I have a student loan in default but I need more financial aid. What now?

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Stanley tate

Student Loan Lawyer

$400M+ student loans managed

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You have 3 options to get federal student loans out of default to go back to school:

  • negotiate a federal student loan settlement
  • apply for a Direct Consolidation Loan
  • enter into the loan rehabilitation program

All 3 of these options don’t apply to loans that are in delinquency, only loans in default.

You can go back to college if your student loans are in default. But you won’t be able to get financial aid to pay for it.

Can I get FAFSA if I have defaulted student loans? You can’t get FAFSA if you have defaulted student loans. You’ll first need to get your student loans out of default to regain eligibility for federal student aid.

To get approved for financial aid, you’ll need to get your student loans out of default first.

You qualify for financial aid again after you make student loan payments for 6 consecutive months. Here’s more information on how to get financial aid back once you lose it.

What is the best way to go back to school with defaulted student loans? The best way to go back to school with defaulted student loans is to get your loans out of default first or pay cash for your education.

The only private lender that has the power to stop you from going to school is your school. If you defaulted on a private student loan borrowed directly from your school, you may need to get that loan out of default before you can enroll at all.

The good news is once you regain eligibility for student aid, you can re-enroll in school. Then you‘ll gain automatic in-school deferment as long as you’re enrolled in school at least half-time.

How long will it take before I can get out of default?

Of those 3, the fastest to get you out of student loan default so you can qualify for additional federal student aid is a student loan settlement.

The federal student loan settlement process takes about 2 weeks from start to finish. But a student loan settlement is expensive. You'll only save about 10-15% of the loan balance and have to pay the settlement in 30-90 days.

The next fastest option for getting out of default to qualify for financial aid is applying for a Direct Consolidation Loan.

Most student loan borrowers can get out of default with consolidation in about 6-8 weeks.

The loan rehabilitation program is the slowest way to get out of student loan default so you can go back to school. It takes about 9 months to get out of student loan default.

Each of these options will get your student loans out of default and reinstate your eligibility to obtain further federal student aid.

COVID-19, student loan default, and going back to school

The federal government has placed most federal student loans into deferment/forbearance until September 30, 2021. It’s yet to be determined if this period will be extended.

The suspension stops all payments without accruing late payments and penalties. It also dropped all student loan interest rates to 0%, so your loans in deferment or forbearance won’t accrue interest.

The COVID-19 suspension also paused all collection efforts like wage garnishments and taking tax refunds.

However, the COVID-related student loan changes did not make borrowers already in default eligible for additional financial aid.

If you want to go back to school and you have defaulted student loans, you'll still need to get out of default, even with the COVID-19 protocols in place.

Option 1: A federal student loan settlement

Student loan settlement is the most immediate of the 3 options. As soon as your settlement payment is received and processed, you’ll regain your eligibility for financial aid.

The pros of settling student loans include:

  • You’ll get rid of your defaulted loans quickly.
  • The damage to your credit from a default status will stop and the status will be removed from your credit report (though the settlement will go on your credit).
  • You’ll have a better debt-to-income ratio for future borrowing.
  • Collection efforts like wage garnishment will stop.
  • Your loans will no longer accrue interest or late payment fees.

The cons of settling student loans include:

  • You’ll need a large lump sum of money to offer the loan holder.
  • You must be in default to settle, which will negatively impact your credit.
  • You may need to pay income tax on the portion of the student loan debt waived in the settlement.
  • Your credit report will show that you did not pay the debt in full.

How to negotiate a student loan settlement

Once you default on your federal student loans, the U.S. Department of Education is often willing to settle your Federal Family Education Loan Program (FFEL), Direct PLUS Loans, and Perkins loans.

To negotiate a federal student loan settlement:

  1. Log in to studentaid.gov to check your federal student loan repayment status and identify the loan servicer and debt collection agency.
  2. Call the collection agency and let them know you would like to settle your student loan (politely).
  3. Negotiate the student debt settlement amount based on the lump sum you can afford to pay.
  4. Get the agreement in writing from the collection agency.
  5. Pay the settlement amount you agreed on with the lender within the specified timeframe.
  6. Request written confirmation that the student loan has been satisfied after the payment clears.

Option 2: Consolidating your student loans

A consolidation loan combines your defaulted federal student loan with another loan in good standing to create a new Direct Consolidation Loan. This leaves you with a single loan with one easy-to-manage payment.

The interest rate on your new loan will be the average of the loans you consolidated and weighted on the balance of each.

The pros of Direct Consolidation loans are:

  • You’ll be out of default in as little as 2 months.
  • You don’t need to have good credit to qualify.
  • It can lower your monthly payment by giving you up to 30 years to repay your loans.

However, Direct Consolidation loans have their drawbacks, too:

  • You can’t have an administrative wage garnishment sent to your employer.
  • You will likely pay more interest over time because your repayment length has been extended.
  • You will lose credit for any payments made toward income-driven repayment plan forgiveness or Public Service Loan Forgiveness.

Parent Plus Loan borrowers beware: You may not want to consolidate your Parent Plus Loans with student loans you borrowed for your school. Doing that will make you ineligible for the best repayment plans based on your income.

How to apply for loan consolidation

Because you're in default, you have two options when applying for consolidation.

To consolidate your federal loans, you can either:

  • Consolidate immediately and agree to repay your loans under an income-driven repayment plan, or
  • Agree to make 3 monthly payments under the IBR plan, then consolidate

In my experience as a student loan lawyer, there's literally no benefit to the borrower to do the second option. All of my clients choose the first option.

With income-driven repayment, your monthly payment under that plan will be based on your family size and income. This can provide relief to borrowers who need their payments reduced in order to get out of default.

To apply for a consolidation loan:

  1. Go to studentaid.gov/app/launchConsolidation.action.
  2. Start the application process (you’ll need to log in to studentaid.gov if you aren’t already).
  3. Enter your borrower information.
  4. Enter your references (2 adults who don’t live with you and have known you at least 3 years will need to offer a reference for you).
  5. View all of your loans and choose which loans you want to consolidate.
  6. Sign the Promise to Pay agreement (which is a legally binding contract).
  7. The Office of Federal Student Loans will process your application.

Important note: You’ll need to make payments while your application is being processed to avoid going back into default.

To apply for income-driven repayment:

  1. Visit studentloans.gov and log in to the site with your Federal Student AID ID.
  2. To get your income, the website will connect you to the IRS's website.
  3. Once on the IRS website, use your Social Security number to get the adjusted gross income from your last tax return.
  4. Some student loan borrowers aren't able to access their tax returns to get their AGI. If that happens to you, you'll need to submit a paper income-driven repayment application to the loan servicer you chose to handle your consolidation.

It doesn’t have to be intimidating; the whole process can take fewer than 30 minutes.

Do you work for the government or a nonprofit? You may not want to consolidate all of your loans if you've begun earning credit towards Public Service Loan Forgiveness or Teacher Forgiveness.

Option 3: Rehabilitating your defaulted student loans

Loan rehabilitation allows you to get out of default by making 9 on-time payments within 10 months. Your payments are on time if they're made within 20 days of the due date.

However, Perkins loans have different rules. You have to make 9 monthly payments within 9 consecutive months.

After your 9th payment, the default status will be removed, and your loans will be back in good standing.

Student loan rehabilitation is probably the most effective method for getting your student loans out of default.

Here are some of the pros of rehabilitating your loans:

  • You don't have to wait 9 months to regain eligibility for student aid.
  • You can regain eligibility for additional federal student aid after you make 6 monthly payments under your repayment plan.
  • Your monthly payments will be low.
  • The default status will be removed from your credit report.
  • You can rehabilitate loans even if your wages are being garnished.

Some of the downsides of student loan rehabilitation are:

  • It takes the longest of the 3 options to get out of default.
  • Your late student loan payments from before you went into default will remain on your credit history.
  • You may be charged fees, although these can be waived.
  • You have to rehabilitate each defaulted loan separately.

How to start the loan rehabilitation program

To begin the student loan rehabilitation program, you’ll need to do the following:

  1. Contact the Department of Education's Default Resolution Group and find out who has your defaulted loans.
  2. Read How to Rehabilitate Your Student Loans so you can be prepared to make the call.
  3. Contact the collection agency that has your default loans and let them know you’d like to enter the rehabilitation program. They will then calculate your monthly payment amount based on your discretionary income.
  4. Once your monthly payment amount is calculated, you'll make your first payment with a debit card or provide your checking account information. You can’t use a credit card to make your monthly payments.
  1. I’ve found it’s best to schedule your payments using your checking account. That way, you don't have to worry about updating the collection agency if your card is lost or stolen.
  1. Once your payments are scheduled, the last thing for you to do is sign your student loan rehabilitation agreement letter and return it to the collection agency.
  1. This agreement provides the terms of the loan rehabilitation program and your responsibilities under it.
  1. Finally, you wait. All you have to do is make your payments, and you'll be able to apply for student loans in 6 months — and be out of default in 9 months.

Consolidation vs. loan rehabilitation

Consolidation is a great choice because:

Neither loan consolidation nor loan rehabilitation removes any delinquency from your credit report. The late payments will remain on your credit report.

The one negative with consolidation is that your student loan debt will balloon with the consolidation loan.

Collection fees and accrued interest are capitalized (added to your principal loan balance) when you consolidate.

And that brings me to the 2 pros of rehabilitation:

  • First, the US Department of Education has stated that its policy is not to capitalize collection fees when you complete loan rehabilitation. So when you rehabilitate, your loan is transferred to a new loan servicer. Your loan amount should include only your principal and interest.
  • Second, rehabilitation removes the default status from your credit report, which can improve your credit score.

However, what loan rehabilitation does not do is to remove the late payment history reported by your loan holder. The history remains unless you can get it deleted.

Other consequences of defaulting on your student loans

Defaulting on your student loans means you lose eligibility for a lot of things when it comes to your student loans. Things like forbearance, deferment, loan forgiveness, and even additional financial aid are off-limits if you default on your student loan.

What is a student loan default? Student loan default happens when you stop making your payments.

Federal student loans will enter default after you miss payments for 270 days, or 9 months. Private student loans will enter default after 120 days of no payments; depending on the private lender, it could be less.

What are the consequences of defaulting on student loans? The consequences of defaulting on student loans include:

  • Damaged credit. Regardless of your outcome, your credit score will drop from the missed payments. Bad credit will make it difficult to get a credit card, force you to pay high interest rates, and need a higher down payment to get approved for loans.
  • Increased loan balance. Your accrued interest and collection fees can cause your loan amount to balloon.
  • Ineligibility for other student loan features. When you default on a student loan, you will lose eligibility for forbearance, deferment, loan forgiveness programs, and other loan modifications.
  • Lost income. If your defaulted loans are owned by the government, they can collect on unpaid loans through wage garnishment, tax refund offsets, or Social Security income offsets.
  • Trouble getting a mortgage. This could make it more challenging to buy a home.

Which option is right for you to qualify for financial aid again?

Which option is best for you really depends on you and your situation. Your future goals are also at play here.

It's hard to give personal advice without me knowing more about you. During a consultation, we’ll discuss details like:

  • How soon do you want to return to school?
  • Have you earned credit towards forgiveness under one of the forgiveness programs?
  • How many federal student loans do you have?
  • What type of federal student loans do you have?
  • What was your adjusted gross income for last year?
  • What's your family size?

Want to return to school? Let me help.

Finishing your degree is important. In order to get a good job to pay off your student loans, you need to finish school. In order to finish school, you need to get your student loans out of default.

It can be frustrating, I get it.

But I can help!

Let’s start by chatting. Schedule a free 10-minute call with me. I’ll get a better understanding of your situation and what you want to accomplish, and when.

From there, we can create a game plan to get your student loans taken care of, so you can get back to school and finish what you started.

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Stanley Tate outside in snow.
Hey, I’m Tate.

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

Read a bit about me & how I got started with student loans.

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