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How to get out of student loan default

    Defaulting on a student loan can be a difficult situation to deal with. You may have been having trouble making payments on your loan, and your loan servicer may be contacting you to get your payments back on track. Or you may be worried that you could go into default in the future. These aren’t the easiest issues to know how to handle.

    Continue reading as we break down what student loan default is and what your options may be if you find yourself in this situation.

    What’s student loan default, and how can you handle it?

    Student loan default is the failure to repay a loan according to the terms you agreed to in the loan promissory note when you originally agreed to the loan terms.

    Federal student loan default, in particular, happens in most cases when your loan servicer can’t obtain your student loan payments for 270 days or more and is attempting to collect payments on your loan.

    Once your federal student loan goes into default, you could face several consequences, such as:

    • Your wages could be garnished, even without a court order
    • You could lose out on a tax refund or Social Security checks (those funds would get applied toward your defaulted student loan)
    • Your credit score could be impacted after credit reporting agencies are notified of the default
    • Could lead to a loss of some of the benefits that come with federal student loans, such as the ability to access deferment or forbearance
    • Could lead to the acceleration of the student loan, meaning the entire balance of the loan (principal and interest) will become due immediately
    • If your federal student loan is in default, you may not receive any additional federal student aid until you’ve taken steps to get your loan out of default

    Of note, eligible defaulted loans will receive certain relief measures as part of the COVID-19 emergency relief, such as not having wages garnished and not having tax refunds on Social Security checks withheld.

    Handling student loan default with federal loans

    There are options provided by the U.S. Department of Education if your federal student loans go into default. Your choices include loan rehabilitation, loan consolidation, or repayment in full. Keep reading for more details on each.

    If you believe your loan has gone into default and you haven’t received a letter from your loan servicer, contact your servicer immediately. Ask about repayment options and find out if you can avoid student loan default.

    Student loan rehabilitation

    Loan rehabilitation on most defaulted federal student loans involves signing an agreement to make nine monthly payments over ten consecutive months.

    You’ll be offered a monthly payment amount based on your income. These payments must be made within 20 days of the due date. Keep in mind that you can rehabilitate a defaulted loan only once.

    Student loan consolidation

    With loan consolidation, you can pay off your defaulted federal student loans by combining your loans into a Direct Consolidation Loan. This could simplify your monthly payments and potentially help you in the long run.

    In order to consolidate a defaulted federal student loan into a new loan, you must either:

    • Agree to repay the new loan under an income-driven repayment plan or
    • Make three consecutive, voluntary, on-time, full monthly payments on the defaulted loan before consolidating it

    Repayment of student loans in full

    This option means that if you can pay the full loan amount you owe back to your servicer, your loan will no longer be in default.  If full repayment isn’t feasible, consider choosing between loan rehabilitation and consolidation.

    Loan discharge

    Although unlikely, there are certain circumstances where your federal student loan obligation may be discharged, and you’ll no longer be required to make payments.

    Federal student loans are only discharged under extenuating circumstances such as the death of the borrower, total and permanent disability, bankruptcy, closure of a school, and select other circumstances. Loan discharge is likely unavailable unless you’re personally facing one of the above difficult situations.

    As a borrower, you should always have a plan for making timely payments on your federal student loans, but should you run into trouble and fail to make timely payments, know that there are many repayment options available to you that should be fully considered and exhausted before a default occurs. Additionally, loan discharge is only available in the face of challenging and rare circumstances, so it shouldn’t be relied upon as a viable method to repay federal student loans.

    Getting out of student loan default with private loans

    Private student loans may have different rules about getting out of default. It’s essential to contact your lender right away to understand your options to navigate your way through default to get out the other side of it.

    Final thoughts

    Although defaulting on your student loans can be scary, if you figure out which options work best to deal with the default, you can get back on track toward financial success.