There are three main ways to get out of student loan default, including consolidation, loan rehabilitation, and repaying the loan in full. Another option, which is only available in rare circumstances, is loan cancellation. The best option for you depends on your situation and whether you’re eligible.
What Is Default?
Direct federal student loan default occurs when you fail to make a payment after 270 days. For Federal Family Education Loans, that timeframe is 330 days after failure to make a payment.
When you default on a student loan, there are dire consequences. Your credit will take a nosedive, and you will lose your eligibility to apply for deferment, forbearance, and repayment plans in the future. Your account will be turned over to a collection agency, which will pester you with phone calls at all hours of the day, and your debt will increase due to late fees, extra interest, collection fees, and additional costs.
Perhaps worst of all, you lose your eligibility to take out additional federal aid in the future, so if you haven’t yet completed your degree, you could be stuck with no options. Only getting out of default through one of the following ways can put you back on track.
Student loan consolidation is a popular option for many borrowers, not just those who find themselves in default. Consolidation is the process of combining all your existing federal student loans into one Direct Consolidation Loan. A Direct Consolidation Loan allows you to enjoy a single monthly payment and loan service provider rather than dealing with multiple loans. You’re allowed to consolidate your debt once you graduate, leave school without graduating, or drop below half-time status.
Once multiple loans are lumped into one consolidated loan, you lose any benefits that were previously attached to those loans. If you’re already in default, however, you’ve probably lost these benefits anyway and are searching for a way to essentially start over.
Regardless, loan consolidation does restart the clock, so to speak, and can stretch out your repayment period so you can enjoy more affordable monthly payments. This can help you catch up and keep your debt in good status, helping you avoid future defaults.
Just remember that you will pay more interest over the life of the loan, and any income-based forgiveness term will restart back at zero. So, for example, if you’ve maintained your payments in an income-driven repayment plan for seven years and the loan forgiveness kicks in at year 20, eliminating your debt, consolidation means you lose those seven years toward that forgiveness and have to start over. Still, default may have already eliminated your forgiveness eligibility, making consolidation worth it.
If you’re not ready to consolidate your student loan, consider loan rehabilitation. With a loan rehabilitation agreement, you agree to make reasonable monthly payments that amount to no more than 15 percent of your annual discretionary income divided by 12. You must agree to make nine of these payments voluntarily within 20 days of the loan’s due date during a period of 10 consecutive months.
Loan rehabilitation is a short-term solution that can alleviate some of the burdens a large monthly payment has placed upon your family. Since your payments are capped at only a portion of your income, you have nearly a year to get back on track without being penalized. In order to qualify for loan rehabilitation, however, you must provide proof of income to your loan service provider.
Depending on how much you make, a loan rehabilitation program can bring your monthly payments down to as low as $5. Again, the payments must be voluntary, so they cannot include any involuntary collections received through wage garnishments or tax offsets. Even if you are subject to involuntary payments, you must still make voluntary payments as agreed until the loan is no longer considered in default.
Repayment in Full
Another way to get out of default is to pay your loan in full. Granted, this isn’t a popular option, since most borrowers in default don’t have the money to keep up with monthly payments, let alone make a large lump-sum payment, but the option does exist.
In rare cases, you may come into an unexpected amount of money through inheritance, lottery winnings, settlements, or other scenarios. If this happens, it’s a smart idea to pay off your student loans as soon as possible. Not only will you get out of default, but you’ll be free from student loan debt for good.
To pay off your student loan in full, contact your loan service provider to get your payoff amount. This amount changes monthly, so make sure to request it when you’re prepared to send the money. You can either pay online or send a check to the U.S. Department of Education at the following address:
US Department of Education
National Payment Center
PO Box 105028
Atlanta, GA 30348-5028
If paying via mail, be sure to include your account number on your check and any other documents you include in the envelope.
Having your loan canceled is almost as rare as having the cash to pay it off in full, but some borrowers do qualify. Federal student loans can be canceled for a number of school-related reasons, such as the school falsifying your student aid certification, not having the proper credentials, or even closing. If you left school early, you can apply for unpaid refund cancellation as long as you went to class for less than 60 percent of the repayment period.
Student debt can also be canceled if the borrower becomes disabled or dies. Naturally, you or a family member will have to provide proof that you meet the criteria before the cancellation is approved. In many cases, if the loan cancellation is approved, the government must repay any previous payments to help restore your credit.
Defaulting on a federal student loan can be devastating, but it’s not the end of the world. Take a deep breath and review your options. With a little effort, you can be back on track in no time.