Resolving Student Loan Default

Temporary COVID-19 Relief

Stopped Collection Activity and Temporary 0% Interest as a Result of the COVID-19 Emergency

To provide relief during the COVID-19 emergency, the U.S. Department of Education (ED) has stopped collection activity on defaulted federally owned student loans. In addition, interest is temporarily set at 0% on defaulted federally owned student loans. This 0% interest and stopped collections period will last from March 13, 2020, through at least Sept. 30, 2021. You can still make payments if you choose.


Do you have defaulted federal student loans?

If so, there are several ways to resolve a federal student loan default. Resolving your default can help you begin to improve your credit and also regain federal student aid eligibility, if you are looking to return to school.

One way to get out of default is to repay the defaulted loan in full, but that’s not a practical option for most borrowers. The two most common ways to get out of default are loan consolidation and loan rehabilitation.

Loan Consolidation

You may consolidate your defaulted federal student loan into a Federal Direct Consolidation Loan. Loan consolidation allows you to pay off one or more federal student loans with a single new loan that has a fixed interest rate.

To consolidate a defaulted federal student loan into a new Direct Consolidation Loan, you must either:

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

Click here to learn more about factors to consider before consolidating to resolve a default and to apply for a consolidation loan

Loan Rehabilitation

Loan rehabilitation is another option for getting your loan out of default. To rehabilitate a defaulted federal student loan, you must agree in writing to make:

  • Nine timely consecutive affordable monthly payments;
  • Each payment within 20 days of the due date; and
  • All nine payments during a period of 10 consecutive months.

To start the loan rehabilitation process, you must contact the holder of your loan. If you are not sure who holds your loan, log into

  • If you have a Federal Direct Loan, the U.S. Department of Education holds your loan; click here and scroll to the “Loan Rehabilitation” section for the steps to take to rehabilitate your loan.
  • If you have a Family Federal Education Loan (aka Stafford), contact the holder of your loan.
  • If you have a Federal Perkins Loan, the original holder of your loan was the school where you received your Perkins Loan. Contact the school to get started. If they are no longer the holder or servicer of your Perkins Loan, they should be able to provide you with contact information for the new holder of your loan.

Rehabilitation is a one-time opportunity. A defaulted loan can only be rehabilitated once.

Click here to learn more about the rehabilitation process.

Loan Consolidation vs. Loan Rehabilitation – Which Option is Best?

You may be unsure which option to choose. Loan rehabilitation takes several months to complete, where loan consolidation can be applied for quickly. However, loan rehabilitation provides certain benefits that are not available through loan consolidation, including a more positive impact on your credit report. Check out the chart found here to compare the benefits of loan consolidation versus the benefits of loan rehabilitation.

Repayment in Full or Settlement

Repayment in full involves paying the entire balance due, including principal, all accrued interest, and collection costs, in one lump sum. Once the defaulted loan is paid in full, the loan will typically show as a paid collection account on your credit report.

Settlement involves settling the debt by paying a sum less than the total payoff amount. Sometimes the loan holder will waive some or all of the collection costs. Always get the agreement in writing. Once the settlement payment is received, the loan will typically show as a settled collection account.

Contact the holder of your loan for more information.

What Happens After You Have Resolved Your Default?

No matter which option you choose, be sure to keep all related paperwork in a safe place. If you are planning to return to school, your school will receive an updated loan status for you, but it does not happen instantly. You may be asked to provide proof that your loan is no longer in default. If you enroll in school at least half-time, your loans should be eligible for in-school deferment (you won’t have to make any payments) until and unless you drop below half-time. When you do enter repayment again, review these helpful ways to avoid default.