How to Get Out of Default on Your Federal Student Loans

Learn about your options for getting out of default.

If you are in default on a federal student loan, you might be subject to severe collection actions. The government can garnish your wages without a judgment, seize your tax refund, and intercept portions of federal benefits such as Social Security. 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. (For more information about what to expect if you default on your loans, see What Happens If You Default on Your Student Loans.)

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

Unlike with 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:

  • rehabilitation and
  • consolidation.

Rehabilitation

To rehabilitate a defaulted student loan, you must make nine payments 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. For 2018, these monthly amounts are as follows:

Family Size

150% of poverty level

1

$ 1,518

2

$ 2,058

3

$ 2,598

4

$ 3,138

5

$ 3,678

6

$ 4,218

Each additional person

$ 540

Then, the servicer will then determine your “discretionary income” by subtracting the amount in the chart above 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.)

Consolidation

Nearly all federal student loans can be consolidated. 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 a consolidation should be completed in less 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 are 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.

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 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 Loan

In certain cases, you might qualify for 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.

Pay Off or Refinance the 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.

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