How to Get Out of Default on Your Federal Student Loans

Learn your options for getting federal student loans out of default.

Defaulting on your federal student loans can lead to serious consequences, like tax refund offsets and federal benefits intercepts, wage garnishment, and the loss of eligibility for deferment, repayment plans, and probably forbearance. You might also find continuing your education or returning to school difficult because the Department of Education can deny you eligibility for new education grants or loans.

Two Main Ways to Get Out of Default: Rehabilitation and Consolidation

Unlike most other kinds of loans, borrowers of defaulted federal student loans have the right to get out of default. The two main ways to do this within the federal loan system are:

  • Student Loan Rehabilitation

  • Student Loan Consolidation

Student Loan Rehabilitation to Get Student Loans Out of Default

To rehabilitate a defaulted student loan, you must make nine payments within 20 days of the due date over the course of ten months. The servicer will set the amount of the payments.

How the Servicer Determines Your Payment Amount

You must submit information about your income, and the servicer will calculate a “reasonable and affordable” monthly payment based on that information and the federal poverty guidelines. First, the servicer will find 150% of the poverty level for your family size. Then, the servicer will then determine your “discretionary income” by subtracting the amount from your adjusted gross income (AGI) in your most recent tax return. The payment will be equal to 15% of your discretionary income.

What to do if the Payment is Still More Than You Can Afford

If the amount is still more than you can afford, you may submit documentation of your expenses. The servicer can determine a lower payment by deducting reasonable expenses. In all cases, the payment must be at least $5 per month.

What Happens Once the Payment is Set

Once your payment has been set, your servicer will send you documentation of the payment amount and may require a rehabilitation agreement. Collection fees will continue to accrue on your loan as long as it is in default and can be as much as 18.5% of the loan balance. These fees are in addition to the interest, which will also continue to accrue.

How Rehabilitation Affects Your Credit

After you complete your rehabilitation payments, the loan will no longer be in default. Additionally, the servicer will remove all reference to the default status from your credit report. However, late payments will continue to be reported. (Learn more about rehabilitating your federal student loans.)

Federal Student Loan Consolidation to Get Student Loans Out of Default

Nearly all defaulted federal student loans can be consolidated into a Direct Consolidation Loan. Combining your student loans through consolidation is a faster and cheaper way to get out of default on federal student loans than rehabilitation. You don’t have to pay fees to consolidate your loan, and consolidation should be completed in fewer than six months. Therefore, collection fees will accrue for a shorter amount of time than under a rehabilitation plan.

You Get to Pick the Servicer

When you consolidate, you must choose a servicer for your loan. This opportunity can be an advantage if you had a bad experience with your current servicer. You will also select a repayment plan.

Requirements for Consolidation

You will have to make three payments before consolidating unless you choose an income-based repayment plan (IBR, PAYE, REPAYE or ICR). If you're married and applying for an income-based repayment plan, your spouse must usually also sign the request. Also, keep in mind that you will have to submit verification of income each year that you are enrolled in an income-based repayment plan.

How Consolidation Affects Your Credit

The default status of the previous loan, as well as late payments, will remain on your credit report for the full amount of time allowed under the Fair Credit Reporting Act.

How To Consolidate Your Student Loans

You can apply for consolidation online at StudentLoans.gov. (Learn more about consolidating your federal, as well as private, student loans.)

Other Ways to Get Student Loans Out of Default

A few other options for getting out of default are getting a discharge, repaying the full loan amount, or refinancing the loan.

Apply for Discharge of the Federal Student Loan

In certain cases, you might qualify for student loan forgiveness (also called a "discharge"). If you think you qualify for loan forgiveness under one of the many programs, you should apply even if you’re in default. Though you might have to get out of default to be eligible.

Pay Off or Refinance the Federal Student Loan

Sometimes, it might be possible to pay off a defaulted federal loan in full or to refinance the debt.

Paying off the Loan

If you have money available, it could make sense to pay off the loan to improve your credit and cash flow.

Refinancing the Debt

Private lenders usually require a cosigner. Depending on the cosigner’s credit score, a private lender might be willing to refinance your defaulted loan.

Generally, you should consider either of these options only after you’ve determined that rehabilitation, consolidation, and discharge are not available to you.

Getting Help

To find out more about how to get out of default, ask your servicer. If you need help dealing with your servicer or need information about your available options, consider consulting with a student loan attorney or debt settlement attorney who deals with student loans.

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