Trouble Making Payments: Consolidation, Default, & Rehabilitation

Contact your loan servicer.  They can answer your questions and help you explore different options, including a change to your repayment plan, deferment, or forbearance.

What happens if I don’t make my loan payment or make changes to my repayment plan?

If you do not make your full monthly payment or if the payment is late, your loan will be marked as delinquent.  Your loan will continue to be delinquent until you catch up on payments, get approval for a change (deferment, forbearance, different repayment plan), or your loan defaults.  For federal loans, the following timeline generally applies:

• After 90+ days of delinquency, credit bureaus will be notified about the delinquency
• After 270 days of delinquency, your loan will go into default, will be reported as such on your credit report, and will be sent to a collection agency

Contact the collection agency managing your defaulted loan.  If you do not know the name of the collection agency, contact your servicer for more information. Being in default can have serious consequences. As noted on studentaid.gov, default can lead to the following for federal loans:

• The entire unpaid balance of your loan and any interest you owe becomes immediately due (this is called “acceleration”).
• You can no longer receive deferment or forbearance, and you lose eligibility for other benefits, such as the ability to choose a repayment plan.
• You lose eligibility for additional federal student aid.
• The default is reported to credit bureaus, damaging your credit rating and affecting your ability to buy a car or house or get a credit card.
• It may take years to re-establish a good credit record.
• You may not be able to purchase or sell assets such as real estate.
• Your tax refunds and federal benefit payments may be withheld and applied toward repayment of your defaulted loan (this is called “Treasury offset”).
• Your wages may be garnished. This means your employer may be required to withhold a portion of your pay and send it to your loan holder to repay your defaulted loan.
• Your loan holder can take you to court.
• You may be charged court costs, collection fees, attorney’s fees, and other costs associated with the collection process.
• Your school may withhold your academic transcript until your defaulted student loan is satisfied. The academic transcript is the property of the school, and it is the school’s decision—not the U.S. Department of Education’s or your loan holder’s—whether to release the transcript to you.

If you have private loans, the situation will likely be similar; however, private lenders do not have as many ways to seize money so lawsuits are more common.

Again, contact the collection agency managing your defaulted loan(s) for help.  When it comes to getting out of default on federal student loans, you have three options: loan rehabilitation, loan consolidation, or repayment in full.

Loan Rehabilitation

If you agree to loan rehabilitation, you will need to make 9 consecutive monthly payments. These payments must be made within 20 days of their due date.  Rehabilitation payments are based on your household income and expenses, with the minimum payment being $5/month.  If the monthly rehabilitation amount you are given is too high for you, you have the right to ask for a more reasonable and affordable amount.  Ask your collection agency to re-evaluate your rehabilitation payment amount.

Once your loan is rehabilitated, your loan will no longer be in default, you will be eligible for programs and benefits you previously had with your loan (deferment, forbearance, forgiveness), and the default will be removed from your credit report (the delinquencies reported will remain on your report).  You can only rehabilitate a loan once, so if you default a second time you will need to consider another option.

Loan Consolidation

If you have more than one federal loan, you can consolidate them in order to get out of default. To consolidate your loans, you have two options:

• Consolidate the loans and repay the Direct Consolidation Loan through an Income-Driven Repayment plan
• Make 3 full monthly payments (consecutive, voluntary, and on-time) on the defaulted loan before consolidating.  This option is for borrowers who do not want to repay their loans with an IDR plan

Like rehabilitation, once your loan is consolidated it will no longer be in default and you will be eligible for programs and benefits you previously had with your loan (deferment, forbearance, forgiveness). Unlike rehabilitation, consolidation does not remove the record of the default from your credit history which can impact many of your financial decisions in the following seven years.  Additionally, because consolidation creates a new loan for you to repay, it will extend the amount of time it takes to repay your loan. However, consolidation may lower your interest rate as it takes the average of all of your loans’ interest rates.

Repayment in Full

This option is not financially realistic for many borrowers.  However, you have the option to repay the entirety of your defaulted loan at once in order to get out of default.  If your loan balance is not very high, this may be a good option for you.