Q: Should I consolidate my defaulted student loans?

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Stanley tate

Student Loan Lawyer

$400M+ student loans managed

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Wondering should you consolidate defaulted student loans?

Student loan borrowers contact me all the time wondering what’s the best way to get out of default: loan rehabilitation, consolidation, or settlement.

Without knowing more about them, it’s hard to say what’s the right decision for them. Before I answer that question I’d like to know how old the borrower is, what’s their loan balance, whether they’re under an active wage garnishment, what type of federal loans they have, etc.

Their answer to each of those questions helps me decide the right option for them.

For instance, if the borrower is 75 years old and their Social Security is being taken for $100 thousand in defaulted student loans, then neither settlement nor loan rehabilitation make sense. That borrower needs to get out of default fast. They need to consolidate.

But what if the borrower is 25 with $30 thousand in student loans. Then settlement makes sense if they can come up with 85% of the loan balance in 30 to 90 days. And if they can’t, loan rehabilitation makes more sense than consolidation because rehabilitation may allow the borrower to have their collection fees waived.

In between those two scenarios are a bunch of other people trying to decide whether to consolidate out of default.

In this post, I’ll share with you things you need to help you make that decision.

But first, let’s make sure we’re on the same page.

You Consolidate Federal Loans Out of Default…Not Private Student Loans

Loan consolidation typically involves taking one federal student loan and combining it with another federal student loan to create a new consolidation loan.

While it’s true that you can combine one private student loan with another private student loan, that process isn’t referred to as consolidation. Instead, it’s referred to as private student loan refinancing.

Loan consolidation is an option to get federal student loans out of default. It is not based on your credit worthiness. That means you can consolidate your federal student loans no matter your credit score.

Dangers of Federal Student Loan DefaultAs a reminder, you default on federal loans after 270 days of missed loan payments. When you default, the government can garnish your wages, offset your tax refund, offset your Social Security Benefits, and deny you financial aid. And they can do those bad things to you without a court order.

Private student loan refinancing, on the other hand, typically isn’t an option for private student loans that are in default.

This is because private lenders typically look at the credit score of both you and your cosigner to decide whether to refinance your loans. If you’re delinquent on your student loan payments, your credit score takes a hit, and it will be incredibly difficult to find a lender willing to refinance your loans.

The Dangers of Consolidating Defaulted Student Loans

There are 3 dangers to consolidating a defaulted loan:

  1. Collection Fees are Added to Your Student Loan Debt
  2. Lose Credit Towards Public Service Loan Forgiveness
  3. Lose Eligibility for Income-Driven Repayment Plans

Let’s go through each danger in more detail.

#1 Collection Fees Are Capitalized During Consolidation

When you defaulted, the government added collection fees to your account.

Collection FeesWhen you look at your loans on the National Student Loan Data System, you won’t see the collection fees added your loan balance. To find out the amount of collection fees that have been added to your account, you’ll need to contact the collection agency handling your loans. They’ll send you a letter showing the breakdown of your loan balance.

Consolidation takes those collection fees and the accrued interest and adds them both to your existing principal balance. This process is called capitalization.

Capitalization can cause you to owe double or triple what you originally borrowed.

You can avoid capitalization by entering into a loan rehabilitation agreement. Typically, at the end of your agreement, the government will waive the collection fees.

#2 Consolidation Resets the Public Service Loan Forgiveness Clock

A consolidation loan is a new loan with no payment history. And because it has no payment history, you lose all credit you’ve already earned towards student loan forgiveness under the Public Service Loan Forgiveness program or one of the income-driven repayment plans when you consolidate.

Loan rehabilitation simply pauses the credits you’ve earned towards forgiveness. Once your loans are out of default, you’ll pick back up where you left off at in terms of the number of payments you need to get loan forgiveness

#3 Avoid Consolidating Defaulted Parent Plus Loans

If you have defaulted federal loans you borrowed for your children and federal loans you borrowed for your studies, avoid consolidating those loans together.

Combining defaulted Parent Plus Loans with other federal student loans causes you to lose eligibility under the income-driven repayment plans that offer the lowest monthly payments.

The best thing to do in that situation is to get 2 consolidation loans: one for the defaulted Parent Plus Loans and one for your other defaulted federal student loans

The Benefits of Consolidating Defaulted Student Loans

Consolidating defaulted student loans does have dangers, but it also has plenty of benefits.

Below are six of those benefits

#1 Federal Loans Get Out of Default Quickly

Consolidation gets you out of default about 3x faster than loan rehabilitation. So if you need to get out of default quick to keep your tax refund or to raise your credit score to buy a home, then consolidation is the way to go.

From start to finish, the consolidation process takes about 2 to 3 months to complete.

You can speed the process up by doing two things. First, after you submit your consolidation application, call your servicer to make sure they got your paperwork, including your income information.

Second, a few weeks into the process, your servicer will send you a loan summary statement. That statement explains which loans will be included in the loan consolidation, your new loan balance, and an estimate of your loan payments under various repayment plans.

You have 10 business days to review that statement. You have the right to waive that review period. To do so, simply contact your loan servicer and let them know that’s what you want to do.

#2 Make Progress towards Loan Forgiveness Faster

Any payments you make on your federal loans while they’re in default do not count towards any of the loan forgiveness programs.

This prohibition also includes payments you make under the loan rehabilitation program. Those 9 months of payments only count towards getting you out of default. They do not count towards loan forgiveness.

So if you’re pursuing forgiveness under the PSLF program, consolidation will get you earning credit faster than loan rehabilitation. But remember, consolidation also causes you to lose any credit you’ve already earned.

#3 Get One Loan Servicer for All Your Federal Loans

Quite a few of my clients who started college before 2010, have loans with different loan servicers.

They have some loans with Navient. Some with Nelnet. And still others with their school.

Keeping up with their loans is a chore.

In truth, it’s such a chore, that it often causes them to default. They simply don’t have the time to keep up with who their loan has been sent to.

Consolidation eliminates that problem.

After you consolidate, you’ll have one loan servicer for your loans.

#4 You get to Choose Your Loan Servicer

Hate the loan servicer who had your loans before you defaulted?

Choose a different servicer when you consolidate.

Consolidation is the one time when you get to choose which company you want to work with to make your payments.

You’re probably wondering which servicer I’d choose.

To be honest, no loan servicer is perfect. They each have their issues. Having said that, I like Nelnet and Great Lakes. But that’s mostly because I think the messages they send borrowers are much more informative than the other servicers.

#5 Raise Your Credit Score Faster

Admittedly, I have no hard evidence of your credit score improving faster with consolidation than with loan rehabilitation.

All I have are the comments I get from clients. My clients who gout of default through loan consolidation say their credit scores improved about 2 months after the consolidation completed.

My loan rehabilitation clients report that they don’t start seeing improvement until after they make the last of their monthly payments.

What Happens to Your Credit Report After You Consolidate Defaulted Student Loans

A consolidation loan pays off the student loan debt for the loans included in the consolidation and adds a new loan to your credit report.

Your credit report should show a $0 balance for each included loan. And those loans should indicate they were paid in full. The default status and the late payment history, however, will remain.

Types of Student Loans Eligible for Consolidation

Most federal student loans are eligible for consolidation.

And some of those loans have the added bonus of not needing to be combined with other student loan debt in order to consolidate.

Confused? Stay with me.

Let’s say the only federal student loan you have is a consolidation loan made under the FFEL program.

You work for the government and want to qualify for the Public Service Loan Forgiveness program.

Right now, the FFEL consolidation loan doesn’t qualify. (Only Direct Loans qualify for the PSLF program.)

To qualify, you simply need to consolidate your FFEL loan into a Direct Consolidation Loan.

True, you’re not combining student loan debt. But you are using the consolidation process to turn your non-Direct Loan into a Direct Consolidation loan so you can get your debt forgiven for working in a public service job.

This process works for other types of non-Direct Loans as well.

What Do You Need to Know About Your Student Loans to Apply for Consolidation?

Let’s break this into two steps:

  1. finding out who has your loans and then
  2. finding out what’s going on with your loans


The first thing you want to do is know everything about your federal student loans.

The easiest way to do that is to visit the National Student Loan Data System.

National Student Loan Data System [NSLDS] homepage

The NSLDS website will tell you:

  • How many federal student loans you have
  • How much you owe in principal and interest (it won’t tell you what you owe in collection fees)
  • The interest rate on your loans
  • The payment status and history of your loans and
  • Which company has your loans currently

Once you have that information, the next thing I’d do is call the company that has your defaulted loan(s).


For many of you, your loans will have likely been sent to the Department of Education’s Default Resolution Group.

You can contact the DRG by calling them at 800-621-3115.

When you call, the automated system will ask you for your SSN and DOB.

From there, the system will tell you which collection company has your defaulted loans.

Call that company and confirm they have your loans and, more importantly, which loans they have.

Sometimes I’ve found that they may not have all of your defaulted student loans.

If that’s true for you, call DRG again and this time skip the automated system by pressing “0”. The live attendant should be able to tell you who to contact about your other loans.

#2 Find Out What’s Going On With Your Defaulted Student Loans

Now that you’ve tracked down who has your loans, you want to know the status of your loans.

Here’s the list of questions I ask the collection agency representative:

  • What’s the current balance
  • What’s the borrower’s account number
  • Is the borrower eligible for loan rehabilitation and
  • Has a garnishment order been sent to the employer? If not, has a notice of proposed garnishment been sent to the borrower?

The answer to the last question is key.

If a garnishment order has been sent to your employer, then you most likely won’t be able to consolidate the loan out of default.

The government has a rule that says you can consolidate federal loans only if their not under a current garnishment.

CONSOLIDATE DEFAULTED STUDENT LOANS UNDER GARNISHMENTEvery now and then I’ve been able to successfully consolidate federal loans while the employer was processing the garnishment order. The key is to move quickly


In practice, you’re under a current garnishment once the garnishment order has been sent to your employer. And that’s true even if your employer hasn’t taken the money out of your pay yet.

Your only option to get out of default at that point is the loan rehabilitation program or maybe filing a chapter 13 bankruptcy.

How to Consolidate Defaulted Student Loans in 5 Easy Steps

The process to consolidate your loans is super simple.

#1 Create an FSA ID

You should already have your Federal Student Aid ID if you logged into the National Student Loan Data System.

But if you don’t have it (or forgot the password) you can easily create an FSA ID by visiting fsaid.ed.gov.

#2 Visit studentloans.gov

IMO, the easiest way to consolidate defaulted student loans is to submit the consolidation application online at studentloans.gov.

Once logged in, you’ll be taken this screen:

Main screen consolidation student loans

From there, click on the tab that says “Apply for Loan Consolidation”.

Screenshot of apply for loan consolidation

You’ll then be taken to the start screen.

Start screen student loan consolidation

#3 Decide Which Loans to Consolidate

Deciding which loans to include in your consolidation can be a complicated decision if you work for the government or a nonprofit or have Parent Plus Loans.

Screenshot of screen which lets you choose which loans to consolidate

Consolidation creates a brand new loan with its own payment history. So if you’re a teacher or a nonprofit and you’re trying to get your loans forgiven under the Public Service Loan Forgiveness program, consolidation will cause you to lose months you’ve earned toward loan forgiveness.

And if you have defaulted Parent Plus Loans, consolidating your Parent Plus Loans with your non-Parent Plus loans will kick you out of the best student loan repayment plans. This is because a Direct Consolidation loan that paid off a Parent Plus loans is eligible only for the income-contingent repayment plan. It is not eligible for REPAYE, PAYE, and IBR, all of which lead to lower payments.

Another thing to consider is if you have federal loans that you’re close to paying off. You’ll want to consider if you should include those federal loans in your consolidation or if you should just keep them where they are and just pay them off.

#4 Choose Your Loan Servicer

Consolidation is the one time you get to choose which loan servicer you want to work with.

Screenshot how to choose new loan servicer

So if you didn’t like your experience with Navient or FedLoan choose Cornerstone, Great Lakes, or Nelnet.

PUBLIC SERVICE EMPLOYEESFor those of you who work for the government or a nonprofit, your servicer is chosen for you — FedLoan. They’re the only servicer authorized to handle the Public Service Loan Forgiveness program.

In my opnion, there are all pretty much the same. While I’ve found Great Lakes easy to work with and their written communication to be pretty clear, I’ve experienced their reps giving misinformation. And that’s true of my experience with other loan servicers.

#5 Complete the Loan Consolidation Application

Now that you’ve decided which loans you want to include in your consolidation it’s time to complete the application.

To do that, you’re going to need:

  • Your driver’s license number
  • Your employer’s name, address, and phone number
  • 2 references (name, number, address, and relationship)

About the references.

Don’t worry about them being called about your loans being in default.

The Department of Education wants 2 references to call in case you default again.

After you provide that information, you’ll be asked to get your adjusted gross income from the IRS website.

Screenshot of IRS connection screen

If you filed a tax return in the past 2 years, you’ll be able to get your AGI so long as you remember your filing status and address. But if you haven’t filed a recent tax return or you can’t remember your status, then you’ll have to submit your income information to your new loan servicer.

SUBMITTING YOUR INCOME INFORMATIONI suggest faxing your tax return or pay stub with the income-driven repayment application to the servicer handling the consolidation and then following up 2 days later to confirm they got it. The last thing you want is for your consolidation to get rejected because they didn’t get your income information.

When Do Monthly Payments on Defaulted Consolidated Student Loans Start?

Your consolidation should complete in about 2 months. Your monthly payments on your new consolidation loan should start about a month or two after that. Until then, your loan will be in an administrative forbearance. You won’t have to make any payments during this time, but interest will be accruing.

When is the Student Loan Default Status Removed from My Credit Report After Consolidation?

When you consolidate, the default status will remain on your credit report.

This is because consolidation doesn’t remove the default status or any other negative information from your credit report.

Instead, the consolidation loan will be added to your credit report as a new loan. Your old student loan debt will report as paid off.

CONSOLIDATION LOANS AND CREDIT REPORTSAfter you consolidate, your credit report will likely show two new loans in your name. Don’t worry, it’s just one loan broken into two portions: the subsidized and unsubsidized portions of the loan. The government pays some of the interest on the subsidized portion; The government never pays interest on unsubsidized loans. That’s your responsibility.

So if you’re worried about fixing your student loans to improve your credit score, explore the loan rehabilitation program.

What Are the Benefits of Working With an Attorney to Help Consolidate Defaulted Student Loans?

The truth is you can consolidate your student loans by yourself for free. You don’t need to hire someone to complete and submit the application for you. As I’ve shown above, for federal loans that’s easily done at studentloans.gov.

But the reason why you’d want to get professional help is to make sure consolidation doesn’t put you in a worse position — especially if you’re a public service employee and you’re seeking loan forgiveness.

In my opinion, student loans have too many tripwires to try and handle on your own without an experienced guide.

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I'm a student loan lawyer that helps people like you with their federal and private student loans wherever they live.

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