How to Get Out of Student Loan Default

What Is Student Loan Default?

For most federal loans, your student loan servicer will report your account as delinquent to the credit bureaus after you haven't made payments for 90 days, and you'll be considered in default after 270 days of nonpayment.

To collect your unpaid balance, the government has the power to garnish wages directly from your paycheck and to withhold your tax refunds, government benefits and Social Security payments. Additionally, records of late payments, delinquency and default will all 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. And just like with a federal loan, your credit will suffer as a result of missed payments and default.

Your options to get out of private loan default depend on the lender's policies, but they're typically less structured or generous than what's available through the federal government.

How to Get Student Loans Out of Default

If you have federal student loans in default, the government offers two methods to get out of default, which have different eligibility rules, application processes and credit score impacts.

Consolidation

Loan consolidation bundles multiple federal loans into a single direct consolidation loan and gives you the opportunity to sign up for an income-driven repayment plan, which could give you a more affordable monthly payment going forward. After consolidating, you'll again be able to take on new federal loans and have access to benefits like payment pauses through deferment or forbearance.

The downsides of consolidation are that your accrued interest will be added to your loan balance, leaving you with a higher balance to pay off. Also, the default notation will stay on your credit report for seven years and continue to negatively affect it—whereas, with loan rehabilitation, it will be removed. Finally, if your wages are already being withheld to collect on the debt or you've been sued and subject to a court order, you'll only be able to sign up for consolidation after a court lifts the garnishment or the court order.

Rehabilitation

An alternative to consolidation is loan rehabilitation, which is specifically for those whose loans are at least 360 days past due. For most loan types, you'll make nine monthly payments within 10 months that are equal to 10% or 15% of your discretionary income, as determined by your student loan servicer.

After those nine payments are complete, your loans will no longer be in default, wage garnishments and other collection activities will stop and you'll regain eligibility for federal student loans and their benefits. The default record will be removed from your credit report, but the late payments preceding the default will remain.

Unlike consolidation, rehabilitation doesn't result in accrued interest being added to your loan balance, which will save you money. But applying for rehabilitation is more time-intensive than signing up for consolidation and must be completed through your loan servicer's own process, rather than via a centralized online form.

Repayment

If you have the means, you can pay the defaulted balance in full. Some federal loan servicers note that if you pay quickly—such as within 75 days of your first notice of default—they will not report the default status to the credit bureaus or charge collection fees. This may be an option for you if the amount of debt in default is relatively low or you're able to tap savings or even a one-time loan from friends or family to avoid default.

For private student loans, you can ask the lender or collection agency to settle your debtor set up a loan modification arrangement that makes your payments more affordable. It's best to work with a student loan attorney to ensure you understand the terms of any agreement you make. You can find free or low-cost legal help in your area at LawHelp.org.

Does Getting Student Loans Out of Default Help Your Credit?

Getting out of default can have a positive impact on your credit. For example, student loan rehabilitation removes the default status from your credit report, which will help you avoid the credit score effects of another negative mark. But late payments from before your loans went into default will continue to hurt your credit score, and can't be removed through federal default-resolution methods.

Since payment history is the most important contributing factor to your credit score, making timely student loan payments after default will give your credit a chance to recover. Additionally, pay all other bills on time, keep other debt balances low and consider adding positive payment history to your credit file—with little risk of taking on more debt—by applying for a credit-builder loan or secured credit card.

Frequently Asked Questions

The Bottom Line

Student loan default has far-reaching repercussions, the most damaging of which include harm to your credit score and the potential for your pay, tax refund and government benefits to be withheld. But there are several ways to get out of default, especially if you have federal loans.

Check your credit report and student loan account portals to see where you stand, and if you're in default, take a deep breath and consider your options. The sooner you decide to get out of default, the sooner you can improve your credit and pay down your debt with confidence.