Options for Getting Out of Student Loan Default

Last updated 3 weeks ago ago. Our resources are updated regularly but please keep in mind that links, programs, policies, and contact information do change.

This article explores the primary options available to US borrowers who have defaulted on their federal student loans, including the Fresh Start program, student loan rehabilitation, Direct Loan consolidation, and the process for reviewing administrative wage garnishment.

Understanding Student Loan Default

For most federal student loans, including those under the William D. Ford Federal Direct Loan Program and the Federal Family Education Loan Program, default occurs when scheduled payments are not made for at least 270 days (approximately nine months).

For loans made under the Federal Perkins Loan Program, the holder of the loan (often the school) has the authority to declare the loan in default if a scheduled payment is not made by the due date.

It’s important to distinguish between loan delinquency and default. A loan becomes delinquent the day after a borrower misses a scheduled payment. The account remains in delinquency until the overdue amount is repaid or other arrangements are made, such as changing repayment plans or obtaining a deferment or forbearance.

While delinquency carries negative consequences, such as being reported to national credit bureaus after 90 days of missed payments, it is a stage that precedes the more severe repercussions of default. Resolving a delinquency is generally easier than resolving a default.

The Far-Reaching Consequences of Default

Defaulting on a federal student loan causes significant negative impacts:

Financial Consequences

• Acceleration: The entire unpaid balance of the loan, including all accrued interest, becomes immediately due and payable.
• Treasury offset: The federal government may withhold federal payments owed to the borrower, such as income tax refunds and Social Security benefits.
• Wage garnishment: Without obtaining a court order, the government can order an employer to withhold up to 15% of a borrower’s disposable pay.
• Collection costs: Borrowers may be responsible for covering court fees, attorney fees, and other administrative charges, potentially adding up to 25% of the outstanding loan principal and interest.
• Loss of eligibility for federal student aid: Borrowers in default are no longer eligible to receive additional federal financial aid.
• Loss of borrower benefits: This includes the ability to choose or switch repayment plans, as well as options like deferment and forbearance.

Credit Score Impact

Default is reported to national credit bureaus, resulting in significant damage to the borrower’s credit rating. This can make it difficult to obtain credit cards, auto loans, and mortgages, and even impact the ability to rent an apartment or secure insurance. Rebuilding credit after defaulting can take years.

Other Potential Repercussions

• The loan holder may take the borrower to court.
• Restrictions on buying or selling assets, such as real estate.
• Educational institutions may withhold official academic transcripts.
• Professional licenses may be suspended or renewal denied.
• Impact on ability to enlist in the Armed Forces.
• For military service members, contractors, and federal employees, security clearances, duty station assignments, and promotions can be jeopardized.

Option 1: The Fresh Start Program

The Fresh Start program is a temporary initiative introduced by the U.S. Department of Education to provide a pathway for borrowers with defaulted federal student loans to return to good standing.

Eligibility

The program encompasses borrowers with most types of defaulted federal student loans, including:

• Defaulted loans under the William D. Ford Federal Direct Loan Program
• Federal Family Education Loan Program loans (whether held by ED or commercially)
• ED-held Perkins Loans

Not eligible for Fresh Start:

• Defaulted Perkins Loans held by the school
• Defaulted Health Education Assistance Loan Program loans
• Student loans currently with the U.S. Department of Justice
• Direct Loans and commercially held FFEL Program loans that entered default after the end of the student loan payment pause

How to Apply

Applying for Fresh Start is free, with multiple options available:

• Contact ED’s Default Resolution Group by phone:
  • 1-800-621-3115 (toll-free)
  • 540-792-9171 (toll number, collect calls not accepted)
  • 1-877-825-9923 (TTY for those with hearing impairments)
• Send a letter by mail to: Default Resolution Group P.O. Box 5609 Greenville, TX 75403
• Visit myeddebt.ed.gov and log in or create a new account to sign up online
• For incarcerated individuals enrolled in a college program that accepts Pell Grants: Submit the Free Application for Federal Student Aid (FAFSA) and sign a Fresh Start acknowledgement with the school

Be prepared to provide relevant information such as full name, Social Security number, date of birth, mailing address, and student loan account number.

Benefits

• Automatically restores eligibility for federal student aid
• Protection from involuntary collection efforts
• Restoration of access to repayment options, including income-driven repayment plans
• Removal of default status from credit reports once new aid is disbursed or payment arrangements are made
• Removal from the federal Credit Alert Verification Reporting System (CAIVRS)
• Restoration of eligibility for future loan rehabilitation
• Cessation of wage and tax refund withholdings
• Return of loans to “in repayment” status

Important Deadline

The Fresh Start program is temporary, with a deadline of September 30, 2024. To maintain benefits, borrowers must make arrangements for long-term payments with the Department of Education or their guaranty agency. Those who fail to make these arrangements will again become subject to default collections one year after the student loan payment pause ends.

Option 2: Student Loan Rehabilitation

Student loan rehabilitation helps borrowers with defaulted federal student loans return to good standing by demonstrating a commitment to repayment through consistent, reasonable, and affordable payments.

Requirements

For Direct Loans and FFEL Program loans:

• Agree in writing to make nine voluntary monthly payments
• Payments must be deemed reasonable and affordable by the loan holder
• Each payment must be made within 20 days of the scheduled due date
• The nine payments must be made within a period of ten consecutive months
• Payments must be voluntary (payments made through wage garnishment or Treasury offset don’t count)

For Federal Perkins Loans:

• Make a full monthly payment each month for nine consecutive months
• Each payment must be received within 20 days of the due date
• The payment amount is determined by the loan holder

Determining Payment Amount

The loan holder determines what constitutes a reasonable and affordable monthly payment, typically calculated as:

• 10% or 15% of the borrower’s annual discretionary income, divided by 12

Borrowers need to provide their loan holder with:

• A copy of their most recent federal tax return or a tax transcript

If the most recent tax return doesn’t accurately reflect current income, or if no tax return was filed in the past two years, borrowers can request an alternative payment amount by:

• Submitting a completed Loan Rehabilitation Income and Expense Information form
• Providing supporting documentation of current income and essential monthly expenses

The alternative monthly payment could be as low as $5, depending on individual financial circumstances.

Benefits

• Default status is removed from both the loan record and credit history
• Collection through wage garnishment or Treasury offset ceases
• Wage garnishment may be suspended after the fifth qualifying rehabilitation payment
• Borrower regains eligibility for benefits available before default (deferment, forbearance, choice of repayment plans, loan forgiveness)
• Restoration of eligibility for federal student aid

Limitations

• A borrower can generally rehabilitate a specific defaulted federal student loan only once
• Exceptions exist for rehabilitations completed before August 14, 2008, or during the COVID-19 payment pause
• Loans for which a judgment has been obtained in court are typically not eligible
• Monthly payment amount may increase after rehabilitation
• Outstanding collection costs may be added to the principal balance

Option 3: Direct Loan Consolidation

Direct Loan consolidation allows borrowers to combine one or more federal student loans, including those in default, into a new single loan.

Benefits

• Removes loans from default status
• Stops collection efforts like wage garnishment and Treasury offset
• Restores eligibility for federal student aid
• Provides access to income-driven repayment plans

Eligibility Requirements

To consolidate a defaulted federal student loan, borrowers must:

• Agree to repay the new consolidation loan under an income-driven repayment plan, OR
• Make three consecutive, voluntary, on-time, full monthly payments on the defaulted loan before consolidation

If the defaulted loan is subject to wage garnishment or being collected under a court order after a judgment, consolidation may not be possible unless the wage garnishment order has been lifted or the judgment has been vacated.

Implications for Loan Terms

• Interest rate: Fixed rate calculated as the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest one-eighth of one percent
• Repayment period: Can extend up to 30 years, potentially resulting in lower monthly payments but more total interest paid
• Principal balance: Outstanding interest on original loans becomes part of the new principal balance
• Loss of certain benefits: Consolidating FFEL Program loans or Federal Perkins Loans may result in losing some original borrower benefits
• Credit history: Unlike rehabilitation, consolidation does not remove the default record from credit history

How to Apply

• Apply online at studentaid.gov/loan-consolidation
• You’ll need a verified FSA ID
• A paper application can also be completed and submitted by U.S. mail
• For assistance, contact the Federal Student Aid Information Center (FSAIC) at 1-800-433-3243

Option 4: Navigating Administrative Wage Garnishment

Administrative wage garnishment (AWG) is a debt collection process that allows the Department of Education and guaranty agencies to recover defaulted federal student loan debt directly from a borrower’s wages without a court order.

The Process

• The government can order an employer to withhold up to 15% of a borrower’s disposable income
• Before garnishment, the Department of Education must send written notice at least 30 days prior
• The notice will inform the borrower about the debt, intention to garnish, and their rights
• Federal law prohibits employers from firing or disciplining employees solely due to wage garnishment for student loan debt

Requesting a Hearing

Borrowers have the right to request a hearing to object to the proposed garnishment:

• Contact the loan servicer or Department of Education Default Resolution Group (1-800-621-3115)
• Online management is available at myeddebt.ed.gov
• The hearing request must typically be made in writing
• Deadline is usually 30 days from when the garnishment notice was sent (some loans have a 15-day deadline)

Valid Grounds for Objection

• The borrower doesn’t owe the debt or the amount claimed is incorrect
• The borrower is currently making payments under a valid repayment agreement
• Bankruptcy case is open or the loan was discharged through bankruptcy
• School-related issues (fraud, misrepresentation, school closure, eligibility for closed school discharge)
• Total and permanent disability
• Wage garnishment would cause extreme financial hardship
• Continuous employment for less than 12 months after involuntary separation from a previous job

Stopping or Reversing Garnishment

Several methods may stop or reverse administrative wage garnishment:

• Negotiate an acceptable repayment plan within 30 days of receiving the notice
• Pay the defaulted loan balance in full
• Enter into a loan rehabilitation agreement
• Apply for Direct Loan consolidation before the employer receives the AWG order
• Request a hearing to present objections
• Demonstrate extreme financial hardship
• File for bankruptcy (temporary stop through automatic stay provision)
• Seek a settlement with the collection agency

Preventing Default and Managing Debt

The best approach is preventing default in the first place:

• Contact your loan servicer immediately if you’re having difficulty making payments
• For Direct Loans and FFEL Program loans, find servicer contact information at studentaid.gov
• For Perkins Loans, contact the school that issued the loan

Available Resources

• Income-driven repayment plans that base monthly payments on income and family size
• Loan Simulator to estimate monthly payments: studentaid.gov/loan-simulator
• Direct Consolidation Loan to simplify repayment: studentaid.gov/loan-consolidation
• Deferment and forbearance options: studentaid.gov/manage-loans/lower-payments
• Track loans online: studentaid.gov/aid-summary
• Debt Resolution site: myeddebt.ed.gov/borrower

Important Tips

• Understand loan terms, including interest rates and repayment schedules
• Maintain organized records of all loan-related documents
• Keep loan servicers informed of changes in contact information or financial circumstances
• Be vigilant against student loan scams (the government doesn’t charge fees for these programs)
• Official communications from Federal Student Aid come from specific email addresses (e.g., [email protected])

Rebuilding Your Credit After Default

Successfully getting out of default can improve your creditworthiness:

• Loan rehabilitation: Removes the default status from your credit report after completing nine on-time payments (late payments before default still remain)
• Fresh Start program: Removes default marks from credit reports and the Department of Education reports defaulted loans as “current”
• Direct Loan consolidation: Gets loans out of default but doesn’t remove the default record from credit history

For borrowers particularly focused on improving credit scores, loan rehabilitation and the Fresh Start program offer advantages over consolidation.

Addressing Common Questions About Student Loan Default

• What to do if a loan has defaulted: Contact the loan holder immediately to discuss available options
• If you believe your loan defaulted in error: Contact the loan servicer with documentation supporting your claim
• Impact on credit: Default damages credit scores, making it difficult to obtain future credit
• Broader consequences: Ineligibility for financial aid, immediate repayment demands, collection agency involvement, wage garnishment, tax refund offsets
• Options for resolution: Contact loan servicer to explore repayment plans, settlement, consolidation, or rehabilitation programs

Taking prompt action is crucial for mitigating the negative consequences of default and moving toward a more secure financial future.

Our articles make government information more accessible. Please consult a qualified professional for financial, legal, or health advice specific to your circumstances.