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Stanley Tate
#1 Student Loan Lawyer
Published on July 12, 2022
Borrowers can get federal student loans out of default fast with settlement and consolidation. Loan rehabilitation is another option, but it takes nine months to complete.
Student loan default is common. Almost one-fifth of all federal student loan borrowers — over 8 million people — were in default at the start of the coronavirus pandemic, according to data from the US Department of Education.
As part of its Covid-19 relief efforts, the government has suspended administrative wage garnishment until student loan payments resume in May. And it’s holding off on taking tax refunds and garnishing Social Security benefits until November 2022.
You can avoid those collection activities by digging your federal student loans out of default before the forbearance ends.
Ahead, learn how to get student loans out of default fast and where to find help if you need it.
The Education Department announced the payment pause would be extended until August 31, 2022. The department added that it would grant more than 7 million borrowers in default a “fresh start” and automatically return their accounts to good standing before the freeze ends. There’s no word yet on when this change will happen.
How to get federal student loans out of default
You have three options to get your student loans out of default:
Settlement (1-2 weeks). When you contact the debt collector, the representative will first ask if you want to pay the full amount. If you say no, they will then offer you a settlement to resolve the loan balance in full. The settlement amount, or compromise, will typically waive the collection costs, half of the outstanding interest, and a tiny portion of the principal balance. You’ll have up to 90 days from the date you reach an agreement to pay the settlement. Learn how to settle federal student loans.
Consolidation (5-6 weeks). If you can’t afford to settle, student loan consolidation is the fastest way to dig out of default. The process takes your federal loans and combines them into a new Direct Consolidation Loan. While consolidation won’t lower the interest rate or shave off some of the accrued interest and collection fees, it will clear you from the CAIVRS report and restore your eligibility for student loan forgiveness programs, like the PSLF Program. Read more about how to consolidate defaulted student loans.
Loan rehabilitation (9 months). The student loan rehabilitation program is the slowest way to get federal loans out of default. But it’s the only option that removes the default status from your credit history, which can increase your credit score. To qualify, you’ll need to sign a rehabilitation agreement letter and make nine monthly payments based on either 15% of your discretionary income or your income and expenses.
Each repayment option has its pros and cons. The right choice for you depends on your goals.
Learn More: Can Defaulted Student Loans Be Forgiven?
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To fix student loans in default fast: Consolidate
Student loan consolidation is the fastest way out of default if you can’t afford to settle. You’re eligible if you don’t have an active student loan wage garnishment and you have at least one other loan to add to your defaulted loan.
You can apply for consolidation by either:
Making three consecutive on-time payments to the collection agency. The company will send your consolidation application to the new loan servicer after your last payment.
Submitting a consolidation application to a loan servicer and agreeing to repay your loans under an income-driven repayment plan. Your monthly payment amount will be capped at no more than 20 You can mail a paper application to the servicer or consolidate it online for free on the Federal Student Aid website, studentaid.gov.
Can I consolidate a second time if I have an FFEL Consolidation Loan? Ordinarily, you have to have more than one federal loan to consolidate. But if you have a consolidation loan from the Federal Family Education Loan Program, you can consolidate more than once — even if it’s your only loan. Basically, you’re refinancing the defaulted student loan debt with the Education Department.
To save on interest and collection fees: Settle
Settlement is the fastest way to get student loans out of default. Plus, it’s the only option that can remove the collection fees, some outstanding interest, and a bit of the principal from your student loan balance. But the payoff amounts for federal student loan settlements are expensive, and you have to pay it in a lump sum within 90 days.
The settlements for federal student debt are more expensive than what private lenders are willing to accept because of the government has collection powers. After you default, the government can garnish your wages, take your tax refund, and seize your Social Security benefits without a court order. And it can stop you from borrowing new financial aid. Private loan holders need a court holder to take money from you.
If you move forward with a settlement, you can pay it with a check or with your debit card online at myeddebt.ed.gov. Credit card payments usually aren’t accepted.
The three major credit bureaus are updated the month after you pay the settlement.
To improve your credit score: Rehabilitate
Many borrowers choose loan rehabilitation because it’s the only option that removes the default status from credit reports. But getting that negative mark deleted may not have as significant an influence on your credit score as does getting out of default under any of the other choices. The program doesn’t remove the late payments — those will stay on your credit for seven years. And your report will keep showing you’re in default until you make the last payment and your account returns to good standing.
Unfortunately, there’s no way to speed up the rehabilitation process. You can’t make all of the nine payments at one time. Each payment has to be made within 20 days of the due date.
So if you’re trying to buy a home or qualify for additional federal student aid in the near future, settlement, and consolidation are better options. Read more about student loan rehabilitation vs. consolidation.
Learn More: How Does Student Loan Default Affect Your Credit Score?
How to find help for student loan debt in default
You can get help for federal loans in default by calling Federal Student Aid at 1-800-433-3243. The representative can check the National Student Loan Data System to find your loans and put you in contact with the company handling your account.
You could also try to find help online. But that can be challenging. There are only a handful of people and organizations that I can recommend based on my knowledge of their skills and experience.
Stanley Tate – I help people across the globe navigate repayment, negotiate settlements, get out of default, and file student loan bankruptcy.
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Default Resolution Group – The Education Department hired DRG to handle collections for its defaulted student debt. Contact DRG representatives (800-621-3115) to learn your options to get out of default.
Jay Fleishman – As the host of The Student Loan Show, Jay provides borrowers with free help to better understand their rights. He also has a law practice focused on helping those same people find a way out of their student loan debt.
Betsy Mayotte – After compiling over two decades of experience dealing with higher education debt, Betsy founded the nonprofit organization, The Institute of Student Loan Advisors. Her aim in creating TISLA was to ensure that “all student loan borrowers have access to free, neutral and accurate resources and mentoring to ensure they can successfully manage their student loan debt.”
Josh Cohen – For the past several years, Josh has led the way in helping to educate student loan borrowers and lawyers in understanding the world of education debt. In his law practice, Josh helps borrowers lower student loan payments, evaluate student loan refinance options, file student loan bankruptcy, and challenge information that harms their credit score.
Adam Minsky – Aside from sharing student loan updates as a senior contributor on Forbes, Adam is a lawyer who’s been helping borrowers navigate tricky student loan issues for the past decade.
Learn More: Default Student Loan Assistance
How to find student loans in default
To find federal student loans in default:
Default Resolution Group: 1-800-621-3115. The DRG can access records for federal student loans in default owned directly by the Education Department.
Federal Student Aid Customer Support: 1-800-433-3243. An FSA representative will be able to see all of the federal student loans you ever borrowed, including loans owned by your school (Perkins Loans) and by guaranty agencies (FFEL Loans).
There isn’t a universal number to call to find private student loans in default. Check your credit report to find the loan holder. Call that company to find out if it still has your loans.
Learn More: Defaulted Student Loan Forgiveness
Need help with your defaulted student loans? Let's talk.
If the process for getting out of default sounds overwhelming, I’m here to help. For years, I’ve worked with people just like you with their federal and private student loans.
Schedule a call with me today. We’ll work together to develop a plan that fits your current financial situation and sets you up to meet your future goals.
We’ll help you escape the consequences of default and get back on track no matter what type of education loan you borrowed.
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