One of the most common questions I’m asked is how to get student loans out of default. At this point, I can cover the three options without thinking much about them:
- Pay the loan in full
- Consolidate it
- Rehabilitate it
But that doesn’t mean you shouldn’t think about them! Each option has its pros and cons, and which you choose will depend on your unique situation. Here’s which could work best for you.
Payment In Full
This option is best if: you owe a small amount, or you’re rich (yeah, right ...)
When your federal student loans default, your entire balance comes due immediately. If you are able to pay in full, try to do so as soon as possible.
You have a 60-day window after you receive the default notice to avoid collection costs if you make satisfactory repayment arrangements. Though no longer required, most federal student loan holders have agreed to this procedure. This also goes for consolidation and rehabilitation.
If you pay the loan in full after the 60-day window, you’d need to pay collection costs as well. These will depend on your loan holder and the activities they performed, but they could be up to 24% of your balance. So, if you default on a relatively small amount, see if you can find some money to pay it off immediately instead of dealing with those extra charges.
This option is best if: you’re trying to return to school quickly
Consolidation is another quick method to get out of default. You can do this by either consolidating and agreeing to repay with an income-driven repayment plan or by making three consecutive, voluntary, on-time, monthly payments and then consolidating.
This would be your best option if you needed to enroll in school within the next couple of months, but can’t receive new federal loans due to your currently defaulted student loans. If your wages are being garnished, this would also cease after the consolidation is complete.
If you choose consolidation, you would incur collection costs of up to 18.5%, which would be capitalized (added to your loan’s balance) at the time of consolidation.
This option is best if: you want to wipe your credit history clean
With rehabilitation, you make nine on-time, monthly, voluntary payments in an agreed upon amount within 10 months. Once you make all of the payments, your loan is sold to a new lender and taken out of default.
At that point, the default line is removed from your credit report. This can be a big help if you’re want to get approved for consumer debt, such as a car loan or mortgage, in the next 7 years (the amount of time the default would otherwise stay in your credit history). Consolidation does not remove the default line from your credit report.
You can regain federal loan eligibility after making six payments under a rehabilitation agreement, but the loan is not out of default until you make all nine payments. Wage garnishment will also cease after five payments (contact your loan holder if the garnishment continues). You can only rehabilitate loans once.
The amount of collection costs charged will depend on the type of loans you have, but will typically not exceed 16%. Any interest and collection costs incurred during rehabilitation will not be capitalized.
Still trying to figure out which option is right for your situation? Sign up or log in with your Salt account to post in the comments, and I’ll help you figure it out.