your Student Loan
To start the rehabilitation process, start with the rehabilitation resources available from the Department of Education’s Default Resolution Group at www.myeddebt.com/borrower/myoptions_rehabilitate.