Here are six things you can do to try and get your federal or private loans out of default.
1. Wait for the statute of limitations to expire
After a lender charges off a private student loan, they must sue the borrower before the statute of limitations runs out. Once that happens, any case they filed against you can be tossed out because they waited too long to take you to court. Check your promissory note to find out which state’s laws apply.
In contrast, there is no statute of limitations for federal student loans. They never run out. The government has the right to collect from you until you die.
Related: How to Get Rid of Student Debt Without Paying?
2. Refinance with a new lender
Once you default on a private student loan, your repayment options go out the window. Your loan servicer’s no longer willing to offer you deferments, forbearances, or even work with you. They’ll send your loan to a debt collector, and that company will demand you pay the entire balance immediately.
The only way to dig the loan out of default and set up a new payment plan is to refinance the loan with a different lender. Unfortunately, finding a bank willing to give you a new loan to pay a debt you defaulted on can be near impossible. In fact, only one company offers this type of student loan refinancing: Yrefy.
Yrefy works explicitly with borrowers who’ve fallen behind on their private student loans but are committed to making a payment they can afford. Read my Yrefy review.
3. Move to a new country
You could flee the country to avoid being served with a lawsuit before the SOL runs out. It’s unusual for private lenders to track down borrowers outside the United States and serve them with a lawsuit. On the other hand, your federal loans will be waiting for you when you return. You could let those debts lie dormant until then, but you’d pass up a huge opportunity for forgiveness.
The US Department of Education writes off education loans that have been in repayment for two decades. Americans who move abroad can get out of default and enroll in an income-based repayment plan where their payment would be zero — even if they are employed — by taking advantage of the Foreign Earned Income Exclusion. Read more about not paying student loans while living abroad.
Related: How Do I Apply for Student Loan Forgiveness After 25 Years?
4. Negotiate a settlement
Private lenders don’t offer borrowers an option to bring their loans out of default after the debt has been charged off. But defaulting presents a unique opportunity: settling for a steep discount. You may be able to strike a deal that lets you save 30-70% of the current loan balance in a lump sum, monthly payments, or a combination of the two. The ability to get these types of savings is why some student loan borrowers consider a strategic default. Read more about strategic default for private student loans.
You won’t be able to get these types of agreements with the US Department of Education. The department has strict debt settlement guidelines. The most you’ll save is half of the outstanding interest and 10% off the principal. Worse, you’ll have 90 days to pay the settlement in full once your offer is accepted. Read more about settling student loan debt.
5. Consolidate or rehabilitate your federal loans
The Education Department is more understanding. They offer borrowers two paths to recover from default:
Consolidation is often the better choice becomes it gets you out of default quicker, occasionally improves the benefits you can get through the department’s student loan forgiveness programs, and restores your eligibility for income-driven repayment plans. Rehabilitation does many of the same things, but it can make more sense to go this route if your balance is low and you want to avoid interest capitalization.
No matter your choice, the late payments that led to your default will remain on your credit history. But rehabilitation can remove the default status from your credit report, which may slightly raise your credit score.
Related: How Much Will My Credit Score Increase After My Student Loan Default is Removed?
6. File bankruptcy
Getting rid of your student loans in bankruptcy isn’t impossible, but it can be a long shot — at least for federal student loans. The government offers a bunch of different affordable repayment options and forgiveness programs that make it hard for many student loan borrowers to argue that their loans are causing them undue hardship.
Related: Can Student Loans Be Discharged in Bankruptcy?
Private student loans are different. They don’t cap your payments at a portion of your discretionary income or have forgiveness programs that wipe out your balance after two decades of making payments. There’s no way out unless you pay the balance in full, which may be impossible based on your personal finances. All these things combine to make private loans a bit easier to discharge in bankruptcy.
Related: Can You File Bankruptcy on Private Student Loans?