You have two options to consolidate defaulted student loans: make three consecutive months of payments based on your income and apply later or agree to enroll in an income-driven repayment plan and apply immediately. The best choice for you depends on your personal finances.
Consolidation is one pathway you can take to get student loans out of default. It is faster and cheaper than the other three options, loan rehabilitation, settlement, paying the full amount. But consolidation is not an option for every borrower in default. If you have an active student loan wage garnishment or the defaulted student loan is a Direct Consolidation Loan, you may have to look at another option to dig out of default.
Keep reading to learn how to consolidate defaulted student loans and if it’s right for you.
Can you consolidate defaulted student loans?
The U.S. Department of Education allows borrowers to consolidate student loans in default in most instances. However, there are a handful of cases where consolidation is off-limits.
Step 1: Log in to studentaid.gov. You’ll need a Federal Student Aid (FSA) ID to log in. Once inside, click “Manage Loans” and then “Consolidate My Loans”.
Step 2: Choose the loans to consolidate. If a loan in default is already consolidated, you can reconsolidate if you include one other eligible loan in the consolidation or if it is an FFEL Consolidation Loan. The interest rate for the new loan will be a fixed rate based on the weighted average of the interest rate of the loans included in the application.
Step 3: Choose a repayment plan. To consolidate your loans out of default, you’ll need to choose one of the income-based student loan repayment options. Borrowers with Parent PLUS Loans will need to choose the Income-Contingent Repayment Plan (ICR). Your new student loan payments will be based on your discretionary income and family size.
Step 4: Chose a student loan servicer. You can choose the company you want to handle the new consolidation loan.
Step 5: Read the disclosures. Check your contact information, loans included in the application, and review the terms in the Master Promissory Note before signing.
Step 6: Review the Loan Summary Statement. A few weeks after you apply, the loan servicer will send you a statement showing the details of your new Direct Consolidation Loan. Check the letter to see your new loan balance, interest rate, and monthly payment amount.
The process to consolidate student loans in default, from start to finish, typically takes about six to eight weeks. However, I have helped clients trying to clear the CAIVRS report and close on a federally backed mortgage (FHA, VA, or USDA) consolidate their loans in less than four weeks.
Federal Student Loan Consolidation Companies
The Department of Education hires private companies to process student loan consolidation applications and service the loans once payment begins. In 2022, the student loan servicing landscape will shift. Granite States (GSMR) and Navient will stop servicing loans at the top of the year, with the latter moving its Education Department accounts to Aidvantage. Later in the year, FedLoan, which manages the Public Service Loan Forgiveness and PSLF Waiver programs, will stop servicing federal loans when its contract expires.
For now, you can choose the following companies to consolidate your loans:
Unfortunately, consolidation won’t remove collection costs or the late payment history and default status from your credit report. Loan rehabilitation is the only option that can remove a negative mark from a credit history. However, you’ll have to make nine on-time payments before the credit bureaus are notified. If you need to raise your score quickly, getting out of default with consolidation may be your best option.
Private lenders typically won’t agree to consolidate defaulted private student loan debt. Loans that previously defaulted may qualify depending on the lender. But you’ll be hard-pressed to find a lender willing to refinance loans with a current default status. The only lender I know of that helps borrowers in these situations is Yrefy. The refinancing company offers competitive interest rates and flexible repayment terms.
Will Biden approve student loan default forgiveness?
One year into the Biden Administration, it appears unlikely that Biden will approve student loan default forgiveness or blanket loan cancellation of any kind. During his campaign, President Biden said he would forgive $10,000 of federal student loans as part of his Emergency Action Plan for the economic recovery. But despite constant pressure from progressive lawmakers who suggest President Biden could forgive student loan debt with a flick of the pen, Americans who voted for the president are still waiting for some type of relief.
Deciding if consolidating defaulted student loans is right for you? Let’s talk.
Consolidation may be the best choice for you if you need to get out of default quickly or want your loans to be in one place with one monthly payment. But if your goal is to pay your loans off in the near future or eliminate collection fees, settlement or loan rehabilitation may be better choices.
If the process for getting out of default sounds overwhelming, I’m here to help. I’ve worked with people just like you with their federal and private student loans for years.
Schedule a free 10-minute call with me today. We’ll work together to develop a plan that fits your current financial situation and sets you up to meet your future goals.
Whether you have defaulted on federal or private student loans, I’ll get you back on track.