How To Get Out of Default With Student Loan Consolidation

Student loan borrowers who have defaulted on their federal loans may be able to restore their loans to good standing through student loan consolidation. Understanding eligibility requirements for default student loan consolidation can help you decide if this is the best path forward for your financial situation.

In this article, learn how student loan consolidation works in this situation, who it’s for, and the potential pros and cons involved. 

Can I consolidate a defaulted student loan?

Student loan consolidation is one path to restoring your defaulted federal loans to good standing, but it’s not right for everyone. This process involves paying off one or more of your defaulted loans with a federal Direct Consolidation Loan. 

You're eligible for consolidation as long as the defaulted loan isn’t attached to any wage garnishment or judgment ordered by a court.

It's important to note that if you consolidate a defaulted loan, any interest you owe will be added to your new principal loan balance. This means your overall loan amount could be larger after consolidation, and you'll have to pay interest on this larger balance. 

That’s why it’s a good idea to consider other options for getting out of default before resorting to consolidation. 

Pros and cons of consolidation

Consolidation comes with pros and cons, especially when using this method to get out of default. Here are some of the biggest advantages and disadvantages of default student loan consolidation:

Pros

• Your unpaid balance is no longer immediately due in full.
• You have the option to switch to an income-driven repayment (IDR) plan, which can reduce your monthly payments.
• You are once again eligible for deferment, forbearance, and loan forgiveness.
• You are no longer in danger of having wages, tax refunds, or Social Security benefits garnished.
• You can begin working to improve your credit score.

Cons

• Any unpaid interest is added to your principal loan balance.
• Your default will remain in your credit history.
• Your monthly payments may still be too expensive if you were already on an IDR plan.

Related: How To Get Your Student Loans Out of Collections

How to consolidate your defaulted loans

There are two paths to becoming eligible for default student loan consolidation with a federal Direct Consolidation Loan:

• Sign up for an income-driven repayment (IDR) plan for your federal Direct Consolidation loans, or
• Voluntarily make three full, consecutive, on-time payments on the defaulted loan before consolidating. 

Taking either of these actions will return your federal defaulted student loan to good standing. 

However, if you have a defaulted Direct Consolidation Loan, you’ll only be able to reconsolidate the loan if you include another eligible loan in the consolidation. If you don’t have any other eligible loans to consolidate, you won’t be able to use consolidation to get out of default. 

Alternatives for getting out of default 

Ideally, paying off your defaulted loan in full is the best way to get out of student loan default. But depending on how much you owe, that might not be possible. 

The Fresh Start program is your next best solution, followed by loan rehabilitation. Each of these programs has the ability to remove the default record from your credit report, unlike consolidation.

For this reason, consider these two options before consolidating your defaulted loan: 

1. Fresh Start program

This is a temporary program offered by the Department of Education. Enrolling in this program transfers your defaulted loan to a new loan servicer, removes the record of default from your credit history, and returns your loan status to “in repayment.” You also have the option to switch to an IDR plan (and 80% of enrollees in Fresh Start do so), but it’s not required.

The Fresh Start program is only available to borrowers with defaulted federal Direct Loans, defaulted Federal Family Education Loans (FFEL), or defaulted Perkins Loans that are held by the Department of Education. Other types of loans, including Perkins Loans held by other loan servicers, are not eligible.

To get out of default through Fresh Start, contact your current loan servicer online, by phone, or by mail to make the request no later than Sept. 30, 2024. 

2. Loan rehabilitation

Loan rehabilitation allows borrowers in default to regain eligibility for federal student aid and benefits like income-driven repayment by making nine consecutive, on-time payments in a 10-month time period. Your loan servicer will determine the amount you pay, and the amount is based on your most recent tax return to ensure affordability. 

Successfully completing this process removes the default status from your credit history and restores access to deferment, forbearance, and other federal student loans. You’ll need to contact your loan servicer to see if you qualify for loan rehabilitation. 

What if I have defaulted private student loans? 

Consolidation, Fresh Start, and loan rehabilitation are all options available to federal student loan borrowers in default. But what options do you have if you have defaulted on private student loans?

To return your defaulted private student loans to good standing, consider the following strategies:

• Call your lender: Whether you’re already in default or concerned about missing your next payment, the first thing you should do is contact your lender. The lender may have options available, like changing your monthly due date, temporarily pausing your payments, or reducing your payment for a short period to create a new, feasible repayment plan.
• Consider debt settlement: With debt settlement, you may be able to negotiate with your creditor to settle your debt for an amount that’s less than what you owe. Normally, this will mean paying a lump sum in exchange for settling the debt. However, debt settlement can potentially hurt your credit score and may come with fees.

If you’re struggling to make your private student loan payments, refinancing may be an option worth considering. When you refinance student loans, you take out a new loan to pay off your existing loan(s). You may be able to find a new private loan with better terms that gives you a more affordable monthly payment. 

Just keep in mind that refinancing federal student loans isn’t always wise, since you’ll lose access to benefits like income-driven repayment plans and forgiveness options. 

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The bottom line

Consolidation can help you manage student loan default, but programs like Fresh Start and loan rehabilitation are generally more ideal options for most borrowers. Unlike consolidation, Fresh Start and loan rehabilitation can remove the default from your credit history, and they don’t come with the risk of increased interest costs.