July 1, 2023


If you haven’t kept current with your student loan debt, you could be in default. Your student loans are placed in default if you haven’t made a payment on them in over 270 days. When your loans go into default, they typically transfer over from a student loan servicing company to a collection agency. With Federal student loans, there is a very specific process and collection agency that follows up.

If you’re ready to regain control of your student loan debt, here are the steps to get your student loans out of default using student loan rehabilitation.

The Consequences of Student Loan Default

Student loan default is a tough place to be. When your loans are in default, you lose the ability to do a lot of things.

First, your credit score will be ruined. It will take years to get that score back, but in the short term, it’s going to be low. You can check your credit score any time using a free service like Credit Karma, which also has great tools for managing your debt.

Second, your defaulted loan is typically assigned to a collection agency which is responsible for recovering as much of the debt as possible. Your debt can be recovered in several ways, including wage garnishments, tax refund offsets, even Social Security garnishments. When you have student loan debt and any kind of income, the government will take some of it to repay the loans.

Third, you’re going to be facing a lot of stress as you move through the process. Getting your loans out of default will be time consuming and expensive. Understand that now so that the process is a little more transparent.

Step #1 – Find Your Loans

The first thing you need to do is re-track down your student loans. Many people in default have simply lost contact with their lenders or given up trying to keep tabs on the loans.

If you have Federal student loans, you can track down defaulted loans through a system called MyEdDebt maintained by the U.S. Department of Education. You can access it here:

If you have private loans, you have far less options. Typically, you need to contact your bank, or the collection agency assigned to your loan. There are typically not rehabilitation options, but you may be able to settle for a lower amount or negotiate a repayment plan.

Step #2 – Assess Your Options

You have three options to get your student loans out of default. They aren’t great, but there they are:

  1. Pay off The Loan: One option for getting out of default is repaying your defaulted student loan in full. This typically isn’t an option for anyone, or else the loan wouldn’t have gone into default. However, it does exist.
  2. Loan Consolidation: You also have an option for getting out of default through loan consolidation. Loan consolidation allows you to pay off the outstanding combined balance(s) for one or more federal student loans to create a new single loan with a fixed interest rate.

A defaulted federal student loan may be included in a consolidation loan after you’ve made arrangements with the Department of Education and made several voluntary payments (contact your school for information about making payments on a Perkins Loan). Usually, you would be required to make at least three consecutive, voluntary, and on-time payments prior to consolidation.

  1. Loan Rehabilitation: Another option for getting your loan out of default is loan rehabilitation. To rehabilitate your Direct Loan or FFEL Program loan, you and the Department of Education must agree on a reasonable and affordable payment plan. (Remember, contact your school for your Perkins Loan)

Step #3 – Complete Student Loan Rehabilitation

Your loan is rehabilitated only after you have voluntarily made the agreed-upon payments on time and the loan has been purchased by a lender. Outstanding collection costs may be added to the principal balance. This is why it’s important to not default, because it will cost a lot more.

These collection costs can add up to 18.5% of the unpaid principal balance and accrued interest to the principal balance of the loan.

Note: Payments that have already been collected from you—for example, through wage garnishments or through legal action taken against you to collect your defaulted loan—do not count toward your rehabilitation payments.

Once your loan is rehabilitated, you may regain eligibility for benefits that were available on your loan before you defaulted. Those benefits may include deferment, forbearance, a choice of repayment plans, loan forgiveness, and eligibility for additional federal student aid. Some of these benefits may be available sooner than others.

Figuring Out the Best Option

You can do this yourself, but it can be a hassle and challenging. You can start by calling your lender and asking for help. They are paid by the U.S. Government to help you with your student loan debt. While they might not have all the answers you need (remember, it is a call center), they are a good starting point for most questions.

If you’re not quite sure where to start or what to do, consider hiring a CFA to help you with your student loans. We recommend The Student Loan Planner to help you put together a solid financial plan for your student loan debt.

Avoiding Student Loan Default Again

Once you’ve rehabilitated your loans, your loan payments may be higher than they were previously, especially due to the higher loan amount with the added fees and costs. As such, it’s important to avoid student loan default again.

One of the easiest ways to do this is to make sure that you select a student loan repayment plan that you can afford. There are income-based options that could make a lot of sense if you’re struggling to make payments under the standard plan. Plus, many of these income-based repayment plans include some type of “secret” student loan forgiveness.

Make sure that you make it a focus to pay off the loans going forward.

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