Roughly 4 million student loans enter into default each year, and now that the pandemic-related payment pause has ended, that number is sure to grow.1 Fortunately, borrowers with defaulted loans have options in dealing with this situation.

Understanding Default

Defaulting on your student loan is something more than just missing a couple payments. Once a payment is missed, that loan is deemed “delinquent”. If the servicer doesn’t receive payment within 90 days, the delinquency is reported to the credit bureaus, impacting the borrower’s credit score. After 270 days (nine months) without payment, then a loan officially goes into “default” status. And the consequences of defaulting on a loan can be disastrous.

What happens when a loan enters into default:

• Loan is assigned to a collection agency, which means an abundance of phone calls and letters to borrowers.
• Credit scores are significantly impacted, affecting your ability to get an auto loan, mortgage, credit card, or even rent. If you are able to get er interest rates if you do manage to get a loan.
• The entire outstanding loan balance becomes due immediately. This balance continues to collect interest and late fees, which can add years to your repayment schedule.
• Eligibility for loan benefits, e.g., additional student aid, deferment, payment forbearance, loan forgiveness, and even tax benefits, is lost, making it even more difficult to catch up on payments than before!
• Wage garnishment and/or tax offset
• Legal action: Lenders may sue borrowers to collect garnished wages. You may then also be charged for any court or lawsuit-related costs.

Options for dealing with default

What if it’s too late, and you’ve already defaulted? You have options to take control of the situation and get your loan back on track:

• Immediate repayment of loans in full
• Discharge due to death or fraud
• Loan Consolidation (the quicker of the two options, which we’ll deal with in another article)
• Loan Rehabilitation (a somewhat slower option, but one that has a number of distinct benefits)

What is Loan Rehabilitation?

Loan rehabilitation is a one-time opportunity to get your loan out of default status by making nine payments in a ten-month period (which means you can miss one payment over the course of ten months). Best of all, these will be reasonable payments based on your current financial situation. Your loan servicer will calculate a monthly payment amount equal to 15% of your discretionary income (the same formula that would be used to calculate an income-based repayment plan.) If that’s still too high, with appropriate documentation of your income and expenses, you can ask them to recalculate a lower amount, which could be as low as $5! Make this new, lower payment for nine out of ten months, and your loan will come out of delinquent status.

At that point, if you’ve been facing wage garnishment and tax offsets, those will stop. Your default will even be removed from your credit history! (Any late payments you made will remain in your credit report, but the more serious notation of “default” will be removed.) To keep you in good standing, you’ll once again be eligible for loan modification and payment plans, along with any forbearance, deferment, or forgiveness options that were lost because of default.

Once your loan is rehabilitated, you’ll be working with a new loan servicer, so you’ll want to be sure to discuss all of your available options with that new servicer to be sure you stay on top of your new payment plan because you will not get this opportunity again. Loan rehabilitation is a one-time option, and you will not be permitted to enter into a loan rehabilitation agreement again.

There are a few exceptions to this: If you rehabilitated a loan before August 14, 2008, though, you will have the chance for loan rehabilitation just one more time. If you get out of default through Fresh Start, it will not count as your one opportunity. (More on that below.)

Taking Advantage of Loan Rehabilitation

If loan rehabilitation sounds like the path you need to get your student loan out of default and stop collections activity, wage garnishment, and all the other negative effects of default, contact us now!

We’ll guide you in contacting your loan servicer or collection agency to get the loan rehabilitation process started. You’ll enter into a written agreement to make nine affordable payments over the course of ten months. You’ll make each of those nine payments within 20 days of the due date. Your default status will be removed, and you’ll be eligible to negotiate a new payment plan. You’ll even be eligible again for further loans and federal student aid!

A Fresh Start for Federal Student Loan Borrowers in Default

Fresh Start is a one-time temporary program from the U.S. Department of Education (ED) that offers special benefits for borrowers with defaulted federal student loans. Fresh Start automatically gives you some benefits, such as restoring access to federal student aid (loans and grants), but you need to act to claim the full benefits of Fresh Start and get out of default. All defaulted borrowers temporarily have these benefits through at least September 2024, but, again, you must use Fresh Start to get out of default to keep them long-term. You should request Fresh Start as soon as possible but no later than August 31, 2024.

To use Fresh Start to get out of default, you must contact your loan holder. If your loans are held by ED, you can find their contact info here. If your loans are held by a guaranty agency, you’ll need to call that agency. Find contact information for guaranty agencies here. If you don’t know who holds your loans, you can contact the ED’s Default Resolution Group at 1-800-621-3115 (TTY 1-877-825-9923).

If you use Fresh Start to get out of default, here’s what will happen:

• ED will transfer your defaulted loans from the Default Resolution Group (or from a guaranty agency) to a loan servicer.
• ED will return your defaulted loans to “in repayment” status.
• ED will remove the record of your default from your credit report.

When you get out of default, you will choose a payment plan to repay your loans. Most borrowers enrolling in Fresh Start (about 80%) choose an income-driven repayment (IDR) plan. You’ll be asked to provide the following details to enroll in an IDR plan:

• Family size
• Number of dependents
• Tax filing status from your most recent federal tax return
• Annual income level from your most recent federal tax return
• Your spouse’s adjusted gross income (if you are married but file separately)

Benefits of Fresh Start

There are many benefits to enroll in the Fresh Start program:

• Access to Federal Student Aid: You can apply for federal grants and loans if you want to go back to school.
• Stopped collections
• Tax refunds (and child tax credits) will not be withheld.
• Wages will not be garnished.
• Social Security payments (including disability benefits) will not be withheld.
• Collection calls will not be made.
• Eligibility for other government loans
  • Many lenders, especially for loans that are backed by the government, will reject applicants who are marked as “in default” in the government credit reporting system (CAIVRS).
• Restored ability to rehabilitate loans
  • Normally, you can only rehabilitate a loan one time, but Fresh Start will not count as your one chance at rehabilitating your loan(s). For example: let’s say you’ve never rehabilitated your loan before and you use Fresh Start to get out of default. Then later on, your loan goes into default again later. In this case, you would still have the option to rehabilitate your loan. If you rehabilitated your loan(s) during the COVID-19 student loan payment pause, that also won’t count as your one chance at rehabilitating your loans.
• Changes to credit reporting
• Access to IDR plans
• Access to apply for loan forgiveness programs
• Access to short-term relief like forbearance and deferment

If you go into default again later

If you go into default again after Fresh Start, ED will use your loan’s original date of delinquency in the information provided to credit reporting agencies. That means that Fresh Start won’t reset how long credit reporting agencies report your loan as delinquent or in default.

If you’ve been delinquent on a loan for more than seven years, that defaulted or delinquent loan doesn’t show up on your credit report anymore. If you’re in this situation, ED will make sure you won’t get a default or delinquency reported for the loan anymore. So, if you take advantage of Fresh Start but default or become delinquent again, that defaulted loan won’t show up on your credit report if it has been at least seven years since you first became delinquent on the loan.

If you take out a new loan during or after Fresh Start, that new loan won’t be affected by Fresh Start, so if you default on the new loan, it will be reported to credit reporting agencies, and you will experience all the regular effects of default.

If you are in default on your student loan, options are available to you, and there’s no better time to act than now. Contact us today to find out the best option for you!