Defaulting on student loans doesn’t mean your credit is ruined for life. While missed payments and a default will show up on your credit report and certainly do decrease your credit score, there are steps you can take to get the default removed.
Along the way, you’ll be repairing your credit.
If you're in default, though, you need to take steps to get back on track. Student loan default is not pretty - it can mean wage garnishments, student loan tax refund offsets, and more. Your student loan debt can even get you fired from your job.
In this article, we’ll cover five easy steps to help you get out of student loan default.
1. Decide on Loan Rehabilitation, Loan Consolidation, or Paying in Full
These are the three paths for getting out of student loan default. Deciding which one to use is the first step to getting out of default.
Those steps are:
- Paying off the student loan balance in full
- Student loan consolidation
- Student loan rehabilitation
The fastest way is to pay off your student loans in full. For many, this is usually not practical. The next two options are loan rehabilitation and loan consolidation.
Loan consolidation doesn’t remove the default from your credit report and there can be limitations on repayment plans. One advantage of loan consolidation is that it’s much quicker than loan rehabilitation. The chart below, from studentaid.ed.gov, summarizes these differences.
Given the disadvantages of loan consolidation, this article will focus on loan rehabilitation.
Be aware that student loan rehabilitation can only be used once. It’s important to make sure you are financially ready, which is what we’ll cover next.
2. Prepare Your Finances
You’ll need to make consistent, on-time student loan payments for a set period of time. It’s important that your finances be in order so you don’t miss any payments. Preparation is the key.
In preparing for your student loan payments, you may need to make a few changes in your lifestyle. For example, eating out less, not going to the movies as much, and maybe even moving in with your parents temporarily, all in an effort to allocate more money to student loan payments.
If you aren’t already using some type of financial software, now may be a good time. It will help you better create a plan for the next 10 months while you are making rehabilitation payments. You’ll also be able to track expenses and income more easily and compare them against your payment budget. Such detailed tracking will remove any guesswork and give you exact numbers to work with.
3. Contact Your Loan Servicing Company
Even though you have a government student loan, your payments will often go to a servicer who is managing the loan on behalf of the government. You’ll want to let your loan servicer or holder know that you’re wanting to enter into loan rehabilitation.
Your loan servicer will also determine your monthly payment amounts. Depending on your financial situation, you can work with your loan holder to try and get the payment amount decreased.
You student loan may also be with a debt collector if you've been in default a long time. Here's the student loan debt collectors and how to find your loans.
4. Make Nine Voluntary, Reasonable, Affordable Monthly Payments
You can find the necessary forms for loan rehabilitation here. After you’ve completed your application and have been notified that it’s been approved, you’ll begin making payments.
The required payment will be based on your financial situation. You must make 9 consecutive payments in 10 months and each payment must be within 20 days of the due date. Once you have completed the nine payments, the default will be removed.
Your wages are probably already being garnished in order to meet student loan payments. Garnishment will still occur even while you are making the nine required payments. This is why the second step is critical to the success of meeting all nine payments.
Your budget will have to take in your regular nine payments plus any wage garnishment payments.
5. Take Action After the Final Payment
Now that you’re in loan rehabilitation and making payments, ensure you never miss a payment by signing up for automatic payments. Auto payments will draft your payment from your bank account by the due date every month. No more forgetting to make a payment. Just be sure that your bank account always has enough in it to cover your monthly loan payment.
If you’d like to see how much you owe and confirm your payments are being processed, you can log in here.
On a final note, be vigilant and stay on top of your loan holder as your application is being processed. Simply meaning, confirm and verify everything you are able to. The Consumer Financial Protection Bureau (CFPB) found problems with intermediaries or loan holders in processing applications. Complaints from students included delayed applications and higher monthly payments than those that were negotiated.
“This matches what I have been seeing on the ground,” Adam Minsky, a lawyer specializing in student debt, told The Washington Post of the CFPB’s findings. “During rehabilitation, I see an array of issues and problems that could derail borrowers — irregularities in calculating a borrower’s monthly payment, failure to deduct payments properly . . . failures to lift wage garnishment orders.”
Final Thoughts
Getting out of default is the best thing you can do if you haven't been making your student loan payments. Student loan rehabilitation is a great way to make it happen, but the other options are good as well.
What's important is, after you're back on track, you make every effort to pay off your student loans faster and make positive progress. Make sure you never fall back into student loan default again.
Traci says
January 19, 2019 at 5:40 amI was told by the collection agency that there was nothing I could do and my Che k would garnished. I requested a hearing to stop it based on financial hardship.Can I go to civil court and stop the wage garnishment? I live in NYC
Thanks Traci
Robert Farrington says
January 20, 2019 at 3:12 pmNot for Federal loans. The government doesn’t need to go to court to garnish your wages or tax refund. You need to start rehabilitating your loans or consolidate (follow the steps in the article), and get out of default.
robert young says
February 21, 2019 at 7:43 amI have started the loan rehabilitation program and I am wondering if my taxes has to wait until I make 9 payments or if they remove from taxes now so I get my taxes back.
Robert Farrington says
February 21, 2019 at 9:11 amYou need to complete the entire process, or you still run the risk of your tax refund being garnished.
Smith says
February 25, 2019 at 2:59 pmIf u call the irs to see if they are gonna take ur income tax check and it say you have one debt with a personal loan and your tax refund could be offset does it mean they are gonna take it??? Or they might take it???
Robert Farrington says
February 25, 2019 at 5:16 pmIF you have an offset listed they are likely going to take it.
Laura Lee says
March 1, 2019 at 6:42 pmMy son is being told by his loan provider that he cannot rehabilitate his Unsubsidized William D. Ford Loan because his wages are being garnished. He has talked to DOE which told him to talk to the loan provider and when he talks to the loan provider they say he can’t do it. This contradicts everything that I am reading. What is your advice?
Robert Farrington says
March 2, 2019 at 5:54 pmAt this point, his debt sounds like it’s in the hands of a debt collector. He needs to find his loans (using the methods above) and work with the debt collector to setup the rehabilitation agreement.
Once he completes it, his loan will be transferred back to a loan servicer.
Also, it could be blocked because rehabilitation is a one time thing. If he did it before and fell back into default he can’t do it again.
Christina Marie Bermudez says
March 10, 2019 at 9:35 amHello,
Thank you for your articles, they are helping with piece of mind. I have a couple of questions. I have about 2-4 unsubsidized loans that have come into default, not sure how many, as these are 15 years old. I did the consolation program, but, after a layoff or two, I stopped paying and get so anxious that i throw Bill’s away. Just being honest. I had a a repayment schedule, for the 9 months, but, I messed that up too. Plus, I just received a potential wage garnishment letter, saying they will start garnishment, but, there was another letter from the creditor they sold it to asking me to call per repayment. Though I get paid 75k as a secretary, SF bay area, my rent, Bills, etc, leave me w no extra to pay off garnishment, even on a non shopping lifestyle. 2 things, how can I best negotiate the smallest wage garnishment or stop it from happening. And secondly, how may I negotiate with the 2 to 4 creditors whom have been sold my loans, for the lowest rates. Thirdly, How can I find all these creditor names, they always seem to be a different creditor. Thank you Robert!
Robert Farrington says
March 10, 2019 at 1:08 pmYou’re not going to be able to negotiate a settlement on Federal loans. You owe the debt to the U.S. taxpayer, so while there are some options to eliminate collection fees and accrued interest to the debt collector, you’re not going to see significant progress. And this is if you can make a lump sum payment today.
Here’s how to find your loans: https://thecollegeinvestor.com/19370/how-to-find-out-who-owns-your-student-loans/
Yamira Monterosa says
April 6, 2019 at 9:15 pmI am in a rehabilitation program for my student loan . last year my taxes were taken .Now that I’m in a payment program since Feb 2019 can they take my taxes again ? I’m in a hardship so the taxes are for my husband’s immigration lawyer. That’s the only way to pay them with my taxes. Do you think I might have them offset even if when I call the TOPS for offset it says I am clear no offsets ?
Robert Farrington says
April 7, 2019 at 9:15 pmYes, until you complete the program you’re still in default.
Stephanie says
April 11, 2019 at 8:57 amI live in Indiana, can they take your tax check and garnish your wages if your a single mother of 3?
Robert Farrington says
April 11, 2019 at 2:48 pmYes, if you’re in default, the government can do that. If you had private loans and were sued (and lost), they can do that as well with a court order.
Summer says
April 24, 2019 at 2:46 pmI called TOPS and my name is clear I also spoke with someone and they said I am inactive I talked to the DOE and they said I was inactive. I was clear. I talked to central research and they said I was clear (Inactive) after making promised 6 payments in the Rehabilitation Program. I keep calling and they keep saying I am inactive. I’m tired of calling and asking the same question hoping someone will tell me different. And I am fine to file taxes, what should I do????
Robert Farrington says
April 24, 2019 at 3:06 pmOur personal opinion is that you should wait until you make your first payment under your new repayment program after completing rehabilitation. But if you want to do anything different, that’s your prerogative.
Rachel says
May 4, 2019 at 3:59 pmI defaulted on some student loans many years ago and finally paid them off a year ago. I am in the pre-approval process for buying my first home and the loan shows as defaulted-paid in full. I got a letter from the loan company showing that they have been paid off but @ this point I have no idea who to send the letter to?? I am not applying for another student loan, so I didn’t think the school was the place to send it but that’s the only place I can think of other than maybe the credit companies?? Who would I forward this to to remove the defaulted status off my credit?
Robert Farrington says
May 6, 2019 at 10:19 amIf there was something inaccurate reported, you can get that removed. But if you did default, and then paid it off, it sounds like it’s being reported correctly.