You can get your federal student loans out of collections using one of the options offered by the Department of Education (settlement, rehabilitation, or consolidation) or, in rare cases, by declaring bankruptcy.
1. Settle the debt with a lump sum
Settlement wipes out some of the outstanding interest and a small part of the principal balance, but you must pay the reduced amount within three months.
Read more about the student loan settlement process.
2. Rehabilitate your loan
Loan rehabilitation returns your loans to good standing after you make nine monthly payments on time in ten months. Rehabilitation can remove collection fees and erase the default status from your credit history, but not the missed payments.
Related: How to Rehabilitate Student Loans
3. Consolidate the defaulted loans
Loan consolidation pays off the loans in default and gives you a new loan made under the Direct Loan Program. You can apply for a Direct Consolidation Loan for free online at StudentAid.gov.
Related: How to Consolidate Defaulted Student Loans
4. Discharge your student loans in bankruptcy
Filing student loan bankruptcy may let you get part or all of your student loans discharged in bankruptcy if you can prove undue hardship.
This option is a last resort and should be pursued after all other efforts have failed. It’s possible to get rid of student loans by filing for bankruptcy, but the bar is very high compared to other loans that may be discharged in bankruptcy.
Bankruptcy creates a long-term negative mark on your credit report that will make qualifying for credit of any kind hard, if not impossible.
Related: How to Discharge Student Loans in Bankruptcy
Private student loans
Private lenders like Sofi and Sallie Mae don’t offer loan repayment options or programs that let borrowers bring their accounts current after the loans have defaulted, been charged off, and transferred to collections.
To get your private loans out of collections:
Ask the debt collector about establishing a payment plan.
Negotiate a payoff for a lump sum, monthly payments, or a combination of the two.
Refinancing is typically out of the question. Missing student loan payment kills your credit score and makes it nearly impossible to meet the eligibility requirements to refinance. But one company works specifically with borrowers that have defaulted on private student loan debt: Yrefy.
You may also want to consider bankruptcy, which is somewhat easier (though still a last resort) for private loans compared to federal debts.
Learn more: Settle Student Loans for Pennies on the Dollar