You can get federal student loans out of default by applying for loan consolidation or entering into the loan rehabilitation program.
Which option for getting out of default is best for you, depends on your goals.
If you need to bring your federal loans back into good standing quickly to buy a home or get back in school, then a Direct Consolidation Loan is the best choice.
But if your goal is to clean up your credit history and to remove the collection costs from your student debt, then the rehab program is the best choice.
I've helped hundreds of student loan borrowers bring their loans back into good standing after defaulting. In this guide, I'll share what I know about dealing with the federal government and collection agencies so you can get out of default quickly.
Who is this guide for?
This guide is for anyone ready to face their student loan debt and finally defeat this monster. This guide's main focus is on helping people get their federal loans out of default, minimize the serious consequences of defaulted student loans, and get back into a repayment plan.
If you're in default on a private student loan, your option to get it out of default is typically limited to paying the student loan payments you missed or asking for a deferment/forbearance.
Private loan holders don't offer loan rehabilitation as an option. And because private lenders care about your credit score, it's near impossible to refinance a private loan that's in default.
When do you default
You default on federal student loans after you miss 9 monthly payments. (Technically, it's after you miss 270 days of payments.)
You default on private student loans usually after you miss just one payment, but your loan servicer likely won't say you're in default. They'll say your account is delinquent. (Check your promissory note to see how default is defined.)
For both federal and private loans, when you're delinquent, but not yet in default, you typically can bring your account current by paying the late payments or having a forbearance applied to your account.
Options for getting out of default
Most student loan borrowers will have two options to get their loans out of default:
- loan rehabilitation or
- Direct Loan consolidation
The loan rehabilitation program requires you to make 9 on-time payments before your loan is brought back into good standing.
The monthly payments are based on your discretionary income using either your adjusted gross income from your most recent tax return or your monthly income and expenses.
Consolidation gets you out of default in about 2 to 3 months. (But it can cause your loan balance to sky-rocket by adding collection fees to your principal balance.)
Neither option will remove the late payments from your credit history. (That information will continue to be reported to the credit bureaus because it's accurate; your payments were late.) But, the rehab program does remove the default status from your credit report. So that may be a small benefit of the program.
Benefit of default
There is one benefit of defaulting on your student loans: settlement.
While you can't settle a student loan that's in good standing, you can settle one that's in default.
Click here to read Guide to negotiating student loan settlements
Consequences of default
The federal government has special collection powers to recover defaulted loans.
Without suing you, the government can:
- garnish your wage using an administrative wage garnishment
- offset your tax refund
- offset your Social Security payments
- stop you from getting new federal student aid
- charge collection fees greater than 16%
- deny you new financial aid
- remove you from loan forgiveness programs
You don't have to worry about any of these consequences with private loans. They can't do anything to you until they sue and get a judgment.
COVID-19/Coronavirus student loan default considerations
As part of the CARES Act, the federal government suspended the interest rate and collections on student loans held by the US Department of Education. They also agreed to suspend the interest that accrues on your loans and to cover the monthly payments you're required to make under the rehab program.
These benefits last until September 30, 2020. After that, the usual collection process will begin again. That means if you don't get your loans out of default before then, you're at risk of a wage garnishment, tax refund offset, Social Security offset, etc.
NOTE: These benefits only apply to loans owned by the Department of Education. If you have Perkins Loans or FFEL loans, those loans may be owned by your school or a guaranty agency. The CARES Act doesn't cover those loans. That means you can still have your wages garnished for these types of loans. Check studentaid.gov to see if you have that type of loan and who your loan holder is.
Twice defaulted student loan
Your options for getting out of default are limited when you default a second time on the same loan.
Rehab isn't an option; that's a one-time thing.
And depending on the type of loan that's in default, consolidation may not be an option either.
Generally, you can consolidate a loan so long as it's not under an active wage garnishment, and you have another loan to consolidate it with.
Sometimes, however, you can consolidate one defaulted loan by itself. This only works for loans made under the Federal Family Education Loan program or the Federal Perkins Loan program.
With those loans, you're using the consolidation process to change the loan program they're made under from either the FFEL or Perkins program to the Direct Loan program.
Click here to learn 4 options when you've twice defaulted on the same loan
Once your loans default, your loan servicer sends them to collections.
If the Department of Educations owns your loans, your servicer will send your loans first to the Debt Management and Collection Systems unit in Greenville TX.
From there, your loans may stay with the Debt Management unit or, more likely, be sent to a private collection agency.
In my experience, many borrowers find it frustrating to work with the
Click here to Understand how the student loan collection process works