Student Loans: Getting Out of Default

Behind on student loan payments? Learn how to get out of default.

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If you are more than 270 days behind in your student loan payments, you are considered in default. 

Getting out of default is key to dealing with student loans. Many repayment plans and most postponement options require that you not be in default, or that you make three reduced, timely payments to qualify for a postponement or reduced-payment option. In addition, as long as you’re in default, you are not eligible to get new loans or grants. To learn more, see What Happens if You Default on Your Student Loans

Here are the various ways to get out of default: 

Cancel Your Student Loan

You can get out of default if you qualify to have your loan canceled (discharged). This is the best option, because when you cancel the loan, you are no longer obligated to repay it. However, there are limited ways to qualify for loan cancelation, so this option won't work for many people.

To learn about the different ways to cancel student loans, see the articles in Nolo's Student Loan Debt area.

Get a Consolidation Loan

You can get out of default by getting a consolidation loan with a repayment plan matched to your income

With a consolidation loan, you combine one or more of your federal student loans into a single loan with one monthly payment. To learn more, see Student Loan Consolidation.

Once you get a Direct Consolidation Loan, you will immediately be taken out of default status. You will stay out of default as long as you keep making payments. Loan consolidation is usually a faster way to get out of default than a reasonable and affordable payment plan (see below), so it often makes sense to try this first.

Get a Reasonable & Affordable Payment Plan

Another way to get out of default is to set up a “reasonable and affordable payment plan” with your loan holder. Borrowers in default have a statutory right to such a payment plan, based on financial circumstances. Be careful in negotiating a plan. By the time you are in default, your loan may be held or serviced by a state guarantee agency or a collection agency under contract with the Department of Education. Some loan servicers, especially collection agencies, may try to make you agree to payments higher than you can afford.

Eligibility to Apply for New Loans

If you make six consecutive and timely payments (within 15 days of when due) under a reasonable and affordable payment plan, you become eligible to apply for new federal student loans or grants if you want to return to school. But beware: If you default after you complete the six payments, you cannot enter into another reasonable and affordable payment plan. You can renew eligibility through such a payment plan only once. However, if you are unable to maintain on-time payments for six consecutive months during the first time you get a reasonable and affordable payment plan, you may try another reasonable and affordable payment plan.

Getting Out of Default

Six payments are not enough to get you out of default. In order to get out of default, you must make at least nine timely payments (within 20 days of when due) in a period of ten consecutive months. Perkins rehabilitation does not specify that the payments must be reasonable and affordable, only that the nine required payment amounts are to be set by the school. If you have a Perkins loan, you should negotiate for reasonable and affordable payments.

Loan Rehabilitation

After you make the qualifying number of payments, the guaranty agency or Department of Education can usually sell your loan to a new lender. This is called loan rehabilitation. Once your loan is rehabilitated, you will be put on a standard ten-year repayment plan or you should request one of the more flexible options. (To learn more, see Student Loan Repayment Options.)  However, you can only one get one loan rehabilitation after August 13, 2008, so be sure the plan is something you can handle before you agree to it. You will not have a second chance. Loan rehabilitation also wipes out the default notation on your credit report.

The option to rehabilitate (bring current) a loan is not automatically available if the creditor has already gone to court and obtained a judgment against you for the debt. Lenders have the choice to rehabilitate these loans but are no longer required to do so.

To learn more about default, student loan repayment options, ways to cancel your loans, and more, see Nolo's Student Loan Debt area.

This is an excerpt from Nolo's Solve Your Money Troubles: Debt, Credit & Bankruptcy, by Margaret Reiter and Robin Leonard.

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