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If you've defaulted on your federal student loans, you've got options to get yourself back on track. You can choose to rehabilitate or consolidate your loans, and in either case, you're doing the right thing to get your student loans squared away.
Both options can lower your payments and help get your loans back in good standing. But these programs differ in a few ways, including how quickly they work and how they affect your credit. Private lenders generally don't offer either program, so you'll have to talk to your lender about your options.
Default can have serious consequences on your finances, including ruined credit, collection fees and, if you have federal loans, withheld wages and tax refunds. Taking action to get out of default is a crucial step to restoring credit and regaining access to federal financial aid if you need it in the future. Here's how.
What Is Student Loan Default?
Student loan default is what happens when you've neglected to make payments toward your student loans for a certain period of time. The time it takes to default and the repercussions of doing so will depend on the type of loans you have.
For most federal loans, your student loan servicer will report your account as delinquent to the credit bureaus after 90 days of nonpayment, and you'll be considered in default after you haven't made payments for 270 days.
When you default, the whole loan balance comes due. At that point you can either pay it in full or choose a default-repair option through the government. To collect your unpaid balance, the government has the power to garnish wages directly from your paycheck and to withhold your tax refunds. Additionally, records of late payments, delinquency and default all will damage your credit and stay on your credit report for seven years.
Private loans can go into default much faster—even after your first missed payment. (The same is true for federal Perkins loans.) While private lenders can't withhold your pay or tax refunds without a lawsuit, they could sue you to collect the debt. Defaulting on a private loan also means you'll be subject to collection fees and immediate payment of the balance. And just like with a federal loan, your credit will suffer as a result of private student loan default.
How to Rehabilitate Student Loans
Rehabilitation is one of two options available to federal student loan borrowers who are looking to get out of default. It requires you to make nine reduced monthly payments in a 10-month period, and as a result, the default notation will come off your credit report. Late payments before the default will still appear, however. Here's how to complete the rehabilitation process:
- Find the student loan servicer that manages your defaulted federal loan by logging in to My Federal Student Aid online. Using the contact information listed, explain to your servicer that you'd like to opt for loan rehabilitation for your defaulted loan.
- Submit proof of income to your servicer. The company will then calculate a monthly payment amount equal to 15% of your monthly discretionary income. You can ask for a lower payment if the servicer's initial offer is not affordable for you.
- Make nine monthly payments in the amount you've agreed to. If the government is withholding your wages or tax refunds to repay the debt, this may continue while you make payments under a rehabilitation agreement.
- Once you've made nine full, on-time payments, your loan will no longer be listed as in default on your credit report. You'll also regain access to federal financial aid and repayment benefits, and wage garnishment and tax refund withholding will stop.
You only get one chance to rehabilitate a defaulted federal student loan—so if you default on that loan again, rehabilitation won't be an option for you.
How to Consolidate Student Loans
Student loan consolidation is when the government pays off a previous loan, or multiple loans, and issues you a new direct consolidation loan. It's an option even for federal loans that are not in default: It can simplify repayment and give some borrowers access to repayment programs they couldn't use otherwise.
If you've fallen behind on payments, consolidation can help you get your loan out of default faster than rehabilitation. But the default notation will remain on your credit report for seven years, even after your defaulted loan has been consolidated into a new one. Here's how the consolidation process works when a loan is in default:
- Contact your student loan servicer and explain that you'd like to submit an application to consolidate a defaulted student loan.
- If you have the means, you can choose to make three on-time monthly payments on the loan before consolidation. Your loan servicer will determine the payment amount, but according to the U.S. Department of Education, it must be affordable for you. Once the loan is consolidated, you can then choose any repayment plan for the remainder of your payments.
- Alternatively, you can opt to make no payments before consolidating, and then choose an income-driven repayment plan once you've consolidated the defaulted loan. Income-driven plans limit your monthly payment to a percentage of your income. If your defaulted loan is a parent PLUS loan, the only income-driven plan you can choose is income-contingent repayment.
- Once your loan has been consolidated and you're making on-time payments according to your new loan agreement, your loan will be back in good standing. But your credit report will still reflect that it was in default.
You can't consolidate a defaulted loan if it's currently subject to wage garnishment, or if you were sued by a loan holder and your debt is being collected as the result of a judgment in court. The garnishment and judgment orders must end before you can consolidate.
Does Getting Student Loans Out of Default Help Your Credit?
Getting out of default can have a positive impact on your credit long term. Late payments from before your loans went into default will continue to negatively affect your credit score, and can't be removed through federal default-resolution methods. But student loan rehabilitation can remove the default status from your credit report, which may help your credit.
Since payment history is the most important contributing factor to your credit score, making on-time student loan payments after default will give your credit a chance to recover. Make sure to pay other bills on time, too, including credit cards, and keep other debt balances as low as possible.
Why It's Crucial to Get Out of Default
It's natural to feel ashamed or uneasy when you miss one or more student loan payments. But you shouldn't just avoid your loans; your best bet is to address the situation as soon as possible.
While student loan default has far-reaching repercussions, there are multiple ways to regain control of your finances, especially if you have federal loans. The sooner you decide to get out of default, the sooner you can improve your credit and move toward a loan-free life.