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  • 7m.

    Recovering From Student Loan Default (You Can Do It!)

    Did you miss a loan payment or two—or a few? Defaulting on federal student loans is serious, but you can recover by paying your debt in full, rehabilitation, or consolidation.
    Updated: August 15, 2016

    What You'll Learn

    • The different ways to get a federal student loan out of default.
    • How each option works.
    • The pros and cons of selecting rehabilitation or consolidation.
    Life preserver floating in water

    If your federal student loans are in default, you may feel like you've run out of options—but that's not the case. There are three ways to get your loans out of default and back into good standing.

    • Paying in full (don't worry: 99% of people can't do this)
    • Rehabilitation
    • Consolidation

    Each method has advantages and disadvantages, so let's run through those as well as how much extra each option will cost you. (While you can fix some consequences of default depending on the option you choose, you will likely end up paying fees. Sorry.)

    Pay In Full

    Once your student loan defaults, the entire balance comes due at once. Not many of us can write a check for tens of thousands of dollars, but paying whatever you can helps.

    Cost: Collection costs of up to 25% of your loan balance will be applied 120 days after the default, so lowering that balance as much as you can will make a difference.


    To rehabilitate your loans, you need to make nine on-time monthly payments to your loan holder. You and the loan holder (or the collection agency working with the loan holder) will agree on a reasonable and affordable payment amount for these.

    All nine payments must be consecutive, on time (within 20 days of the due date), and voluntary to count toward rehabilitation. If your wages are being garnished, you will have to make these voluntary payments in addition to the garnishment. Once you make the first five payments, the garnishment order will be suspended. You may only receive this suspension once, so it's important to keep making your rehabilitation payments on time.

    How Much Will My Payment Be?

    Your loan holder will initially calculate your rehab payments as 15% of your disposable income (which is your adjusted gross income minus 150% of the poverty level for your family size). To do this, they will need information about your income, as well as the number of people in your family. You can provide these details verbally over the phone; however, if you agree to this payment amount, you must submit proof that your income is what you said it was. You can estimate what your rehabilitation payments will be here.

    If you can't afford that amount, your loan holder will ask for more information about your expenses via this federal form to better understand your total financial circumstances. This often, but not always, results in a lower payment. You can then choose between the 15% formula amount and the amount based off the more detailed information. If neither is acceptable, you may not be able to participate in the rehabilitation program.

    What Happens After Rehabilitation?

    Once you have agreed upon a payment amount and made all the payments, your loan is considered rehabilitated (yay!) and your loan will be sent to a new lender and servicer. You will send all future payments to this new loan servicer, so make sure you have their payment address and contact information.

    You'll also need to work with them to develop a new payment plan that will allow you to keep your loan in good standing, as loans rehabilitated on or after August 14, 2008, can only receive the rehabilitation opportunity once. Rehabilitated loans are eligible for lower payment options, such as income-based repayment and extended repayment.

    Not only will rehabilitation get your loans back on track, but it may also help your credit and lower your collection costs. And, if you are going back to school, you typically become eligible for additional financial aid once your six payments into the rehabilitation process.

    To get started, contact your loan holder, which will be either your guarantor or the Department of Education. You can find out who this is on the National Student Loan Data System (NSLDS®).

    Cost: Collection costs may be charged of up to 16% of the total unpaid amount, which includes interest. If you enter into the rehabilitation agreement and make an eligible payment toward an acceptable satisfactory repayment arrangement within 60 days of receiving your original notice of default and completely satisfy the agreement until the loan is out of default, you may not be charged collection costs.

    Advantage: Once your loans are rehabilitated, the default will be removed from your credit history (though the delinquency will stay).

    Disadvantage: Time. Rehabilitation takes 9 months. If you are looking to go back to school soon and need financial aid, this could delay your educational goals.


    Consolidating out of default is a faster way to get out of default than rehabilitation, but it doesn't have the same advantages.

    You can consolidate your loans out of default by doing either of the following:

    • Arranging three consecutive payments with your current loan holder and then consolidating into the Direct Loan program (the only place where you can consolidate federal student loans).
    • Agreeing to repay a consolidation loan under an income-based or income-contingent repayment plan with Direct loans.

    This means that you can have your loans out of default in 3 months or less! Just keep in mind that consolidation can make your loan more expensive by extending how long you repay the loan. You can learn all about the general pros and cons of consolidation here.

    Cost: Collection costs may be charged of up to 18.5% of the total unpaid amount, which includes interest. If you pay the loan in full or make an eligible payment within 60 days of receiving your original notice of default and before consolidating, you may not be charged collection costs.

    Advantage: Time. This can be done faster than rehabilitation.

    Disadvantage: Consolidation does not remove the default from your credit report and can cost you more money over the lifetime of your loan.

    Going Back To College

    You can’t receive federal financial aid (loans and grants) while your federal student loans are in default. To regain this eligibility, your fastest solution would be consolidation. This may also be your only option if you are in the middle of enrollment.

    However, if you aren’t enrolling in the immediate future, you can still opt for rehabilitation and its benefits. If you do, you need to make just six on-time payments according to your rehabilitation agreement to reapply for federal financial aid or have your school disburse your aid. Remember to make your last three rehab payments, too. Your loans will still be in default until you do. And you can only regain aid eligibility in this way once—so be careful not to default again.

    Once you successfully rehabilitate your loans, they can be placed in an in-school deferment if you are attending school at least half time.

    To Get Started

    There really isn't a right or wrong choice here. Whichever method you choose should be the one that works best for you. To get started, contact your loan holder. If you aren't sure who that is, you can look it up in NSLDS.

    How Do I Get Private Student Loans Out Of Default?

    The options for getting a private student loan out of default aren't as clear as for federal student loans—but you can still do it.

    First, talk to your loan holder as soon as you can about how to fix the default. They will likely ask you to pay the full balance immediately. Don't panic. Ask about setting up an arrangement that gets the loan back into good standing after you make a certain amount of payments. Your loan holder may say no. If they do, still pay what you can every month—even if it's only $5.

    Doing this shows a good faith effort to repay your loan and that you acknowledge your debt obligation. If the worst happens and your loan holder sues you due to your unpaid debt, the court is much more likely to side with you because you made that effort. After a year of making these payments, contact your loan holder again and ask if you can get your loan out of default based on your payment history. There's no guarantee here, but they will be much more likely to remove the default after they see that you're serious about making your payments.

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