How to get out of student loan default: rehabilitation consolidation and what happens to interest

Quick Answer

Private student loans follow their own contracts, not the federal 270 day rule, so contact your lender. If you are behind but not in default, contact your servicer now.

Criteria for federal student loan default

This status differs from delinquency, which describes missed payments that occur before the 270 day mark. You can check your student loan options by checking your account with your loan servicer.

Consolidated: consolidation combines your old loans into a new loan

Consolidated loans are created by merging multiple education loans into a single Direct Consolidation Loan. This process simplifies your repayment by combining different debts into one monthly payment. It matters because it provides a structured way to manage and repay your defaulted debt.

Borrower responsibility for loans without cosigner

A loan without cosigner remains the borrower’s sole responsibility. A loan without cosigner is a debt where only the student is legally responsible for repayment. This includes a special student loan and helps you understand how interest accumulates during repayment.

A special student loan is a specific type of federal loan program with unique repayment terms. If a borrower defaults on a Direct Loan, the entire unpaid balance and accrued interest are immediately due and payable.

The Secretary may take action to collect the debt by filing a lawsuit, reporting the default to consumer reporting agencies, offsetting the federal income tax refund, or garnishing wages. The loan deduction phase is a step in the collection process.

When does a federal student loan enter default?

A federal Direct Loan enters default when the failure to make an installment payment persists for 270 days and the Secretary finds the borrower no longer intends to repay, according to 34 CFR Part 685 (U.S. Department of Education).

How can you get out of default?

You can get out of default by completing a loan rehabilitation or by applying for a Direct Consolidation Loan. According to 34 CFR Part 685 (U.S. Department of Education), a defaulted Direct Loan is rehabilitated if the borrower makes 9 voluntary, reasonable and affordable monthly payments within 20 days of the due date during 10 consecutive months.

Borrowers can also consolidate education loans made under certain federal programs into a Direct Consolidation Loan, according to 34 CFR Part 685 (U.S. Department of Education). This process combines multiple loans into a single new loan.

Student loan refinance options

• Direct Consolidation Loans allow a borrower to combine various federal education loans into one.
• Student loan debt remains the total amount owed, including the principal and any accrued interest. Student loan debt is the total amount of money a person owes for their education costs.
• The Secretary instructs consumer reporting agencies to remove a default from a credit history once a loan is rehabilitated.
• Defaulting on a Direct Loan makes the entire unpaid balance and accrued interest immediately due and payable.

Rehabilitated: rehabilitation removes your default from your credit history

The Secretary then instructs consumer reporting agencies to remove the default from your credit history. This process is your primary path to clearing your record and restoring your credit standing.

Options for a loan to clear your status

Borrowers may request a loan rehabilitation to restore their eligibility for federal benefits. Alternatively, a borrower may apply for a Direct Consolidation Loan to merge existing debts into a single monthly payment structure.

Methods to get into rehabilitation

Loan rehabilitation allows you to move a defaulted loan back into good standing by making a series of consistent payments. A defaulted Direct Loan is rehabilitated if the borrower makes 9 voluntary, reasonable and affordable monthly payments within 20 days of the due date during 10 consecutive months, according to 34 CFR Part 685 (U.S. Department of Education).

Successful rehabilitation changes your credit status. According to 34 CFR Part 685 (U.S. Department of Education), the Secretary instructs any consumer reporting agency to which the default was reported to remove the default from the borrower’s credit history once a loan is rehabilitated.

Rehabilitation steps

1. Contact the loan servicer to confirm the current status of the defaulted loan.
2. Request a rehabilitation plan to determine the specific monthly payment amount.
3. Submit 9 voluntary, reasonable, and affordable monthly payments to the servicer.
4. Verify that the servicer updated the credit reporting agencies to remove the default.

Steps to enter the rehabilitation program

Borrowers must first identify the specific federal loan program and contact the designated loan servicer. The servicer determines the monthly payment amount based on the borrower’s ability to pay. Before starting, you should weigh how interest keeps growing while the borrower makes each payment within 20 days of the due date for 10 consecutive months.

What happens to the interest and fees?

The unpaid balance and accrued interest become immediately due and payable if a borrower defaults on a Direct Loan, according to 34 CFR Part 685 (U.S. Department of Education). Collection costs are limited to a maximum of 18.5 percent of the outstanding principal and interest, according to 34 CFR Part 685 (U.S. Department of Education).

The Secretary may take action to collect a defaulted Direct Loan by filing a lawsuit, reporting the default to consumer reporting agencies, offsetting the federal income tax refund, or garnishing wages, according to 34 CFR Part 685 (U.S. Department of Education).

Consequences of default on your scores

Defaulting on a loan results in a report to consumer reporting agencies. However, if a defaulted loan is rehabilitated, the Secretary instructs any consumer reporting agency to which the default was reported to remove the default from the borrower’s credit history, according to 34 CFR Part 685 (U.S. Department of Education).

Government collection rights for student debt

The government can seize your wages, offset your federal income tax refund, and report your default to consumer reporting agencies. According to 34 CFR Part 685 (U.S. Department of Education), the Secretary may also file a lawsuit to collect a defaulted Direct Loan, so you should see how it reduces your tax bill.

Immediate repayment of balance and interest

Borrowers should respond to notices quickly because options narrow once the government starts collection. If a borrower defaults on a Direct Loan, the entire unpaid balance and accrued interest are immediately due and payable. The government may also apply collection costs to the borrower or compare subsidized vs unsubsidized student loans.

What the government can seize?

The government can seize your wages through wage garnishment.

Borrowers in or near default

Borrowers in early delinquency

If you are behind on payments but not in default, contact your servicer now to avoid default.

Borrowers in default

If your loan has been in default, rehabilitation or consolidation may restore your good standing.

Borrowers facing garnishment

If collection has started and you face garnishment, you should act quickly and seek advice.

Default mistakes

• Ignoring notices can lead to the use of collection tools.
• Paying a company to fix default is risky because scams exist and official options are free.

Steps to resolve your student loans and exit default

Taking action on a defaulted loan requires having your current account information ready to begin the rehabilitation or consolidation process.

Actionable steps to resolve default

1. Identify which servicer or agency holds your loan. Locate your original loan documents or correspondence to find the specific entity responsible for your account.
2. Ask your servicer about rehabilitation and consolidation options. Inquire about the specific requirements for rehabilitation and the process to consolidate education loans into a Direct Consolidation Loan.
3. Document every payment you make. Keep a detailed record of all payments to ensure you complete 9 voluntary, reasonable and affordable monthly payments within 20 days of the due date.
4. Respond to every collection notice you receive. Acknowledge each notice to monitor the status of the entire unpaid balance and accrued interest which are immediately due and payable.
5. Avoid paying for help you can get free. Use official resources to manage your default instead of paying third party companies for services provided for free by the government.

Frequently asked questions