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How To Get Out Of Default With Student Loan Rehabilitation

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Student Loan Debt RehabilitationIf 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.

Filed Under: Student Loans
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Comments

  1. 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!!!!!

    Reply

    • 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.

      Reply

  2. 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?

    Reply

    • I just checked it and it’s fine. Clear your browser cookies and cache and try again.

      Reply

  3. 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?

    Reply

  4. 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.

    Reply

  5. 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.

    Reply

    • 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.

      Reply

      • why does it take so loan to come off the default list? & once your off you can file your taxes right?

        Reply

        • 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.

          Reply

          • Question… is it definitely safe to file your taxes as soon as your out of default? I just made my 9 payments and came out of default last Saturday. I filed my taxes today.. I’m definitely out of default. Will everyone know that? All the right agencies?

          • Maybe… I always recommend filing your taxes after you’ve made your first payment under your new repayment plan. Paperwork can take time to process, and you’re taking a risk.

    • 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.

      Reply

        • 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.

          Reply

  7. 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?

    Reply

    • No, but he can get on an income-based repayment plan and potentially look for forgiveness programs.

      Reply

  8. 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 ?

    Reply

    • 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.

      Reply

  9. 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?

    Reply

    • 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.

      Reply

  11. 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?

    Reply

  13. 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?

    Reply

    • 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.

      Reply

  14. 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

    Reply

  15. 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?

    Reply

  16. 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?

    Reply

    • 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.

      Reply

  17. 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.

    Reply

      • 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?

        Reply

        • They can’t force you to do anything – you can apply for your repayment plan using your information on the paper form.

          Reply

  18. I am finishing my 6th month going from defaulted student loan to rehabilitation who or how does it get to next phase

    Reply

  19. 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?

    Reply

  20. My student loan was off of default when the receive my taxes and they still garnish my taxes. Can they do that

    Reply

  21. 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!

    Reply

    • You need to call and setup a rehabilitation plan. Once you’re rehabilitated you can look at getting a loan.

      Reply

  22. 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.

    Reply

  23. 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 🙂

    Reply

    • 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.

      Reply

  24. Hello,
    So I am currently in the nine month payment plan to get out of default. It starts in June and it will end in February. Will I still be able to sign up for fasfa? I realized I might be cutting it close with that one so what are other options I can turn to for school?
    Will my tax refund be in trouble

    Reply

    • You can’t get any student aid until you’re out of default – after February. Same with your tax return – don’t file until you’re out of default.

      We actually recommend waiting on all of that until you make your first payment on your next payment plan.

      Reply

  25. Hello, Mr R. Farington
    Question: I have an outstanding student loan of approx. $94,000. Should I add $30,000 to this outstanding balance or invest in real estate to increase the chances of substantially reducing this loan debt?
    Thank you, for your time and reply.

    Reply

    • Are you in default on this loan? How are you going to add $30k?

      In general, this is a bad idea, but I’m very confused based on your comment and this article how this applies.

      Reply

  26. I have loans with both Fedloan and Florida Dept of Education that are in default or danger of default depending on which website I’m on. If I have to rehabilitate the loans, will I have to do rehabilitation with both lenders or will they allow me to split the payments (which are based on my last year’s AGI which was horribly low) and give each half?

    Reply

  27. Hello

    I recently started into Debt rehab, I am lost my job but I am paying the 5$ a month but without the garnishment will that kick me out of the program?

    Reply

  28. My daughter had consolidated her undergrad loans of approximately $79,000 and was on an income-based payment plan. Because her income was so low, her payments were zero. She started grad school in 2016 and acquired another $50,000 in loans. Because she was in school, her loan payments were deferred. All of a sudden she started getting letters from myeddebt that her original loan was in default. How can that be? Can she get help from Fedloan Services who originally serviced the loan to find out why the loan went into default? I know shes required to recertify for income based paymentvplan every year, but Fedloan hascalways notified her when this needed to be done. We’really trying to consolidate all the loans, and I can’t even check the myeddebt website as it says it’s down for maintenance. This seems to be a regular occurence, but I’m guessing it may be due to the government shutdown. Don’t know where to turn for answers. She barely makes enough to live on, is a single mom, and doesn’ have a dime to her name.

    Reply

    • Is she out of school now? Did she contact Fedloan for her in-school deferment and process the paperwork? Why are you trying to re-consolidate? You reset the clock on forgiveness on the older loans, so it’s probably not a good idea to do that.

      Reply

  29. Hello I need to get out of default. It has been in default for 2 yrs now. I was given myeddebt.ed.gov in order to do this. I was told I would pay for 9 months with an automatic withdrawal from my bank. If this is correct ? Then what happens after that? I couldnt afford to pay back the amount Sallimae wanted me to pay back monthly. It would have cost me my whole paycheck to do that. I have read up on many articles and am afraid to just give my bank account number to just any one please help.

    Reply

    • I was told I would pay for 9 months with an automatic withdrawal from my bank. If this is correct?
      That’s a very typical student loan rehabilitation agreement.

      Then what happens after that?
      After you rehabilitate your loan, it goes back to your Federal loan servicer (like FedLoan, Navient, etc.) and you resume making payments on your student loan until you pay it off.

      Reply

      • I went into default because my payments were tripled. i couldnt afford to pay $600 a month and I still cant. I live paycheck to paycheck where do i go from here? will they allow me to pay less or will they still expect the $600

        Reply

        • You have to send a rehabilitation agreement that states your income and expenses, and setup a reasonable payment plan.

          Reply

  30. Hi Robert,
    I have student loans I was paying them with no problem. I am a single mom and was having issues keeping up with my payments. I have since stopped paying and now my loans are in default. I’m at a point in my life where I am able to start getting back on track paying something to get them out of default. Who can I contact about the rehabilitation program. I received a letter from an attorney who has my account. Would I need to reach out to them about the rehabilitation process or do I need to contact Fedloans? Any advice would help!!

    Thank you!!

    Reply

  31. Hi Robert,
    I have student loans in default and I have never heard of the offset program until my tax refund was taken. I never got any kind of prior notice of this before it happened. Losing my refund is going to seriously put me at risk to lose everything except my job. Is there a way I can start a payment plan and get my refund back? Or do I just have to wait until next year?

    Reply

    • The best thing you can do is take action now so that you can avoid this in the future. You can also change your tax withholding to avoid big refunds, which gives you more money each paycheck anyway.

      Reply

  32. Hi i have a question. I filed my taxes jointly with my husband amd he has student loan debt but a monthly payment has been coming from his social security check for 7 or 8 years. Would my tax refund be safe?

    Reply

    • Yikes, he’s seeing his SS garnished – that’s not good. Yes, he’ll probably see his tax return garnished as well.

      You need to file an injured spouse relief form to get your portion back. And then you need to get out of default.

      Reply

  33. Hi, I just recently received a notice that my taxes are offset. I filled out a forbearance but I was just notified as of 03-06-2019 now that they have not received it and my loan was turned over to a collection agency. Also, I haven’t received any correspondence from them in regards to the loan being defaulted until just recently. I called the Department of Education and they have communicated that all my correspondence was sent to an old PO box that I no longer use. This whole time I was under the impression that my loan was under forbearance as they have received it and just recently I found out that was not the case. I am a single mom and never been married to my daughter’s father. I have already filed for taxes and received an offset letter recently. My question is, if I amend my taxes and have my daughter’s father use the child credit for his tax return, would that change anything as far as the offset being returned? I am working on rehabilitating my loan as we speak and I might be evicted since I was depending on that tax refund. Please any help in this matter would be very helpful. Much appreciated.

    Reply

  34. Hello,
    My loan is in default and I recently checked the MYEDDEBT site. It is giving me the option to make payments there. Does this mean that my loan is still being serviced by the government? Is the amount listed on this site the amount that I actually owe?
    Thanks,
    Peter

    Reply

    • You could be in default and be serviced by the Department of Education – they handle some directly, as well as a network of loan servicers. However, it’s more than making payments – you need to get on a rehabilitation program.

      Reply

  35. I am in default for a LARGE amount and have not been able to pay for several years because I stupidly started a business which I have been unable to pay myself with because of all its bills ( which are finally paid for but unfortunately too late to make a difference ) and so I have a second weekend job to pay my bills. I am in the process of trying to sell my business and just do the weekend job but full time weekend and weekdays which pays four times more if I work full time. My question is: I want to start sending Trellis money toward my account but can not find a payment address and also I want to send it weekly or biweekly to get caught up but not sure if that is okay..

    Reply

  36. I am in default for the second time and received a letter they were going to garnish wages. I am not working but do not want this to escalate. I contacted ECMC to make a payment arrangement and they denied any payment arrangement or consolidation. They say I could not consolidate because I had a spousal consolidation when I was in school. My only option is to pay the $76,000 in full (the original loan was $22,000) or make payments of $820 for the next ten years which is not sustainable and will likely put me in default again. Are there any options left?

    Reply

    • Spousal consolidation loans are the worst – are you still with your spouse and working on it together?

      You cannot really do anything with spousal consolidation loans, which is the problem. So local credit unions have been found to refinance them, but I’ve only heard stories, never seen it in practice.

      Reply

  37. Both my wife and I have large student loans, we just completed a Bankruptcy chpt 13 last year. Nelnet is gave us a payment amount that is a lot more than we can afford. We have been sending them something every month just not the full amount. What are our options to keep out of defaulting the loans and getting our wages garnished?

    Reply

    • If you’re not already on an income-driven repayment plan (usually not – you have to ask for it and complete the paperwork), get on it. These plans will cap your monthly repayment at 10 to 15% of your discretionary income. If you are still struggling beyond that, you need to look at your overall budget.

      Reply

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