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Getting Student Loans Out of Default for Your Financial Future

Understand the process of getting student loans out of default to help protect your credit score for the future.

Student loans are one of those strange things that can change your life by making it possible to attend college. They can also weigh you down for years, especially if they go into default. If that happens to you, getting student loans out of default is an important step in securing your financial future.

While borrowers currently have a moratorium on federal student loan payments, which is anticipated to allow as many as 7.5 million to get out of default, payments are scheduled to resume in August.

It’s true that student loans, forgiveness, forbearance, deferment, default, and multiple repayment options can feel confusing. So let’s break down the student loan default process, including what it is and some tips for getting your student loans out of default.


Understand what defaulting on student loans means

The federal government provides over 90% of student loans in the United States. A federal student loan is considered in default if a payment has not been made for nine months. Once a default happens, the entire balance of the loan becomes due. This scenario can be very troubling for a student who was already struggling to pay the loan because now they may need to figure out how to repay the entire loan balance immediately.

The best way to get out of loan default is to pay off the rest of the loan. However, for most people, that’s not a possibility, especially if they were already struggling to make payments on the loan. Fortunately, there are some other approaches to getting student loans out of default.

Getting student loans out of default: Loan rehabilitation

The first step in dealing with a default is loan rehabilitation. If you receive notice that you’ve defaulted on student loans, the best course of action is to contact the organization that informed you of the default to discuss options. You can explain the situation you are experiencing, including the financial hardships or lack of employment, and you may be able to make new payment arrangements.

Requirements are different depending on what kind of loan you have. There are different types of federal student loans, and there are also private student loans, even though federal student loans are used more frequently.

For a Direct Loan or a Federal Family Education Loan (FFEL), you must agree to a few situations. First, you must agree in writing to pay nine voluntary, reasonable, and affordable monthly payments within 20 days of the due date. Second, you must agree to make nine payments during ten consecutive months. The agreed-upon payment will likely be around 15% of your annual discretionary income divided by 12.

If that payment is too high for your financial standing, then the loan holder may calculate a different rate for you. You’ll need to provide documentation on monthly income and expenses, and complete a loan rehabilitation form in order to qualify. Fortunately for those who are eligible, monthly payments may become very low.

Getting student loans out of default: Loan consolidation

The next option for getting student loans out of default is loan consolidation. Going this route will lead you to a new Direct Consolidation Loan. To qualify, you must first agree to repay the new loan based on an income-driven repayment plan. Second, you need to make three voluntary, consecutive payments on time in full. Once that happens, the loan will be officially consolidated.

There may be some special considerations if you’re trying to consolidate specific types of federal loans. For instance, with a Direct Consolidation Loan, you have to include at least one other loan in the consolidation. If you don’t have any other loans, you won’t be eligible for a consolidation loan, and you’ll need to either pay in full or work toward loan rehabilitation. With an FFEL Consolidation Loan, you do not have to include another loan into the consolidation. Still, you will need to agree to repay the loan under an income-driven plan.

Participation in an income-based repayment plan is also more likely to lead to loan forgiveness down the road per the most recent announcement from Washington.

Remember, it’s not the end of the world if you or someone you love defaults on a student loan. It is important to remedy the situation as soon as possible, though, and these strategies will help in that process.

What is your biggest fear or regret associated with taking out student loans?


*This post has been updated from a version originally published in 2021.