You have three 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
Of those three, the fastest to get you out of student loan default so you can qualify for additional federal student aid is a settlement.
The federal student loan settlement process takes about 2 weeks from start to finish. Settlement is expensive, however. You'll only save about 10-15% of the loan balance. Plus, you have to pay the settlement in 30-90 days.
The next fastest is applying for a Direct Consolidation Loan.
Click here to read Consequences of Defaulting on a Federal Student Loan
Most student loan borrowers can get out of default with consolidation in about 6-8 weeks.
The loan rehabilitation program is the slowest. It takes about 9 months to get out of student loan default.
You qualify for financial aid, however, after you make student loan payments for 6 consecutive months.
The only private lenders that have the power to stop you from going to school is your school. If you defaulted on a private student loan you borrowed from your school, you might need to get that loan out of default before you can enroll.
Click here to learn How to Get Federal Financial Aid (FAFSA) to Go Back to School
COVID, default, and going back to school
The federal government has placed most federal student loans into deferment/forbearance through September 2021.
The suspension stops student loans from sending wage garnishments to employers and taking tax refunds. It did not make borrowers in default eligible for additional financial aid.
If you want to go back to school and you have defaulted student loans, you'll need to get out of default.
What is loan consolidation?
A consolidation loan takes your defaulted federal loan and combines it with another loan to create a new Direct Consolidation Loan.
This option will have you out of default and eligible for financial aid in about 2 months.
The interest rate on your new Direct Loan consolidation will be the weighted average of the loans you consolidated.
You don't need to have a good credit score to consolidate your loans.
You qualify so long as:
- you have another federal student loan to consolidate the defaulted student loan with or
- you're consolidating an FFEL Consolidation Loan and
- you're not under an active wage garnishment for your defaulted student loans.
You cannot consolidate a defaulted student loan if an administrative wage garnishment has been sent to your employer.
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 get a consolidation loan
You can consolidate your loans at studentloans.gov.
You'll need a Federal Student AID ID to log in to the site.
Once logged in, you'll be able to view all of your loans.
You can choose which loans you want to consolidate.
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.
Because you're in default, you'll need to apply to make your loan payments under an income-driven repayment plan.
Your monthly payment under that plan will be based on your family size and income.
The website will try to get your income by connecting you to the IRS's website.
That website will use your Social Security number to get the adjusted gross income from your last tax return.
Some student loan borrowers aren't able to access their tax return 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.
Click here to read How to Consolidate Defaulted Student Loans
What is loan rehabilitation?
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.
Perkins loans have different rules. You have to make 9 monthly payments within 9 months.
After your 9th payment, the default status will be removed, and your loans will be back in good standing.
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. You still have to make the remaining 3 payments to get out of default.
How to start the loan rehabilitation program
Contact the Department of Education's Default Resolution Group to find out who has your loans to start the rehabilitation process.
The DRG will be able to tell you which collection agency has your loans.
Before you call, read How to Rehabilitate Your Student Loans so you can be prepared.
In that article, I explain how the collection agency calculates the amount of your monthly rehabilitation payments. (Hint: they use your discretionary income).
After your monthly payment amount is calculated, you'll make your first payment with a debit card or using your checking account information. (You can't use credit cards to make your monthly payments.)
In my experience, scheduling your payments using your checking account information is the better way to go. That way, you don't have to worry about updating the collection agency if your card is lost or stolen.
Once the payments are scheduled, the last thing for you to do is sign your student loan rehabilitation agreement letter.
This agreement provides the terms of the loan rehabilitation program and your responsibilities under it.
You'll need to sign the loan rehab agreement and return it to the collection agency.
From here, you wait. Make your payments. You'll be out of default in 9 months.
Consolidation vs. loan rehabilitation
Consolidation is a great choice because:
- It's faster than rehabilitation
- You get to choose your loan servicer and
- You're statistically less likely to re-default
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 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 two 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. And that could 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.
Which Option is Best for You
It's hard to say without knowing more about you. During a consultation, I'd want to know:
- 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? Etc.
Your answers help me advise you. Can you wait to return to school? Cool, maybe we can rehabilitate and stop you from getting collection fees. Do you have loans made under the Federal Family Education Loan program, but you work for the government? Maybe we need to consolidate to get you out of default and qualify you for forgiveness.
There's no best answer on whether you should rehabilitate or consolidate to get your student loans out of default to go back to school. If you can wait, wait. But if you need to start school now, consolidation is your best option — even if it causes your loan balance to balloon.