Failing to make payments on your federal student loan may cause you to end up in default. While the quickest way to get out of default is by repaying the defaulted loan in full, this is often not a realistic option for most borrowers.
Before pursuit of either option available to resolve defaulted loans, you will need some key information:
- Which agency/servicer is currently holding your loans?
- If you're not sure, call Dept of Ed Loan Locator to find out: 1-800-621-3115
- Are you already in Default? If so, for how long?
- How much do currently owe (total)?
- Ask Collections/Servicer what your options are to get out of default
- ...any other additional information you can gather
The two alternatives available to federal student loan borrowers are loan rehabilitation and loan consolidation. The Federal Student Aid Office of the Department of Education provides the following information on rehabilitation and consolidation:
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. To fulfill loan rehabilitation, you must agree in writing to make nine voluntary, on-time monthly payments over the course of ten months.
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.
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 (IDR) 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 re-consolidate an existing Direct Consolidation Loan or Federal (FFEL) Consolidation Loan that is in default:
- To re-consolidate 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 re-consolidate 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 re-consolidate a defaulted FFEL Consolidation Loan if you meet either of the two requirements described above.
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.
For further details and information, please visit https://studentaid.ed.gov/sa/repay-loans/default/get-out