Credible takeaways
- Federal loans enter default after 270 days, but consolidation can help you get out of default.
- Consolidation can prevent default in certain cases, but it depends on the timing.
- Rehabilitation is another option to get out of default and can remove the default status from your credit history.
Federal student loans can become delinquent and eventually enter default if you fall behind on payments. Since default has serious consequences, preventing it before it happens is key. One option is to consolidate with a Direct Consolidation Loan, which can combine several student loans into one, pay off existing balances, and reset your repayment timeline. However, you must take this step before a default.
If you’re already in default, consolidation can also be a tool to get your loans back into good standing under certain conditions. Here‘s what you need to know about student loan default prevention and management.
Current student loan refinance rates
What happens when a student loan goes into default?
Failing to repay your student loans puts you at risk for delinquency and default. Though the terms are often used interchangeably, there’s a major difference between them.
“If you miss a federal student loan payment, your loan becomes delinquent right after the due date passes,” says Becca Craig, certified student loan professional (CSLP) and certified financial planner (CFP) at Focus Partners Wealth. “If a borrower continues to be delinquent, the loan can move into default.”
The main difference is the amount of time that has passed. While your loan becomes delinquent after missing your due date by one day, it takes more time to reach default status.
“For most federal Direct Loans, default happens when a borrower goes more than 270 days without making a payment. Default is a much bigger headache, with tougher consequences, sometimes including wage garnishment,” explains Craig.
On top of wage garnishment, borrowers in default could have their tax refunds offset and face collections and various fees.
“Delinquency hurts your credit, but default triggers aggressive collections,” says Brady Lochte, a financial adviser and founder of Axon Capital Management.
Can consolidation prevent student loan default?
Federal student loan consolidation can prevent default if you complete the process before your loan reaches default status. Consolidating via a Direct Consolidation Loan pays off your existing loans, and you make payments on the new loan. The process streamlines repayment, since you only have one loan to repay. The new loan essentially resets your terms, monthly payment, and interest rate (which will be the weighted average of your previous loans, rounded up to the nearest one-eighth of a percent).
If you’re already in default, loan consolidation is one option to get your student loans back into good standing.
“Consolidation rolls multiple federal loans into one new Direct Consolidation Loan. If a borrower is already in default, it can be a way out, but it’s not automatic,” says Lochte.
You must take certain steps to qualify for a Direct Consolidation Loan as a means to get out of default.
How federal student loan consolidation works for defaulted loans
To consolidate your defaulted federal loans, you have two options:
- Agree to repay the Direct Consolidation Loan using an income-driven repayment plan.
- Make 3 full and consecutive monthly payments voluntarily by the due date before consolidating.
If you’re struggling to make your current payments, the first option can potentially lower your monthly payments. Income-driven repayment plans set your payment at a percentage of your discretionary income.
While consolidation can help with some issues, it may not help with others.
“Consolidation can stop collection activity and get the loan back into good standing, but it doesn’t reduce the balance or erase interest. It’s more of a reset button than a cure,” says Lochte.
Be aware that when you consolidate your loans, any unpaid interest will get added to your outstanding balance. As a result, your balance will increase, and you’ll pay more in interest charges.
Consolidation vs. rehabilitation for defaulted loans
Borrowers in default can pay off their balance in full to get back into good standing. While that may be the most direct route, it’s out of reach for many. The other two options to get out of default are loan consolidation and rehabilitation. Consolidation can be a relatively quick process, while rehabilitation takes longer.
“Rehabilitation typically removes the default from your credit report after nine monthly payments, which can help in long-term repair. Consolidation is faster but may leave a credit scar. Choose rehabilitation for credit recovery, consolidation for immediate relief from garnishment,” says Lochte.
You must contact your loan holder to begin rehabilitation and agree in writing to make the necessary nine monthly payments within 10 consecutive months. These payments will be “reasonable and affordable,” which typically means paying 10% or 15% of your discretionary income, divided by 12. Based on your income, your loan rehabilitation payments can be as low as $5 per month.
When comparing consolidation vs. rehabilitation on defaulted loans, consider speed and the impact on your credit. Consolidation can get you out of default faster, but it doesn’t remove the default status from your credit history. Rehabilitation takes longer, but it does remove the default status.
Keep in mind that consolidation and rehabilitation will not prevent the late payments that were reported by your loan holder before the default from appearing on your credit report. These late payments will remain in your credit history for seven years.
Editor insight: “You can only use consolidation or rehabilitation to get out of default once. I recommend weighing the pros and cons of each option carefully before choosing one to ensure you make the right choice for your situation.”
— Kelly Larsen, Student Loans Editor, Credible
When consolidation may not be enough to stop student loan default
While consolidation can be a useful tool, it may not be enough to stop student loan default in some cases. If your payments are being collected through wage garnishment or a court order, you’re not eligible to consolidate.
To qualify, the wage garnishment must be lifted and any judgments vacated. You may qualify for rehabilitation, but wage garnishment can continue and won’t count toward your monthly payments. The process will stop once you make five of your payments or your loan is no longer in default.
Borrowers who don’t comply with the minimum payment requirements for consolidation and rehabilitation may not be able to avoid default. Additionally, private student loan borrowers aren’t eligible for federal consolidation.
Other ways to prevent or stop federal student loan default
If you’ve already missed payments, it’s crucial to take steps to prevent or stop federal student loan default. Some options can include:
- Enrolling in an income-driven repayment plan
- Requesting a deferment or forbearance
- Negotiating with your loan servicers
- Adjusting the due date on your payments
Being proactive can help you avoid some of the consequences of default. The key is to start.
“From a financial planning perspective, student loans should be treated like a fixed obligation that needs a strategy, not something to ignore and hope resolves itself,” says Lochte.
FAQ
Can I consolidate federal student loans after they default?
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Will consolidation remove federal student loan default from my credit report?
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Is federal student loan consolidation better than rehabilitation?
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Can private student loans be consolidated to stop default?
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How quickly can federal student loan consolidation stop collection actions?
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