Student Loan Rehabilitation vs. Consolidation: Getting Out of Default
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If you miss a payment on a federal student loan, your loan will be considered delinquent. After missing payments for a certain amount of time (270 days for most federal loans), your loan will enter default.
While getting back on track after ending up in default might feel impossible, the good news is that there are a few ways to recover — including rehabilitation and consolidation. Refinancing your loans could also be an option in some cases.
If you’re considering student loan rehabilitation vs. consolidation, here’s what you should know:
Rehabilitation vs. consolidation: What’s the difference?
Student loan rehabilitation and consolidation are the two of the most common ways to recover from federal student loan default. Which one is right for you will depend on your individual circumstances and financial goals.
Here’s how rehabilitation and consolidation work:
- Rehabilitation: With this option, you’ll need to make on-time payments for nine to 10 consecutive months, depending on the type of loans you have. If you successfully complete the terms of your rehabilitation agreement, the default status will be removed from your loan as well as your credit report.
- Consolidation: You could also choose to consolidate your federal loans into a Direct Consolidation Loan, which could extend your repayment term up to 30 years. Keep in mind that before you can consolidate, you’ll have to agree to either repay the loan under an income-driven repayment (IDR) plan or make three consecutive, on-time, full payments first. Also note, that while this will remove the default status from your loan, it will remain on your credit report.
|How it works||Removes default status from existing loans||Combines old loans into new Direct Consolidation Loan|
|Process||Direct or FFEL Loans:
|Must agree to:
|How long to complete||9 to 10 months
(depending on loan type)
|30 to 45 days
(might take longer if you decide to make 3 payments before consolidating)
|Can use for multiple loans?||No, must be done separately for each loan||Yes, can consolidate multiple loans at once|
|Allowed if wages are being garnished?||Yes, but wages might continue to be garnished during the rehab process||No, you can’t consolidate unless the order is lifted or judgment is vacated|
|Impact on credit report||If you successfully make the required payments:
|Can do more than once?||No, can only be done once for each loan||No, can consolidate to get out of default only once|
Student loan rehabilitation
To rehabilitate defaulted federal loans, you’ll have to make consecutive, on-time payments for nine to 10 months, depending on the kind of loans you have.
If you successfully complete rehabilitation, the default status will be removed from both your loans and your credit report — this could make rehabilitation a good choice if you want to begin rebuilding your credit.
Keep in mind, though, that any late payments could stay on your credit report for up to seven years.
If you decide to enter a rehabilitation agreement during this administrative forbearance period, your suspended monthly payments will qualify as on-time payments — meaning you could get credit for rehabilitation without actually paying anything.
However, if you haven’t made each of the required rehabilitation payments before the forbearance ends, you’ll still need to make the remaining payments.
Learn More: Federal Student Loans and COVID-19: What You Need to Know
Pros of rehabilitation
- Default status removed from credit report: After making each of the required payments, the default will be cleared from your loans and from your credit report.
- Might lower your payments: If you have Direct Loans or loans made under the Federal Family Education Loan (FFEL) Program, your rehabilitation payments will generally be limited to 15% of your discretionary income. If you can’t afford this, your servicer might calculate a lower alternative after you provide documentation of your income and expenses. If you have Perkins Loans, your payments will stay the same.
- Restores eligibility for other federal benefits: Having defaulted loans makes you ineligible for federal protections, such as access to IDR plans and student loan forgiveness programs. But if you rehabilitate your loans, you’ll regain these benefits.
Cons of rehabilitation
- Long process: You’ll have to make consecutive, on-time payments for nine or 10 months to complete rehabilitation — a much longer process compared to consolidation.
- Only applies to one loan: A rehabilitation agreement only applies to one loan. If you have multiple loans you want to rehabilitate, you’ll have to set up an agreement for each one.
- Won’t stop wage garnishment: If your wages are being garnished, agreeing to rehabilitation won’t necessarily stop these involuntary payments.
Check Out: How to Find Your Student Loan Balance
How to rehabilitate a defaulted student loan
If your federal loans are held by the Department of Education, follow these three steps to apply for rehabilitation:
- Mail or fax a copy of your latest tax return or transcript. The Department of Education will use this information to calculate your monthly payment. Keep in mind that if you are married, live with your spouse, and file taxes separately, you’ll also need to submit your spouse’s tax returns. Additionally, if your tax returns don’t accurately represent your income, you can fill out the Loan Rehabilitation Income and Expense Form.
- Sign and return the agreement. You’ll be mailed a loan rehabilitation agreement to review within 10 business days of the Department of Education receiving your income information. This will include your payment amount, payment options, and agreement terms. You’ll need to sign and return this form to officially begin rehabilitation.
- Make the required payments. After the rehabilitation agreement is in place, you’ll need to make the agreed-upon monthly payments. For Direct or FFEL Loans, this means you’ll have to make nine consecutive, on-time payments. Perkins Loans, on the other hand, require 10 full payments. If you successfully make each of these payments, the default status will be removed from your loans and credit report.
Learn More: Federal Student Loan Repayment Calculator
Student loan consolidation
Another option for getting out of student loan default is consolidating your federal loans into a Direct Consolidation Loan. A request to consolidate your loans could be processed within as little as 30 to 45 days, which makes it a faster option than rehabilitation.
Additionally, while consolidation won’t change your interest rate, you can extend your repayment term up to 30 years. This could greatly reduce your monthly payments — though keep in mind that it also means you’ll pay more in interest over time.
Check Out: How to Consolidate Your Student Loans
Pros of consolidation
- Faster process: Consolidating your federal student loans could take as little as 30 to 45 days — a much shorter process compared to the nine to 10 months of payments required by rehabilitation.
- Can combine multiple loans: Federal consolidation lets you combine multiple federal loans — leaving you with just one loan and payment to manage.
- Could reduce your payments: Through consolidation, you can extend your repayment term up to 30 years. This could greatly reduce your monthly payments — though remember that it also means you’ll pay more in interest over the life of the loan.
Cons of consolidation
- Default won’t be removed from credit report: Unlike rehabilitation, consolidation won’t remove your default status from your credit report.
- Capitalization of interest and collection costs: After you consolidate your loans, any interest or collection costs from your old loans will capitalize — meaning they’ll be added to your new loan balance.
- Can’t consolidate if wages are being garnished: If you’re subject to wage garnishment, you won’t be able to consolidate until the wage garnishment order is lifted or judgment is vacated.
Learn More: Pros and Cons of Consolidating Student Loans
How to consolidate defaulted student loans
If you want to consolidate your federal loans, follow these three steps:
- Contact your loan holder. Before you can consolidate defaulted federal loans, you must contact your loan holder and agree to either repay your consolidated loan under an IDR plan or make three consecutive, on-time, full monthly payments first. If you choose to make the three payments, the payment amount will be calculated by your loan holder based on what you can reasonably afford according to your total financial circumstances.
- Apply for consolidation. You can fill out an online application at StudentAid.gov or a paper application from your servicer. When completing the application, you’ll need to provide your personal information, list the loans you want to consolidate, and choose your repayment plan. Afterward, you’ll need to sign and submit the application.
- Manage your payments. A consolidation request generally takes 30 to 45 days to process. Once your loans have been consolidated, you can begin making your new monthly payments.
However, if you have a defaulted FFEL Consolidation Loan, you don’t need to include any additional loans in the new consolidation as long as you agree to repay the loan on an IDR plan.
Check Out: Private Student Loan Consolidation
Student loan refinancing with a cosigner
Refinancing your student loans could also help you get out of default. With this process, your federal loans will be paid off with a new private student loan. You’ll typically need good to excellent credit to qualify for refinancing, which could be difficult if your loans are in default.
To increase your chances of approval, consider applying with a creditworthy cosigner. A cosigner can be anyone with good credit — such as a parent, other relative, or trusted friend — who is willing to share responsibility for the loan. Having a cosigner might also get you a lower interest rate than you’d get on your own.
You’ll also no longer be eligible for the suspension of federal student loan payments and interest accrual under the CARES Act.
Learn More: Defaulted Student Loans: Can You Refinance?
Pros of refinancing
- Might get a lower interest rate: Depending on your credit and if you apply with a cosigner, you might qualify for a lower interest rate. This could save you money on interest and even help you potentially pay off your loan faster.
- Could reduce your payments: If you choose to extend your repayment term, you could reduce your monthly payments. Just remember that this means you’ll pay more interest overall.
- Can combine multiple loans: Through private refinancing, you can consolidate multiple federal as well as private loans.
Cons of refinancing
- Could be hard to qualify: Defaulting on student loans can severely damage your credit, which could make it difficult to qualify for refinancing.
- Loss of federal benefits: If you refinance your federal loans into a private loan, you’ll no longer have access to federal benefits and protections.
- Lack of repayment options: Private loans don’t offer federal student loan repayment options. For example, you generally won’t be able to sign up for an IDR plan after you refinance.
Check Out: Student Loan Consolidation vs. Student Loan Refinancing
How to refinance a defaulted student loan
If you decide to refinance a defaulted student loan, follow these steps:
- Check your credit. When you apply for refinancing, the lender will review your credit to determine your creditworthiness — so it’s a good idea to check your credit beforehand so you know where you stand. You can use a site like AnnualCreditReport.com to review your credit reports for free. If you find any errors, dispute them with the appropriate credit bureaus to potentially boost your credit score.
- Compare lenders and pick a loan option. Be sure to compare as many lenders as possible to find the right loan for your situation. Consider not only interest rates but also repayment terms, any fees charged by the lender, and eligibility requirements. After comparing lenders, choose the loan option that works best for your needs.
- Complete the application. Once you’ve picked a lender, you’ll need to fill out a full application and submit any required documentation, such as tax returns or pay stubs. Also be prepared to provide information regarding each of the loans you want to refinance.
- Manage your payments. If you’re approved, continue making payments on your old loans while the refinance is processed. Afterward, you might consider signing up for autopay so you won’t miss any payments in the future — several lenders offer a rate discount to borrowers who opt for automatic payments.
Before your refinance, remember to consider as many lenders as you can to find the right loan for you. Credible makes this easy — you can compare your prequalified rates from our partner lenders in the table below in two minutes.
|Lender||Fixed rates from (APR)||Variable rates from (APR)||Loan terms (years)||Loan amounts||Min. credit score|
|4.54%+||N/A||10, 15, 20||$7,500 up to $200,000
(larger balances require special approval)
|Does not disclose|
|2.15%+||1.87%+||5, 7, 10, 15, 20||$10,000 up to $250,000
(depending on degree)
|2.44%+1||2.24%+1||5, 7, 10, 15, 20||$10,000 to $500,000
(depending on degree and loan type)
|Does not disclose|
|2.99%+2||2.94%+2||5, 7, 10, 12, 15, 20||$5,000 to $300,000
(depending on degree type)
|Does not disclose|
|2.16%+||2.11%+||5, 7, 10, 15, 20||$5,000 to $500,000||
|1.8%+5||1.8%+5||5, 10, 15, 20||$1,000 to $250,000||700|
|2.47%+3||2.39%+3||5, 7, 10, 12, 15, 20||Minimum of $15,000||680|
|3.47%+4||2.44%+4||5, 10, 15, 20||$5,000 to $250,000||670|
|N/A||5, 7, 10, 12, 15, 20||Up to $300,000||670|
|3.05%+||3.05%+||7, 10, 15||$10,000 up to the total amount of qualified education debt||670|
|2.89%+||N/A||5, 8, 12, 15||$7,500 to $300,000||670|
|2.69%+||N/A||5, 10, 15||$7,500 up to $250,000
(depending on highest degree earned)
|5, 7, 10, 15, 20||$5,000 up to the full balance of your qualified education loans||Does not disclose|
All APRs reflect autopay and loyalty discounts where available | 1Citizens Disclosures | 2College Ave Disclosures | 5EDvestinU Disclosures | 3 ELFI Disclosures | 4INvestEd Disclosures | 7ISL Education Lending Disclosures | 6SoFi Disclosures
|Compare personalized rates from multiple lenders without affecting your credit score. 100% free!Compare Now
Consequences of ignoring student loan default
If you’ve defaulted on federal student loans, it’s important to address the default instead of ignoring it. This way, you have a better chance of avoiding or resolving some of the potential consequences of default, which include:
- Damaged credit: Missing payments and defaulting on a student loan can severely damage your credit. The longer you continue to miss payments on your loan, the more harm will come to your credit. Keep in mind that having bad credit could make it hard to access more credit in the future.
- Loan acceleration: If you default on a loan, your entire balance could become due.
- Loss of hardship benefits: Loans in default no longer have access to federal hardship benefits, such as deferment and forbearance. You also won’t be able to access more federal financial aid.
- Wage garnishment: In some cases, your wages could be garnished, or your tax returns could be withheld.
- Collection costs: Your defaulted loan might be sent to a collections agency that will try to obtain payments from you. If this happens, you’ll be held responsible for covering the collection costs incurred by your loan holder.
Learn More: 6 Ways Student Loans Can Impact Your Credit Score
Recovering from student loan default: How is my credit affected?
How your credit is affected will depend on the method you choose to get out of default. Here’s what you can generally expect:
- Rehabilitation: If you successfully rehabilitate your loan, the default status will be removed from your loan and your credit report, which could have a positive impact on your credit. Any late payments you made on your loan will remain on your credit report for up to seven years — but the more time that passes, the less effect these will likely have on your credit.
- Consolidation: Unfortunately, consolidating your federal loans doesn’t remove the default from your credit report — like late payments, a default can stay on your credit report for up to seven years. But if you’re careful to make on-time payments on your consolidated loan, you might see an improvement in your credit score over time.
- Refinancing: When you apply for refinancing, the lender will perform a hard credit check to determine your creditworthiness. This could cause a slight drop in your credit score — though this is usually only temporary, and your score will likely bounce back within a few months. Additionally, refinancing might actually help your credit in the long run. For example, consistently making on-time payments on your refinanced loan could help you build a positive payment history and raise your credit score.
If you decide to refinance your student loans, remember to consider as many lenders as possible to find the right loan for your needs.
This is easy with Credible: You can compare your prequalified rates from multiple lenders in two minutes — without affecting your credit.
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