There are options for when you default on your federal student loans to help you recover; however, your loans will have to be officially in student loan default.  If you aren’t sure if you have reached the defaulted loan status, you can read up here on how to verify it. It is important to take action now to avoid the consequences of ignoring your student loan default.

How To Get Your Student Loans Out Of Default

There are three ways you can get your federal student loans out of default:

  • Repayment
  • Consolidation
  • Rehabilitation

Each option provides the opportunity to stop or prevent further consequences of being in default. Read below to learn more about each to see which option may be best for your situation. If you are unsure which option may be best for your federal student loans, give us a call and we will help review your situation and potential courses of action.

Repayment: Get Out of Debt Completely

When your federal student loans go into default, the full balance is due immediately. Payment plans are no longer an acceptable option. Paying off your balance is one of the options recommended by the Education Department. However, for most people in default, this isn’t much of a viable option.

However, if you had a most of your balance available—like in a savings account or 401(k) you may be able to request a settlement (agreement to accept less than the full balance in exchange for a lump sum payment) and use those funds to pay your federal student loan off in full.

We do not recommend applying for a personal loan or private debt consolidation loan to pay off your defaulted loans. By now, your credit has already been heavily impacted by the default and the terms of a private loan will be quite unfavorable towards you and, possibly, cost you more over time. If you want a fast way to get out of default, see the Consolidation option

What about filing for bankruptcy? Can I discharge my federal student loans?

Technically, it is possible, but the process is rather tricky, and it doesn’t always work. Before filing for bankruptcy in hopes to achieve this, make sure bankruptcy really is the right financial option for you.

Consolidation: Fast Resolution

This is the fastest option that is also realistic (unlike the option above). You have to complete either of the following options to qualify:

Under this process, you get a new loan—specifically a Direct Loan—and pay off your defaulted federal student loan. Then, under the new Direct Loan, you resume regular monthly payments. While this method can quickly stop the consequences of your default it technically does not erase it from your credit history. This type of loan will, however, allow you to go back to school if you wanted to further you education, apply for financial aid and other loans, and apply for student loan forgiveness.

Rehabilitation: Get Out of Default AND Help Your Credit

Rehabilitation is the most recommended option for most defaulters. The student loan rehabilitation process removes the defaulted status from your credit history (although the late payments prior to the loan defaulting will remain on your report).

To complete this process and get out of default, you will be required to make nine payments over the course of 10 consecutive months—you cannot miss a payment, or you will also default from this program and will not be allowed a second chance.

The payment amount is calculated at 15% of your discretionary income, that is, remaining funds after necessities are taken care of. The Education Department calculates discretionary income by taking into account your gross income, where you live, and your family size. If the amount calculated is still outside of your financial capabilities, you can submit a request for a lesser amount.

Private Student Loan Options

The Student Loan Advisory Group primarily focuses on helping those having difficult with their federal student loans. However, recovering from debt is a passion of ours and sharing our knowledge is one of the ways we try to help others recover from debt and make smart financial choices when it comes to student loans.

Unfortunately, the above situations do not apply to private student loans. One of the perks of using federal student loans for your education are the programs and plans available to you. This does not mean you are entirely out of luck if you have defaulted on your private student loans. Each lender may have their own programs or options for borrowers who are struggling to make payments—some of which may be similar to federal student loan programs. If you are unable to work something out with your lender, you may have to seek legal counsel from an attorney familiar with student loan debt or professional financial advice from a CPA or similar.