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: https://www.myeddebt.ed.gov
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.
Learn more about consolidation here: The Guide To Student Loan Consolidation
3. 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. Check out The Student Loan Planner here.
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.
lisa says
Having a major issue with FED Loan Servicing. M loans have been in existence for a long time and are in good standing. Back in May of 2015 in filed a forbearance due to a pending surgery and I knew I would not be able to attend graduate school until I had healed. In December I got a letter from a 3rd party company stating I need to check my account. To my amazement nothing had been done. Chirs, the company representative, assisted me with filling out the papers and the forebearance was set. I pulled my credit report and there was a neg mark on my account from Federal Loan Servicing. Wow!!! EVen though they went back and straightened it out it is still on my credit report. What do I do now. I am still working on towards my doctorates, but may not be able to get a decent job if my credit score it checked, I don’t have to begin repaying loans for a while. However, I can not buy a car or house now because of the score. Help!!!!!
Robert Farrington says
You can dispute your credit report directly with the credit reporting agencies as well if you do think there is an error. You can use a service like Credit Karma to find the forms and check for errors consistently.
Brian says
I was making payments to myeddebt.ed.gov, now my browser tells me the site is unsafe and I actually have no way to access it. Does anybody know what’s up?
Robert Farrington says
I just checked it and it’s fine. Clear your browser cookies and cache and try again.
Pam says
Hello, I would like to know how I can sign up for help with student loans without dragging my husband into it. Being that I had the loans before marrying him, I would not like for him to have to get penalized when dealing with taxes and them coming for him because of me. Is there a way around this?
Pam says
I forgot to include that we have been filing taxes together since we got married. His income is around 160,000 however mines is 0.
Robert Farrington says
There are options to file your taxes married filing separately, but they will make you pay more in taxes. Read about it here: http://growth360tci.wpengine.com/17807/the-math-behind-married-filing-separately-for-ibr-or-paye/
In general, you need to work together on this. I know you want to “not drag your husband into it”, but you’re a unit now.
Jennifer says
I am trying to make payment plans on my default loans, my question is I am afraid that they are going to keep my income tax refund. Once i make a plan and make the first payment how long approximately does it take to be taken off the default list or to be on their good side. When would i be safe to file my taxes.
Robert Farrington says
Yes, it’s likely too late this year to change that. It typically takes 30-60 days to get your loans rehabilitated, so at this point in time, you likely will see your tax refund offset.
michelle pernell says
why does it take so loan to come off the default list? & once your off you can file your taxes right?
Robert Farrington says
It depends on the length of your rehabilitation agreement (usually 6-9 months). After that, you can file your taxes without fear of a tax offset.
Tashena says
Hey robert my studejt loan is in the income driven repayment plan,will irs take my tax refund?
Robert Farrington says
Not if you’ve been making your payments per the plan. They only take your refund if you’re in default and haven’t made payments in a long time.
Heather says
How long is a long time?
Robert Farrington says
If you’re on a monthly repayment program, you’re in default after 270 days. If you have an FFEL loan with a payment of less than once a month, you’re in default after 330 days.
Christina says
My son signed up for a 40,000 loan but had to stop going to college because of the tuition fees the first year. Is there any way to return the loan or get out of it?
Robert Farrington says
No, but he can get on an income-based repayment plan and potentially look for forgiveness programs.
Latasha says
Hey I’ve been in the rehabilitation agreement since November of last because my loan was in default. Would my tax refund be taken? When would be a good time to file ?
Robert Farrington says
Once you’re out of default they should offset your loan any longer. So finish rehabiliation and you don’t have to worry about it.
As for filing, you should talk to a tax professional about that.
Dee says
Hi can I negotiate a lump sum payment on a defaulted federal student loan? I had the one time deal to make payments but couldn’t keep up. My student loan was taken by a collection agency which I started paying only to (what I assume) be sold to another collection agency. I would like to pay this debt off but was wondering does it have to be the full amount or can I negotiate 50-80% lump sum payment to completely wipe the debt clean?
Robert Farrington says
No, in general, you cannot make a lump sum payment or negotiate you Federal student loans. You need to rehabiliate your loans and get them paid off.
Erica Davis says
Hello , what can I do if my rehab loan is in default?
Robert Farrington says
You can follow the directions in the article above.
Bobby young says
I fell for the Obama forgiveness program and all they were able to do was lower my payments from $85 per month to $32 per month I just saw on your site that they are a scam I’m assuming the $600 fee is how they scammed me. Now I have received a letter from Mohela who is handling my loan saying I need to renew that agreement or pay $174+ I want out of this!,my student loan was for $3000.00 at a school back in 1987 that has since closed now my balance reads over $15,000 how is this possible?
Robert Farrington says
Remember, you need to re-certify your income annually to continue paying your income-driven amount. If you don’t re-certify, your payments will rise.
Here is an article to read about what to do if you think you’ve been scammed.
Mike says
When will I be elgable for an FHA loan after starting my rehabilitation
Robert Farrington says
Probably not. Since you defaulted on Federal debt (even if you’re getting back on track paying it off), you’ll likely be prevented from taking out any more Federal debt: http://www.bankrate.com/finance/mortgages/caivrs-database-will-lock-you-out-of-fha-mortgage.aspx
Sherry says
I hvae to talked to my collection agency and agreed to a rehabilitation program starting this month, and they were saying I need to make 9 consecutive payments to get out of the default. And my question is after 9 month, it’s going to be March, and I am expecting a lot more tax refund amount that previous year because we are having a child but our tax refund has been taken by DOE. Will they release me from the offset before the 4/15? Or do I need to talk to them before and ask for me to release me? I have used turbotax till now so I don’t have anyone to consult with. I do need that money, what donI have to do?
Robert Farrington says
9 monthly payments is going to be close to when you file. If you’re loans are still in default, you’ll see your refund garnished. If you’re done with your 9 payments and officially out of default, you’ll be safe.
You should consider speaking to a tax professional. It could make sense to file an extension on your tax return to ensure you’re out of default.
James says
Hello Robert,
Thank you for considering this circumstance.
I have been advised by US Dept of ED that I have three FFEL loans from 1981, ’82 and ’87 for a total principal of $6,250.00. However, the ED debt statement indicates current principal of $7,604.99, and the assigned collection agency indicates “Original Balance” is $9878.00. Accrued interest is >$15k and as the loan has been assigned to collection, where more fees are attached. Inquiring with the collection agency for records, they provided three promissory notes for the loans. I’m deliberating the following: 1. issue a Request for Hearing to verify/itemize attached fees and interest, (the oldest loan is >30 years), or 2. work out payment plan with collection agency. Not sure option 1 will yield any disputable facts worth the time and energy.
Any thoughts on this matter?
Many thanks – James
Robert Farrington says
I have no thoughts in the matter – you should consult a lawyer who specializes in student loan debt. You’ll have to ask yourself if it’s worthwhile to contest it, especially if it’s valid.
Read this: Getting A Lawyer For Your Student Loan Debt
Laura says
Hello Robert,
My son is on the FFEL pay back program. Can he pay more than the monthly repayment amount that they set up for him or does he have to stick to what they calculated?
Robert Farrington says
You can pay more, but it’s not typically advised. Here’s an article that explains it: http://growth360tci.wpengine.com/19797/pay-ahead-status-loan-forgiveness/
Sharon Neil says
Is it possible for me to qualify for financial aid (FASA) after makingetting payment arrangements and making only one payment. I did apply for FASA
it was denied because I have student loan in default. I did make payment arrangements and has made two payments. Can I reapply for FASA?
Robert Farrington says
Hi Sharon, one of the basic eligibility requirements is that you are not in default. You need to make enough payments per your arrangement that you’re no longer in default (it’s typically about 6). Once your loan is out of default and back in repayment, you can re-apply.
Maria says
Hello,
I defaulted on my student loans. I have contacted the collection agency to rehabilitate my student loans. I read that the payment amount is based on a 15% formula of adjusted gross income. I got married 2 weeks ago, we have never filed taxes together, and the year is not over and tax filing has not started. We will also be filing separately. When i contacted the agency they advised me that they have to include my spouse income to come up with a payment plan agreement. I advised them that we have never filed jointly, the marriage is 2 weeks old, and my most recent tax is filed as single status in 2016. My paystub also say single. They advised me i no longer qualify to make payment with the 15% rate and they want to force me to do a household income financial statement including my spouse. My question is my student loan debt is when i was in college and before i was married, can they force me to include his income. I am ready to make payments based on a monthly payment calculation using a 15% only on my income. Please help, i cant find any information online for this.
Robert Farrington says
It depends on the repayment plan. IBR and PAYE allow you to just use your income if file separately. RePAYE requires your joint income regardless of filing status. You can learn more here: Marriage Filing Status And Student Loan Repayment Plans.
Maria says
Thank you for your response Robert.
We have not filed any taxes together, we are recently married. Therefore, wouldn’t the collection agency based the payment plan only on my income and my recent tax returns?
Can they force me to use household income when there are no joint taxes?
Robert Farrington says
They can’t force you to do anything – you can apply for your repayment plan using your information on the paper form.
julia says
I am finishing my 6th month going from defaulted student loan to rehabilitation who or how does it get to next phase
Robert Farrington says
Each rehabilitation agreement is different. What does your agreement say?
Rick says
I have a student loan I took for my son paid on it for years then my wife forgot to make payments for a while. We have picked it back up and doubled the payment amount but interest rate is 10% and I took a big pay cut this year. How can I get the rate lowered or forgiveness somehow?
Robert Farrington says
Sounds like you might have a Parent PLUS Loan? If so, you might find this helpful: http://growth360tci.wpengine.com/17101/options-if-you-cant-afford-your-parent-plus-loans/
The only real way to lower your rate with a PLUS loan is to refinance.
Melissa says
My student loan was off of default when the receive my taxes and they still garnish my taxes. Can they do that
Robert Farrington says
Yes, it’s called a tax offset due to student loan debt. Get your loans rehabilitated now so that you can get your refund next year.
Ash says
Im currently in default I can’t pay full but only a portion for now and I do wish to go back to school. What can I do and how can I still apply for college? Can I pay a portion and come out of default? I’m not working and I only left school because of academic suspension which is over now and I haven’t applied back for 2 years and now I’m in so much debt!
Robert Farrington says
You need to call and setup a rehabilitation plan. Once you’re rehabilitated you can look at getting a loan.
Heather says
Can I enroll in a university and pay cash for the classes I want to take, if I have defaulted student loans? Also, how do I find a phone # to call to find out who now has my student loans. It has been about 5 years since I paid on them or have had any correspondence from an institution so I have no idea where to start to even get into a loan rehab agreement.
Robert Farrington says
Hi Heather,
You can pay cash at your school for classes.
As for how to find your loans, check out this guide: How To Find Who Owns Your Student Loans
Yana says
Hi Robert,
I read your article hoping it would give me some more insight on my own personal issue with defaulting. I went to school for about 3 years and decided to take a year off, I had heard of other friends just “stopping.” So I didn’t do any research into it and just didn’t reapply for the next year. At this point, I’m ready to go back to school and had applied for FAFSA but got denied because i’m in default. Can I call FAFSA and explain the situation and have them reverse the default on my record or not? Thanks for the help 🙂
Robert Farrington says
No, if you’re in default, you need to follow the process and get your loans rehabilitated. Simply because you “stopped” didn’t make your loans stop.