How to Deal With Student Loan Default

Written By Mary Beth Eastman
Last updated November 30, 2021

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January 25, 2018

Simple. Thrifty. Living.

More than four million people have defaulted student loans, with the total amount exceeding $74 billion. If you run into problems making payments and go into default, you have several options available to resolve the issue.

You can regain your eligibility for federal student aid through a program called loan rehabilitation. The lender sets up a 10-month repayment plan and agrees to move the loan out of the default status if you make at least nine on-time payments. You regain federal student loan eligibility slightly earlier in the process, at six months.

This repayment plan is typically structured so you’re paying at least 1 percent of the loan balance each month. Extenuating circumstances may lower this minimum further. Note that you can’t go through the rehabilitation process a second time. If it defaults again, it retains that status.

Loan consolidation is an option if you have multiple defaults. If you can make three payments that are equal to your original student loan terms, you can consolidate them all into one easy-to-manage loan. People willing to change their payment amount to one based on their income can immediately consolidate their loans. The interest rate may be more favorable than the ones you currently have, which can decrease your monthly payment.

Do you have the entire loan amount available in your savings or from another source? Call the lender to get the total repayment amount, since it may have changed from the original due to collection costs, interest payments and other fees.

Paying it off completely changes the loan status from default to repaid, and the account will turn into a closed tradeline on your credit report. This method is the most straightforward of your options, so if you have the money on hand, it’s preferable to leaving a negative account on your credit report while you pay the loan down.

A student loan default is a stressful situation, but you have several methods for addressing it. Take a close look at the big picture of your financial health to determine which makes the most sense for the loan amounts and your budget.

About the Author

Mary Beth Eastman

Mary Beth Eastman serves as the content manager for Simple. Thrifty. Living, where she is dedicated to helping readers use money and credit wisely. Mary Beth believes that access to the right financial information paired with a growth mindset are essential tools for getting out of debt and building wealth. Mary Beth has a degree in Journalism from Bowling Green State University and has focused her 20-year journalism career on putting readers front and center, carefully considering their concerns and presenting information that will help them in their everyday lives. She has won numerous statewide journalism awards. Her writing on personal finance as been featured on numerous websites in addition to Simple. Thrifty. Living, including Huffington Post and Lexington Law blog. Mary Beth resides in Pittsburgh, Pa., with her family and two rescue dogs.

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