Have you defaulted on your student loans? For most federal student loans, your servicer will report your account as delinquent after 90 days of no payment, and you’ll be considered in default after you haven’t made payments for 270 days.
Defaulting on student loans can have serious consequences, affecting your credit score and staying on your credit report for seven years! It could become difficult to obtain credit cards, home or car loans, or other forms of consumer credit. You may also be charged a higher interest rate. You may have trouble signing up for utilities, getting homeowner’s or renter’s insurance, getting a cell phone plan, or getting approved to rent an apartment. Additionally, the government has the power to garnish wages directly from your paycheck and to withhold your tax refunds!!!
The only way to get out of student loan default is to pay your loan(s) in full (🥵), or choose one of two default-repair options.
Option A: Rehabilitation
Rehabilitation is available to federal student loan borrowers and requires you to make nine reduced monthly payments in a 10-month period, and as a result, the default notation will come off your credit report.
How it works:
- Contact your servicer and tell them you’d like to opt for loan rehabilitation for your defaulted loan(s).
- Your servicer will ask for proof of income. They will then calculate your monthly payments based off of 15% of your monthly discretionary income. You can ask for a lower payment if the servicer’s initial offer is not affordable for you.
- You’ll then need to make nine payments on your student loans. If the government is withholding your wages or tax refunds to repay the debt, this may continue while you make payments under a rehabilitation agreement.
- After you’ve made nine full and on-time payments for the monthly amount you’ve agreed to, your loan(s) will no longer be considered defaulted on your credit report. You’ll also be eligible for other repayment plan options. (The Revised Pay As You Earn plan caps monthly payments at 10% of your discretionary income). If the government was garnishing your wages and/or tax returns, they won’t anymore.
Note: You only get one chance to rehabilitate a defaulted federal student loan. If you default again, you won’t be eligible for another rehabilitation.
Option B: Consolidation
Student loan consolidation is when the government consolidates your defaulted loan(s) into one new direct consolidation loan. This option is faster than rehabilitation, but the default notation will still remain on your credit report for seven years.
How it works:
- Contact your servicer and tell them you’d like to opt for loan consolidation for your defaulted loan(s).
- You’ll then choose an income-driven repayment plan once you’ve consolidated the defaulted loan(s). Income-driven plans limit your monthly payment to a percentage of your income. Check out our blog for the different income-driven repayment plan options.
- Once your loan has been consolidated and you make on-time monthly payments, your loan will be back in good standing. As mentioned above, your credit report will still reflect a defaulted loan.
Note: If the government is garnishing your wages and/or tax return(s), consolidation is not an option for you.
Defaulting on student loans is totally avoidable though!
If you haven’t actually defaulted on your loans and you’re just late making payments and/or currently using student loan forbearance/deferment, you can cap your monthly student loan payments at an amount that is affordable to you. Income-driven repayment plans cap monthly payments at 10-20% of your income and some of these plans have great interest subsidies and interest caps! Read our blog about why now is the best time to enroll in an income-driven repayment plan!