How to Get Out of Default on Student Loans

Defaulting on your student loans can be a stressful situation. Daily calls from collection agencies and damage to your credit score are bad enough. But if you’re in default long enough, you’re looking at severe penalties like garnished wages and claims against your property.  

Fortunately, there are options for getting out of default whether you have federal or private student loans. 

How to Get Out of Default on Federal Student Loans

Delinquent federal student loans have repayment options like income-driven repayment or deferment and forbearance that can help you catch up when you fall behind. But you can’t use these options once your loans are in default.

Default means more than just a few missed payments. It means missing so many payments your lender assumes you have no intention of repaying the loan. 

For most federal student loans, default happens after 270 days of missed payments, or roughly nine months. However, Perkins loans can go into default immediately. 

And once federal loans go into default, the U.S. Department of Education (ED) has extraordinary powers to collect. Federal law allows the ED (or anyone collecting on its behalf) to garnish up to 15% of your disposable income to collect on defaulted student loans. And, unlike private lenders, the ED doesn’t have to sue you before it can seize the money.

Fortunately, the ED offers three pathways to recover from a default: full repayment, consolidation, and rehabilitation. Which is best for you depends on your situation and goals. 

1. Best Immediate Solution: Full Loan Repayment

When you’re in default on any loan, the full balance becomes due immediately. Thus, if you can afford it, the easiest and quickest way to deal with the debt is simply to pay off the balance and be done with it.

Of course, that isn’t realistic for most defaulted student loan borrowers. After all, it’s likely you defaulted on the student debt because you couldn’t afford it in the first place. 

You may be able to negotiate a student loan settlement, which lets you pay off the balance for less than you owe. But the government rarely settles for less than 90% of the balance.  

Thus, most borrowers need to explore student loan consolidation or rehabilitation.

2. Best Fast Solution: Student Loan Consolidation

If you can’t pay off the debt entirely, consolidation is the next fastest route to exit default. To remove your default status, you must either:

• Make three full, on-time, consecutive monthly payments on the new consolidation loan 
• Agree to repay your consolidation loan under an income-driven plan.

Most income-driven plans calculate your monthly student loan payments as 10% of your discretionary income, and the formula also accounts for family size. Some plans even take your spouse’s student loans into account.   

Income-driven payments are significantly lower than the wage garnishment penalty of 15%. But you can’t consolidate a student loan if the government is already garnishing your wages. 

Note that student loan consolidation gets your loans out of default. But it doesn’t remove the default line from your credit report.

Start by contacting your servicer to request a new direct consolidation loan. 

3. Best for Improving Your Credit Score: Loan Rehabilitation

Student loan rehabilitation is the best option in most cases because it’s the only one that removes the default from your credit report, although previously reported late payments remain on your report. Therefore, it’s the best way to improve your score. 

To rehabilitate your loan, you must make nine on-time monthly loan payments within 10 consecutive months. Usually, your monthly payments will be 15% of your discretionary income. However, if that’s unaffordable, you can request a lower amount.

Now is the perfect time to try federal loan rehabilitation. The government’s pause on payments means that any “payments” you don’t make between now and the pause’s lift count toward rehabilitation. 

You make the payments to the ED (or guaranty agency in the case of federal family education loans). Once you’ve completed the payments, the ED transfers the loan to a student loan servicer. 

Once you’ve completed rehabilitation, the ED removes the default status from your credit report.

A word of caution: You can only rehabilitate your student loans once. So if you choose this option, ensure you can afford the payments. 

One potential risk is that your monthly payments post-rehabilitation could be higher. That’s because loan holders can calculate lower payments for borrowers based on their living expenses.

But there are no federal repayment plans that take a borrower’s living expenses — or even other debts, such as private student loans — into account. Income-driven plans only consider family size in calculating their income-based payments.  

You can use the loan simulator at StudentAid.gov to see what the monthly payment for your rehabilitated loan could be, depending on the repayment plan you choose.

How to Get Out of Default on Private Student Loans

Unfortunately, private student loans don’t come with legally mandated options for getting out of default like federal student loans. Your lender may have an option to rehabilitate your loan, but it’s unlikely, though it never hurts to ask.

More likely, the lender will send your debt to a collection agency, which typically happens much quicker than with federal student loans, 90 to 120 days of missed payments, or roughly three to four months. But default time frames for private student loans vary by lender, so check your loan contract. 

A collection agency will do everything it can to collect the debt. Bear in mind that while receiving phone calls and letters from debt collectors can feel stressful and scary, most collection agencies can’t take legal action against you. 

Only the owner of the debt can sue you. And while sometimes collection agencies buy debts, they rarely buy student loan debt. More often, they contract with the lender to collect the debt on their behalf and charge a fee when they’re successful.

However, if you receive a debt collection letter from a law firm, they likely plan to sue you. 

If that happens, request they verify the debt, even if you believe it’s valid. Mistakes and scams are possible, and you need to ensure you’re paying the right amount to the right lender. 

Further, the burden is always on the collector to prove the debt, and they can’t bring suit against you without adequate evidence. It will give you time to decide how to proceed at the very least.

The Consumer Financial Protection Bureau (CFPB) has a sample letter you can send. 

Also be aware all debt collectors must follow the Fair Debt Collection Practices Act. If collectors harass you in any way, including calling at odd hours, threatening you, lying to you, or asking your family members to pay your debts, document the interaction and submit a complaint to the CFPB.

The CFPB also has sample letters you can send to collectors for other situations, such as if you want the collector to stop contacting you or only contact your attorney. 

Whatever you do, don’t simply ignore the debt. Ignoring it won’t make it go away. Instead, you’ll need to decide on one of three options for dealing with defaulted private student loans:

1. Best Immediate Solution: Full Loan Repayment

As with federal student loans, you can immediately get rid of the debt — and the default on your credit report — by simply paying the full amount due. 

However, it’s equally likely that if you defaulted on private student loans, it’s because you couldn’t afford to pay them. 

2. Best to Save Money: Negotiate a Settlement

Although it’s difficult to negotiate a debt settlement with the ED, it’s much easier to settle private student loans. That’s because private lenders have less ability to collect on the debt, so they’re more willing to negotiate. Private lenders also aren’t tied by Congressional regulations, so they have more wiggle room to make deals.

Thus, unlike the ED, which rarely settles loans for less than 90% of the balance due, private lenders often settle for as little as 40% to 60% of the balance owed. 

3. Best for Those Who Borrowed Nonexempt Loans: Discharge the Loans in Bankruptcy

Traditionally, it’s been excessively difficult to get student loans discharged in bankruptcy, whether federal or private. That’s due to federal regulations requiring borrowers to prove the debt causes an undue hardship, which bankruptcy courts have historically interpreted strictly. 

But multiple court cases over the past several years have set new standards for the dischargeability of student loans, especially private student loans. 

For example, in August 2021, a New York-based court of appeals ruled that certain types of private student loans aren’t “qualified education loans,” meaning they’re not exempt from discharge in bankruptcy. 

These include: 

• Loans borrowed to attend nonaccredited for-profit schools
• Loans used for non-degree-granting programs, such as for a coding boot camp
• Loans paid directly to the student that exceed the school’s certified total cost of attendance    

How to Get Help if You’re in Default on Student Loans

If you’re in default on private student loans, it’s best to contact a lawyer who specializes in them. Dealing with debt collectors or negotiating a settlement is complicated. So having someone who understands the system and your rights is beneficial. 

Although you can consolidate or rehabilitate your student loans without the help of an attorney, student loan lawyers can also help you navigate the complex system of federal student loans. They can also help you decide on your best options if you’re unsure. 

Many lawyers offer free consultations, so you can find out what your options are or if that lawyer is a good fit. 

To find one, use an online attorney directory like the one at the National Association of Consumer Advocates, the bar association for consumer rights attorneys, some of whom specialize in student loans. 

If you decide bankruptcy is the right path for you, try the American Bar Association or the National Association of Consumer Bankruptcy Attorneys to find a bankruptcy lawyer. Ensure your bankruptcy attorney specializes in student loans, as many bankruptcy attorneys specify they don’t.

Final Word

If now’s not the right time to pursue getting out of default, explore the federal options for cancellation or discharge to see if you qualify for any. These include having your loans canceled if your school intentionally misled you, committed fraud, or closed before you could graduate with your degree.

But most borrowers don’t qualify for those, and they’re not available on private loans. So as a last resort, pay your loan holder whatever amount you can afford every month until your situation changes. Then pursue the process of getting out of default when you’re able.  

Once you’re out of default, it’s vital to keep up with your payments. Defaulting again only causes more damage to your credit, increases your stress levels, and may even rob you of options you had the first time you defaulted, such as rehabilitation.

To avoid default in the future, contact your lender before you miss a payment and explain the situation.