How to Get Student Loans Out of Default

Updated on April 9, 2026

Federal student loans exit default through one of four paths: rehabilitation, consolidation, settlement, or bankruptcy discharge. Which path fits depends on how fast you need out, what you can afford, and what you’re trying to protect.

The Four Paths Out of Default

Rehabilitation and consolidation are administrative programs — the two paths the Default Resolution Group and collection agencies offer. Settlement and bankruptcy are legal paths that require negotiation or litigation. Most government resources don’t mention them.

This article covers federal student loans. Private student loans don’t have access to rehabilitation or consolidation — the paths are settlement or bankruptcy.

Loan Rehabilitation

Rehabilitation removes a federal student loan from default after you make nine qualifying payments during a ten-month window. It’s the only path that deletes the default notation from your credit report.

The trade-offs: rehabilitation takes the longest — roughly a year from request to completion. It works only once per loan. And if your wages are being garnished, garnishment continues during the process, though it must be suspended after your fifth qualifying payment.

Payments are based on income and can be as low as $5 per month.

Loan Consolidation

Consolidation exits default by replacing the defaulted loan with a new Direct Consolidation Loan. Processing takes six to eight weeks.

The trade-offs: consolidation does not remove the default from your credit report — the record stays, but the new loan reports as current. And federal regulations prevent you from consolidating while wage garnishment is active.

Low-income borrowers who consolidate and enroll in an income-driven repayment (IDR) plan may qualify for a $0 per month payment — exiting default without paying anything upfront.

How to Choose Between Rehabilitation and Consolidation

The decision turns on three factors: whether you need speed (consolidation), whether credit repair matters (rehabilitation), or whether garnishment is already active (rehabilitation is the only administrative option).

Both paths restore eligibility for federal aid, IDR plans, and forgiveness programs. Neither one reduces your balance — the full amount, plus any accrued interest and fees, carries forward.

Settlement

Settlement resolves a defaulted student loan by negotiating a payoff for less than the full balance. Unlike rehabilitation and consolidation, settlement ends the debt, not just the default.

Federal settlement terms are set by the Department of Education through the Default Resolution Group (DRG). Standard federal compromises typically require payment of the outstanding principal and interest and waive collection costs. Private loan settlements can offer discounts of 30% to 60% of the balance in some cases.

The trade-offs: you need a lump sum or the ability to pay within a short window. And any forgiven balance may count as taxable income.

Bankruptcy Discharge

Bankruptcy can eliminate student loan debt entirely — but it requires filing an adversary proceeding and proving that repaying the loans would cause undue hardship. This is the only path that ends the debt without any payment.

In 2022, the Department of Justice created a streamlined process for federal student loan discharge cases. Borrowers who meet certain criteria on the attestation form may receive a full or partial discharge without a trial. This guidance applies to Direct Loans, FFEL Program loans, and Perkins Loans — not to private student loans.

The trade-offs: the process requires filing for bankruptcy, takes at least months (longer if contested), and the legal standard for undue hardship varies by federal circuit.

What Happens After You Get Out of Default

Exiting default restores access to federal programs that were suspended during default. The specific benefits depend on how you got out.

After rehabilitation or consolidation, you regain eligibility for income-driven repayment plans, deferment, forbearance, and forgiveness programs including Public Service Loan Forgiveness (PSLF). You also regain eligibility for new federal student aid, which matters if you’re returning to school.

If you consolidated, you’ll need to select a repayment plan for the new loan. An IDR plan qualifies for PSLF and IDR forgiveness.

If you’re returning to school, restoring aid eligibility through rehabilitation or consolidation requires completing the full process. A faster alternative for aid eligibility alone: six voluntary, on-time monthly payments. Those six payments restore aid eligibility but do not remove the loan from default.

After settlement, the debt is resolved. The settled account will appear on your credit report as settled for less than the full amount.

After bankruptcy discharge, the loan is eliminated. The discharged debt will appear on your credit report as included in bankruptcy.

How to Get a Default Clearance Letter

A default clearance letter confirms that your loan is no longer in default. You may need one to restore federal financial aid eligibility, and some schools require it before processing new aid applications.

To request a default clearance letter, contact the Default Resolution Group directly:

Online: myeddebt.ed.gov
Phone: 1-800-621-3115

Processing time varies. Once rehabilitation or consolidation is complete and the loan is updated in the National Student Loan Data System (NSLDS), the letter confirms that status. If the system hasn’t been updated yet, it may take additional time.

FAQs

How do I know which option is right for my situation?

The decision depends on your priorities. If credit repair matters most, rehabilitation removes the default from your credit report. If speed matters most, consolidation processes in six to eight weeks. If you have cash available and want to resolve the debt entirely, a settlement ends the obligation. If repayment isn’t realistic given your income and circumstances, bankruptcy may be worth evaluating.

What is Fresh Start?

Fresh Start was a time-limited initiative that gave borrowers a streamlined path out of default during and after the COVID-19 payment pause. The enrollment window has closed. The current paths out of default are rehabilitation, consolidation, settlement, and bankruptcy.

Are collections currently active on defaulted federal student loans?

As of January 2026, the Department of Education paused all involuntary collections on defaulted federal student loans, including wage garnishment and tax refund seizure. The pause is in effect through July 2026. Borrowers in default can still pursue rehabilitation, consolidation, or other resolution paths during this period.