Update: The Department of Education announced the Fresh Start program for federal student loans in default: a limited-time opportunity for borrowers in default to get their loans back into good standing before payments resume. This program is set to end one year after payments resume, putting the expiration at the end of 2023. Unfortunately, the Fresh Start benefits will not be automatic. Right now, the Department of Education has said that it will contact affected borrowers with next steps, which will most likely require contacting the Default Resolution Group and requesting the default fresh start. They can be reached at myeddebt.ed.gov or by calling 1-800-621-3115. You can read more on Summer's blog!
The first step for getting your loans out of default is to contact your loan servicer or the Department of Education's Default Resolution Group. If your loan is in collections, you can find a list of servicers here.
For federal student loans, there are three main options available.
1. If you're able to, you can pay off your loans in full to get them out of default, but of course this will depend on your financial situation.
2. Loan Rehabilitation
Loan rehabilitation involves making nine on-time monthly payments to your servicer in an amount that you both agree to. We’d recommend looking into this option as a first step.
Once the process is complete, the default will be removed from your credit history (although late payments will remain), and you can enroll in an income-driven repayment plan for more affordable monthly payments. Loan rehabilitation can only be completed once, so it’s important to avoid defaulting again.
The first step is to contact your loan servicer and tell them you want to start loan rehabilitation. Here’s what to expect with loan rehabilitation on a overview level:
- Your servicer will ask you for documentation of your income, like a tax return or a pay stub.
- They’ll give you a new monthly payment amount that’s based on 15% of your discretionary income. The payments can be as low as $5 per month.
- If you can’t afford the payment amount your servicer gives you, you can let them know and they’ll recalculate it to include your monthly expenses. For this, you may need to give them documentation for your monthly expenses, like bank statements.
- You’ll make nine on-time monthly payments of the new amount to “rehabilitate” your loan.
- Once your loan has been rehabilitated, you can enroll in an income-driven repayment plan for monthly payments that are based on your income.
3. Loan Consolidation
If you have loans available to consolidate, you can also consolidate your defaulted loans into a new Direct Consolidation loan and enroll it in an income-driven repayment plan. This option is faster than making the nine months of payments required for Loan Rehabilitation - your servicer will probably process the consolidation within eight weeks. And if you have an older type of loan (like a FFEL loan), you may need to consolidate your loans anyways to be eligible for programs like Public Service Loan Forgiveness.
Unlike loan rehabilitation, loan consolidation will not removed the default from your credit history. Consolidating your loans into a new loan will also mean that any qualifying payments you’ve made toward income-driven repayment and Public Service Loan Forgiveness will disappear.