How to Get Out of Default
If your loan is currently in default, you are not eligible for Public Service Loan Forgiveness.
Unfortunately, in order to be eligible for Public Service Loan Forgiveness on your Federal Direct student loans, you have to be enrolled in an eligible repayment plan and consistently making on-time payments.
You Have Four Options to Get Out of Default
The U.S. Department of Education offers four ways to get out of default on a federal student loan, and some options will be more helpful than others:
Make nine out of 10 on-time payments using the same formula as Income-Based Repayment, which would cap your monthly payment to 15 percent of your income or less. For many borrowers, this is the most practical option for getting out of default. Learn more »
Typically, before you’re allowed to consolidate to a Direct Consolidation Loan, the debt collector you’re assigned to will ask you to make at least three voluntary consecutive on-time payments on the loan or loans that are in default. If you don’t want to make three voluntary payments, you can still consolidate your loan(s) if you agree to enter into an income-driven repayment plan. Learn more »
Canceling your loan is only available in limited situations, but if you’re in default, it could be an option for you. You can have your federal student loans canceled for school-related reasons, such as your school closing, or in the event of disability or death. Learn more »
You can only rehabilitate and consolidate your loans once.
The National Consumer Law Center has put together a great fact sheet (PDF) comparing consolidation and rehabilitation to help you decide which is better for you.
These options apply only to Federal Direct and Federal Family Education Loan student loans.
On this page, we write exclusively about getting out of default on your Federal Direct and FFEL student loans. Private student loans and Perkins loans operate under different rules, and for more information on getting out of default, you should reach out to your servicer or the school you attended.
How to Rehabilitate Your Loan
To rehabilitate a federal student loan, you and the Department of Education must reach an agreement on a “reasonable and affordable” repayment plan in which you’ll have to make nine out of 10 on-time payments. Any garnished wages, tax returns or social security earnings will not count toward these payments.
Here is what you need to do and be aware of in the rehabilitation process:
- Be prepared: Visit the U.S. Department of Education’s central database for student aid to confirm what loans you have, amount owed and their status. You’ll need your PIN number to log in. Have this information handy when you call to request loan rehabilitation.
- Costs and limitations: Be fully aware of any costs the collector might try to place on you and the limits of rehabilitating a loan before you call. Federal Family Education Loan (FFEL) lenders and debt collectors will generally add collection costs to the new loan balance. As of July 1, 2014, this amount should be no more than 16 percent of the unpaid principal and accrued interest for Federal Direct Loans, and for FFEL Loans, the amount should be no more than 16 percent of the unpaid balance and interest at the time of the sale of your loan. You are only entitled to get out of default through rehabilitation once per loan – so before you begin the process, be sure you will be able to continue making payments once you fully rehabilitate your loan.
- Contact your loan servicer or collector and document everything: Call whichever company is servicing or collecting on your loans (this may be two different companies — if you’re getting collections calls, start with the collector, but know they may eventually direct you back to your servicer). Explain that you want to apply for rehabilitation on your student loan. Debt collection and servicing companies have been repeatedly found guilty of misrepresenting information to borrowers. Whenever you speak to anyone from these collection agencies, confirm their name and title and note the date of the call. Ask the representative for a summary and confirmation of any changes to your loan in writing, but you should still take your own notes of what was discussed and agreed to.
- Agreeing on a payment rate: Your loan servicing company will explain that in order to rehabilitate your loan, you will need to make nine out of 10 on-time payments at a rate calculated using the Income-Based repayment formula (15 percent of your discretionary income – which means you need to be able to prove your income with a pay stub, W-2 or 1040 form). If that payment rate is still too high, you can request a lower amount. If the IBR payment calculation amounts to a $0 monthly payment, you will be required to make $5 monthly payments.
- Optional good faith payments: You might be asked to make “good faith” payments while the servicer or debt collector calculates what you will pay monthly based on your income. This is optional, and you do not have to make these payments. However, if you do make them, good faith payments can count toward the nine on-time payments you’re required to make, as long as the payments you make aren’t higher than the amount you pay to rehabilitate your loan.
- Wage garnishment suspension: Once you have made five on-time payments during your rehabilitation, you can request a one-time suspension of wage garnishment.
- Rehabilitation to Income-Based Repayment: Once you’ve made nine on-time payments, your loan is effectively rehabbed, and you should ask to enroll in an Income-Driven Repayment plan (or whatever repayment plan you feel suits your financial situation best). Collectors will often try to move rehabbed loans into a standard 10-year repayment plan, but that will cause your monthly payment amount to jump significantly. Be sure to track when you’ve made your ninth rehabilitation payment so you can immediately contact your servicer to enroll in the best repayment plan for you.
- Servicer transition: If you have a Direct Loan, you will be transferred to a new servicer once you successfully complete the loan rehabilitation. You should ask the collector to provide you with the name and contact information for that servicer as soon as they have it. If you have a FFEL loan, the debt collector will be required to sell the loan after rehabilitation is complete and you will have to keep making payments until that happens. One way to avoid those additional payments is to apply for a Direct Consolidation Loan.
The most important thing to know is that you have the right to negotiate how much you pay every month.
It is incredibly common for debt collectors to tell you that you have to pay a certain amount — often one that goes beyond what you can afford — and this is wrong, and now illegal.
As of July 1, 2014, there are new regulations governing how you rehabilitate your loans, and allow you to pay as little at $5 a month to rehabilitate your student loan.
If a debt collector refuses to offer you an option for which you believe you qualify, submit a complaint with the Consumer Financial Protection Bureau online or call (855) 411-2372. You can also contact the Federal Student Aid Ombudsman online or call (877) 557-2575.
How to Consolidate Your Loan
Another way to get out of default on a federal student loan is to consolidate it. You can consolidate into a Direct Consolidation Loan, even if you only have one federal student loan. Consolidation can be a good option for getting out of default, as long as you’re able to commit to the repayment plans it requires.
It’s important to find out if consolidation is best for you. For example, if you only have a Federal Family Education Loan or Perkins Loan, that means you’re not eligible for Public Service Loan Forgiveness — but if you consolidate it into a Direct Consolidation Loan, you are. On the flip side, if you have a Parent PLUS loan, you’ll lose access to Income-Based repayment on the entire consolidation unless you exclude the Parent PLUS loan from the consolidation (which you can do).
To consolidate a federal student loan, you’ll be asked to make at least three voluntary consecutive on-time payments on the defaulted loan. If you don’t want to make three voluntary payments, you can still consolidate your loans if you agree to enter into an income-driven repayment plan.
- To begin, you must apply on-line through StudentLoans.gov or download an application form and mail a completed copy to the Department of Education.
- Once you’ve applied, the department will mail you a detailed listing of all the loans that would be included in the consolidation and the repayment plan you selected. You will have 15 days to review and dispute any of the terms or details of your loan(s), including what repayment plan you’re going to be placed in or interest rates. If you don’t contact the Department in that 15-day period, the agency will assume everything is correct and process the consolidation. While the Department is putting all this information together, the agency will most likely request that you to make interest payments on the loans. If you can’t afford the interest payments, you can apply for forbearance until they can notify you to confirm your new consolidated loan payment amount.
- The collection costs associated with your defaulted loan will likely be added to the principle of your new Direct Consolidation Loan, but legally the costs cannot exceed more than 18.5 percent of the outstanding principal and interest. For example, a defaulted loan of $8,500 plus $1,500 of accrued interest = $10,000. Fees of $1,850 can be added to the $10,000, which means the new consolidated loan amount totals $11,850.
- In order to qualify, you will be asked to make three consecutive reasonable and affordable monthly payments or agree to enter into income-contingent repayment or Income-Based repayment plan.
After that, all of your loans will be rolled into one loan so that you only have to make one payment a month, and you can begin making your regular payments.
How to Cancel Student Debt
In some circumstances, whether your loan is in default or not, you might be eligible to have your federal student loans canceled entirely. Student loan cancellation is often limited to very specific situations, but in those situations, the option is required by federal law to be available to debtors. You may not cancel your student loan based on dissatisfaction with your college, the degree you received or your job placement prospects after graduation. The circumstances that make you eligible for loan cancellation include:
- School related, such as your school either closing or falsifying your student aid certification
- Borrower disability or death
- Perkins Loan cancellation, based on a qualifying profession
While the above circumstances entitle you access to loan cancellation by law, you will have to prove you meet very specific criteria in order to have your application for cancellation approved. If your application for loan cancellation is accepted, not only will the debt be canceled, but in most cases, the government must repay any previous payments and help restore your credit. It’s important to note that loan cancellation is not the same as bankruptcy.
Here’s a bit more detail about school-related circumstances that can provide potential eligibility for loan cancellation:
You can apply for loan cancellation if you attended a school that closed while you were enrolled, or if you withdrew 120 days before the school’s closure and you were unable to complete the educational program due to the closing. The types of loans eligible for school closure loan cancellation are Direct Loans and FFEL, PLUS and Perkins loans. In order to apply for school closure loan cancellation, fill out this form and mail it to:
U.S. Department of Education Federal Student Aid Processing Group
Regional Office, Room 8633
50 Beale St.
San Francisco, CA 94105-1813
You can apply for false certification loan cancellation if the institution you attended falsely certified your eligibility for federal student aid. The National Consumer Law Center describes the four ways this can happen: “There are four specific categories that can lead to a discharge. The first three false certification categories: Ability to Benefit, Disqualifying Status and Forgery apply only to FFEL and Direct loans received at least in part on or after January 1, 1986. The fourth category, identity theft, is available if the false certification occurred as a result of a crime of identity theft.” For more information on these potential situations, you should visit the National Consumer Law Center website.
You can apply for unpaid refund loan cancellation if you left school early. If you went to school for less than 60 percent of the loan repayment period, you should have received a refund for at least some of what you borrowed. Your school should have returned the money to your servicer, who should then notify you of your refund. Learn more at the National Consumer Law Center website.
How to Pay Off the Balance of Your Loan
Mail a check or money order to this address:
US DEPARTMENT OF EDUCATION
NATIONAL PAYMENT CENTER
PO BOX 105028
ATLANTA GA 30348-5028
Be sure to include your account number on any payment you send to the Department of Education.
If you’d prefer to pay by credit card or debit card, you can pay online at MyEdDebt.com.
What Is Default?
Direct Federal student loans go into default after 270 days of non-payment; Federal Family Education Loans go into default after 330 days of non-payment.
Defaulting on a federal student loan carries severe consequences, often worse than defaulting on a credit card or any other bill payment. According to the U.S. Department of Education, defaulted loans create the following severe consequences:
- The entire unpaid balance of your loan and any interest is immediately due and payable (i.e., not just your monthly payments to bring the account current, but rather, the full balance of the loan).
- You lose eligibility for deferment, forbearance and any repayment plans.
- You lose eligibility for additional federal student aid.
- Your loan account is assigned to a collection agency.
- The loan will be reported as delinquent to credit bureaus, damaging your credit rating. Your federal and state taxes may be withheld through a tax offset. This means that the Internal Revenue Service can take your federal and state tax refund to apply toward any of your defaulted student loan debt.
- Your student loan debt will increase because of the late fees, additional interest, court costs, collection fees, attorney’s fees and any other costs associated with the collection process.
- Your employer (at the request of the federal government) can withhold money from your pay and send the money to the government. This process is called wage garnishment.
- The loan holder can take legal action against you, and you may not be able to purchase or sell assets such as real estate.
- Federal employees face the possibility of having 15 percent of their disposable pay offset by their employer toward repayment of their loan through Federal Salary Offset program.
Reestablishing credit and recovering from your federal student loan going into default can take years. In addition to all of this, at least twenty-two states have passed laws that could actually cost you your job if you default on your student loans.
You want to avoid defaulting on a federal student loan if at all possible, because the system is designed to make it extremely hard to get out of default. Worse yet, the debt collection agencies hired by the Department of Education to collect on your defaulted student loans have been known to break the law, so you need to make sure you know your rights to avoid having them try to take advantage of you.
What Is Delinquency?
You’ll become delinquent on a federal student loan after you miss just one payment, and your account will remain in delinquency until you catch up on whatever the government says you owe (likely your past due balance for the payment you missed, plus whatever is currently due).
But once your loan has been delinquent for 90 days, your student loan servicer will report this delinquency status to the three major credit bureaus. This official delinquency status on your credit report will negatively impact your credit score, making it harder or less affordable to:
- Open a credit card
- Sign up for utilities without a deposit,
- Get renter’s, home owner’s, or auto insurance,
- Get a cell phone plan, or
- Get approval to rent an apartment.