How To Get Out Of Default

By Daniel SachsUpdated September 15, 2017

It’s easy to despair when you default on your student debt. However, what many borrowers do not realize is that there are options out there that will help you avoid the worst consequences of defaulting.

In this article, we examine the two options available to you if you’re already in default of federal student loans:

  • Loan rehabilitation
  • Loan consolidation

Loan rehabilitation

Loan rehabilitation allows you to have the default status on your loan removed stopping the collection of payments.

Borrowers will regain eligibility for benefits that were available on the loan before you defaulted, such as deferment, forbearance, a choice of repayment plans, and loan forgiveness. You’ll also be eligible to receive federal student aid. Also, the record of default on the rehabilitated loan 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.

Rehabilitation is a one-time opportunity only. If you rehabilitate a defaulted loan and then default on that loan again, you can’t rehabilitate it a second time.

How it works

The specific requirements for default rehabilitation vary by loan type:

William D. Ford Federal Direct Loan (Direct Loan) Program and Federal Family Education Loan (FFEL) Program

You must agree to make nine voluntary, reasonable, and affordable monthly payments (as determined by your loan holder) within 20 days of the due date, and make all nine payments during a period of 10 consecutive months. Reasonable monthly payment is equivalent to 15% of your annual discretionary income, divided by twelve. Discretionary income is the amount of your adjusted gross income that exceeds 150% of the poverty guideline amount for your state and family size.

Note that if you can’t afford the initial monthly payment amount, you can ask your loan holder to calculate an alternative monthly payment based on the amount of your monthly income.

Once you have made the required nine payments, your loans will no longer be in default.

Federal Perkins Loan

To rehabilitate a defaulted Federal Perkins Loan, you must make a full monthly payment each month, within 20 days of the due date, for nine consecutive months. Your required monthly payment amount is determined by your loan holder.

Loan consolidation

The other option to clear your defaulted federal student loans is to have them consolidated with a Direct Consolidation Loan. A Direct Consolidation Loan allows you to combine all your federal education loans into one loan. The result is a single monthly payment based on a fixed interest rate.

After your defaulted loan has been consolidated, your Direct Consolidation Loan will be eligible for benefits such as deferment, forbearance, and loan forgiveness. You’ll also be eligible to receive additional federal student aid, but unlike loan rehabilitation, consolidation of a defaulted loan does not remove the record of the default from your credit history.

How it works

To consolidate a defaulted federal student loan you will need to 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.

There are special considerations if you want to reconsolidate an existing Direct Consolidation Loan or Federal (FFEL) Consolidation Loan that is in default:

To reconsolidate a defaulted Direct Consolidation Loan, you must also include at least one other eligible loan in the consolidation in addition to meeting one of the two requirements described above. If you have no other eligible loans that can be included in the consolidation, you cannot get out of default by consolidating a defaulted Direct Consolidation Loan. Your options are repayment in full or loan rehabilitation.

You may reconsolidate a defaulted FFEL Consolidation Loan without including any additional loans in the consolidation, but only if you agree to repay the new Direct Consolidation Loan under an income-driven repayment plan. If you include at least one other eligible loan in the consolidation, you’re eligible to reconsolidate a defaulted FFEL Consolidation Loan if you meet either of the two requirements described above.

In addition, if you want to consolidate a defaulted loan that is being collected through garnishment of your wages, or that is being collected in accordance with a court order, you cannot consolidate unless the wage garnishment order has been lifted or the judgment has been vacated.

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