If you failed to make your payments on your federal student loan and now are in default, don’t let the consequences of default affect your financial future. Find out how to get out of default.
Loan Rehabilitation
Loan Consolidation
Repayment in Full
Getting Help With Your Defaulted Loan
One way to get out of default is to repay the defaulted loan in full, but that's not a practical option for most borrowers. The two main ways to get out of default are loan rehabilitation and loan consolidation. While loan rehabilitation takes several months to complete, you can quickly apply for loan consolidation. However, loan rehabilitation provides certain benefits that are not available through loan consolidation. Take a look at the chart below to compare the benefits of loan rehabilitation versus the benefits of loan consolidation.
Loan Rehabilitation and Consolidation Comparison Chart
|
Benefit Regained |
Loan Rehabilitation |
Loan Consolidation |
|---|---|---|
|
Eligibility for Deferment |
Yes |
Yes |
|
Eligibility for Forbearance |
Yes |
Yes |
|
Choice of Repayment Plans |
Yes |
|
|
Eligibility for Loan Forgiveness Programs |
Yes |
Yes |
|
Eligibility to Receive Federal Student Aid |
Yes |
Yes |
|
Removal of the Record of Default From Your Credit History |
Yes |
No* |
*NOTE: We previously indicated that loan consolidation would result in removal of the record of default from a borrower’s credit history. That cell of the table has now been corrected to indicate that loan consolidation will not result in removal of the record of default from the borrower’s credit history.
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. Late payments will remain on your credit report for seven years from when they were first reported. It’s important that you fully understand loan rehabilitation and loan consolidation before making your decision. Learn more about loan rehabilitation and loan consolidation.
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.
Loan Rehabilitation
One option for getting your loan out of default is loan rehabilitation.
William D. Ford Federal Direct Loan (Direct Loan) Program and Federal Family Education Loan (FFEL) Program
To rehabilitate a defaulted Direct Loan or FFEL Program loan, you must
- agree in writing 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.
Under a loan rehabilitation agreement, your loan holder will determine a reasonable monthly payment amount that is equal to 15 percent of your annual discretionary income, divided by 12. Discretionary income is the amount of your adjusted gross income (from your most recent federal income tax return) that exceeds 150 percent of the poverty guideline amount for your state and family size. You must provide documentation of your income to your loan holder.
If you can’t afford the initial monthly payment amount described above, you can ask your loan holder to calculate an alternative monthly payment based on the amount of your monthly income that remains after reasonable amounts for your monthly expenses have been subtracted. You’ll need to provide documentation of your monthly income and expenses. Depending on your individual circumstances, this alternative payment amount may be lower than the payment amount you were initially offered. To rehabilitate your loan, you must choose one of the two payment amounts.
Depending on your income, your monthly payment under a loan rehabilitation agreement could be as low as $5.
Your loan holder may be collecting payments on your defaulted loan through wage garnishment or Treasury offset (taking all or part of your tax refunds or other government payments). These involuntary payments may continue even after you begin making payments under a loan rehabilitation agreement, but they can’t be counted toward the required nine voluntary loan rehabilitation payments. Involuntary payments may continue to be taken until your loan is no longer in default or until you have made some of your rehabilitation payments.
Once you have made the required nine payments, your loans will no longer be in default.
Federal Perkins Loan Program
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. Find out where to go for information about your Perkins Loan.
Benefits of Loan Rehabilitation
When your loan is rehabilitated, the default status will be removed from your loan, and collection of payments through wage garnishment or Treasury offset will stop. You’ll 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, and you’ll 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.
If you rehabilitate a defaulted loan and then default on that loan again, you can’t rehabilitate it a second time. Rehabilitation is a one-time opportunity.
Loan Consolidation
Another option for getting out of default is to consolidate your defaulted federal student loan into a Direct Consolidation Loan. Loan consolidation allows you to pay off one or more federal student loans with a new 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.
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 after a judgment was obtained against you, you cannot consolidate the loan unless the wage garnishment order has been lifted or the judgment has been vacated.
If you choose to repay the new Direct Consolidation Loan under an income-driven plan, you must select one of the available income-driven repayment plans at the time you apply for the consolidation loan and provide documentation of your income.
Note: If you want to consolidate a defaulted PLUS loan that you obtained as a parent to pay for your child’s education, the only income-driven plan you can choose is the Income-Contingent Repayment Plan (ICR Plan).
If you choose to make three consecutive, voluntary, on-time, full monthly payments on your defaulted loan before you consolidate it, you may repay the new Direct Consolidation Loan under any repayment plan you are eligible for.
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.
Learn more about consolidation and how to apply for a Direct Consolidation Loan.
Repayment in Full
A third option for getting out of default is to repay the full amount of your defaulted student loan.
Getting Help With Your Defaulted Loan
If you need help with your defaulted loan, you will need to contact the holder of your defaulted loan. Find out who holds your loan by logging in to “My Federal Student Aid.”
Note: “My Federal Student Aid” will not include information about any private student loans you may have received.
