How to Get Out of Default on Your Federal Student Loans

Legal Update: Borrowers who have defaulted on their federal student loans can have their loans returned to good standing, any delinquency cured, and again get access to several student aid benefits under the "Fresh Start" initiative. The Fresh Start program will end on September 30, 2024.

Also, if you're paying your loans under an income-driven repayment (IDR) plan or are seeking Public Service Loan Forgiveness (PSLF), usually consolidating your loans would cause you to lose credit for qualifying payments you've already made toward IDR forgiveness or toward PSLF. But if you apply to consolidate your student loans (see below) by April 30, 2024, you can get credit for forgiveness as far back as your first loan payment on the oldest of the original loans in the bundle.

According to chamberofcommerce.org, one-quarter of student loan borrowers (10.3 million) owe $40,000 or more in federal student loans. And for many, repaying those loans will be a challenge. But defaulting on your federal student loans can lead to severe consequences, like:

• tax refund offsets and federal benefits intercepts (sometimes called "Treasury offsets")
• 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.

If you go into default on your federal student loans, you might be able to resolve the matter by rehabilitating your loans or consolidating them.

What It Means to Default On Your Federal Student Loans

If your FFEL or Direct Loan payments are due monthly, default will occur after 270 days—about nine months—of missed payments. If your payments are due less frequently than monthly, default occurs after 330 days of missed payments, about 11 months.

But a Perkins loan is in default as soon as you miss a payment or violate any other term of the payment agreement.

Rehabilitating Your Federal Student Loans to Get 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, which may require a rehabilitation agreement.

Collection fees usually 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 normally continue to accrue.

How Rehabilitating Your Federal Student Loans Affects Your Credit

After completing your rehabilitation payments, the loan will no longer be in default. The servicer will remove all references to the default status from your credit reports. But the previous late payments will continue to be reported.

Federal Student Loan Consolidation to Get 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. So, collection fees will accrue for a shorter amount of time than under a rehabilitation plan.

However, be sure to consider the pros and cons of federal student loan consolidation (see below) before taking this step. First, here are some basics about the program.

You Get to Pick the Servicer When You Consolidate

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

Requirements for Federal Student Loan Consolidation

You'll have to make three payments before consolidating unless you choose an income-based repayment plan. If you're married and applying for an income-based repayment plan, your spouse must usually also sign the request.

Also, remember that you must submit income verification each year that you're enrolled in an income-based repayment plan.

How Federal Student Loan Consolidation Affects Your Credit

The default status of the previous loan and late payments will remain on your credit reports for the total amount of time allowed under the Fair Credit Reporting Act.

Pros and Cons of Federal Student Loan Consolidation

Before you move forward with a Direct Consolidation Loan, consider both the advantages and disadvantages.

Advantages of Federal Student Loan Consolidation

Consolidating your federal student loans into a Direct Consolidation Loan offers some potential advantages.

You Might Pay Less Each Month

Consolidating your loans could lead to lower monthly payments because the repayment term is extended up to 30 years.

The Interest Rate Is Fixed

Direct Consolidation Loans have a fixed interest rate. Since July 1, 2006, all federal student loans have a fixed interest rate. But if you have federal loans, except Perkins Loans, that were disbursed before this date, you might have a variable interest rate on one or more of your loans. If the variable rate loans that you're consolidating currently have low rates, you can lock in a fixed low rate by consolidating.

The new interest rate is determined based on the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest one-eighth of a percent.

You'll Make Only One Payment Each Month

After your loans are consolidated, you'll only have to make one payment each month instead of multiple payments on various loans. For many people, keeping track of their student loan balance is easier.

You Could Get Access to Different Repayment Options

By consolidating, you might get access to a repayment plan that wasn't previously available to you. You can repay a Direct Consolidation Loan, in most cases, with:

• a standard repayment plan
• a graduated repayment plan
• an extended repayment plan
• the Income-Contingent Repayment (ICR) Plan
• the Pay As You Earn Repayment Plan (PAYE)
• the Saving on a Valuable Education (SAVE) Plan
• the Revised Pay As You Earn Repayment Plan (REPAYE), or
• an Income-Based Repayment (IBR) Plan.

You Can Get Access to the Public Service Loan Forgiveness (PSLF) Program

Consolidated loans are eligible for the PSLF program. So, federal loans originating under the FFEL program or the Perkins loan program can be consolidated into a new Direct Consolidation Loan to qualify for PSLF. Otherwise, these kinds of loans usually aren't eligible for the PSLF program.

But including a Perkins Loan in a consolidation loan will cause the loss of other specific cancellation benefits only available for that program.

You Might Get Access to Other Loan Forgiveness Options

With a Direct Consolidation Loan, you'll get access to income-based repayment plans that provide loan forgiveness.

Why You Might Not Want to Get a Direct Consolidation Loan

The following are a few potential downsides to consolidating your federal student loans under the Direct Consolidation Loan program.

You Might Be On the Hook for More Interest

Again, consolidation will extend the repayment period—perhaps to 30 years—which lowers the monthly payment. But you'll pay more interest over the life of your loan. If you've just about paid off your student loans, it might not be worthwhile to consolidate.

Also, because the rate is based on the average rate of your consolidated loans, the rate on a consolidation loan might be higher than it was on some of the loans before you consolidated. So, if you have one or more loans with significantly higher interest rates, it might make sense not to consolidate those loans and instead focus on trying to pay them off more quickly.

You Don't Get a Grace Period

With a Direct Consolidation Loan, you don't get a grace period. The repayment period starts immediately upon consolidation, and the first payment will be due in around 60 days.

However, if any of the loans you want to consolidate are still in the grace period, you can delay the processing of a Direct Consolidation Loan until the end of a grace period if you make this selection in the application.

You Won't Get an Immediate Credit Score Boost If You Were In Default

If you were in default, your report will reflect that your previous loans were in default but are now paid in full through the new loan. So, consolidating your loans won't immediately help your credit. But if your payments are affordable after you consolidate and you continue to make on-time payments, your credit scores will begin to improve.

On the other hand, if you rehabilitate your federal student loans, the lender will remove the default from your credit history (but not your history of late payments).

Your Prior Payments Won't Count Toward Loan Forgiveness

You don't get to count any payments that you made on a loan before you consolidated for loan forgiveness requirements; consolidation restarts the clock on loan forgiveness programs. So, you lose credit for any payments made toward forgiveness, like income-driven repayment plan forgiveness and PSLF.

You Might Lose Some Benefits Associated With the Loans You're Consolidating

By consolidating, you could lose other benefits, like reduced interest rates, principal rebates, repayment incentive programs, or loan cancellation benefits that are available under the loans that you're consolidating. Again, if you include a Perkins Loan in the consolidation, you'll lose certain cancellation benefits only available from that program.

Can You Rehabilitate or Consolidate a Student Loan Twice?

Both rehabilitation and consolidation are available only once for each federal student loan. But it's possible to consolidate just one loan. So, you could get out of default quickly on a particular loan while retaining the ability to consolidate other federal student loans if you default on a different one.

How to Rehabilitate or Consolidate Your Student Loans

To consolidate or to start a loan rehabilitation arrangement related to your defaulted federal student loans, contact the Department of Education's Default Resolution Group, or call them at 800-621-3115 (TTY for the deaf or hearing-impaired 877-825-9923) for assistance. Learn more at StudentLoans.gov.

Other Ways to Get Out of Default On Your Federal Student Loans

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

Applying for a Discharge of Your Federal Student Loans

In some cases, you might qualify for student loan forgiveness (also called a loan "discharge" or "cancellation"). If you think you qualify for loan forgiveness under one of the many programs, you should apply even if you're in default. However, you might have to get out of default to qualify.

Paying Off Your Federal Student Loans

If you have money available, it could make sense to pay off the loan.

Refinancing Your Federal Student Loans

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

Sometimes, it makes sense to refinance a federal student loan as a private loan. But you'll lose access to federal repayment plans, repayment incentives, and forgiveness programs. Make sure that it's in your best interest to refinance before you do so. It usually isn't.

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.