Posted by Nick Dvorscak
If you didn’t make payments on your federal student loans and are now in default, don’t get discouraged. It may seem like an overwhelming situation, but you have multiple options for getting out of default. Remember, it’s in your best interest to act quickly to resolve the default, because the consequences of default can be severe.
Default Resolution Group
1-877-825-9923 TTY for the deaf or hard of hearing
Options for Getting Out of Default
You have three options for getting out of default: loan rehabilitation, loan consolidation, or repayment in full.
1. Loan Rehabilitation
To rehabilitate most defaulted federal student loans, you must sign an agreement to make a series of nine monthly payments over a period of 10 consecutive months. The monthly payment amount you’ll be offered will be based on your income, so it should be affordable. In fact, your monthly payment under a loan rehabilitation agreement could be as low as $5! Each payment must be made within 20 days of the due date.
Note: You can rehabilitate a defaulted loan only once.
2. Loan Consolidation
Loan consolidation allows you to pay off your defaulted federal student loans by consolidating (combining) your loans into a new Direct Consolidation Loan.
To consolidate a defaulted federal student loan into a new Direct Consolidation Loan, you must either
- agree to repay the new Direct Consolidation Loan under an income-driven repayment plan or
- make three consecutive, voluntary, on-time, full monthly payments on the defaulted loan before you consolidate it.
3. Repayment in full
Repayment in full is exactly as it sounds; you can repay the full amount that you owe at any time.
We understand that repayment in full is not a viable option for most people. If that’s the case, you should focus on deciding between loan rehabilitation and loan consolidation.
Comparing the Benefits You Regain After Rehabilitation and Consolidation
Now that you have a better understanding of what rehabilitation and consolidation are, you can determine which option is best for you. Once your loan has successfully been removed from default, you will regain eligibility for certain benefits, depending on whether you chose rehabilitation or consolidation.
|Loan Rehabilitation||Loan Consolidation|
|Regained eligibility for deferment, forbearance, and loan forgiveness||Yes||Yes|
|Regained eligibility for additional federal student aid||Yes||Yes|
|Choice of repayment plans||Yes||Yes (but there may be limitations—see below**)|
|Removal of the record of default from your credit history||Yes (but see below*)||No|
*If you rehabilitate a defaulted loan, the record of the default will be removed from your credit history. However, your credit history will still show late payments that were reported by your loan holder before the loan went into default. If you consolidate a defaulted loan, the record of the default (as well as late payments reported before the loan went into default) will remain in your credit history.
**Unless you make three voluntary, on-time, full monthly payments on a defaulted loan before you consolidate it, your choice of repayment plans for the new Direct Consolidation Loan will be limited to one of the income-driven repayment plans. If you make three voluntary, on-time, full monthly payments before consolidating, you can choose from any of the repayment plans available to Direct Consolidation Loan borrowers.
Staying Out of Default
There are a number of things you can do to keep yourself on track and out of default:
1. Enroll in an income-driven repayment plan.
If you haven’t already, you should consider enrolling in an income-driven repayment plan. Learn more about income-driven plans.
2. Consider setting up automatic payments.
Sign up for automatic debit through your loan servicer, and monthly payments will automatically be made from your bank account. You may also get a 0.25% interest rate deduction just for enrolling.
3. Track your loans online.
Log in to “My Federal Student Aid” to find information about all of your federal student loans.
4. Keep good records.
It’s helpful to keep important documents such as records of monthly payments, payment schedules, and notes about phone calls to your loan servicer in an organized file.
5. Stay in touch with your loan servicer.
As soon as you think that you’ll have trouble making your monthly payment, contact your loan servicer to discuss your situation—they are there to help you. Additionally, if you enrolled in an income-driven repayment plan, your loan servicer will let you know when it’s time to recertify your income and family size.