How to Return to College After Defaulting on a Loan

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More than half of American students take out student loans, but a surprising number find themselves unable to make payments. In fact, a quarter of Americans end up defaulting on their student loans. You may worry about going back to school if you find yourself in this situation. So, what happens if a student loan defaults?

Not only do you no longer qualify for federal aid, but your entire unpaid loan balance becomes due, your credit score falls, and you may be sued by your loan servicer. You can avoid these outcomes, but only if you take action. You may even qualify for student loan forgiveness or cancelation programs.

Returning to college after defaulting on a student loan is possible, but before you can, you’ll need to get out of default. Note that this piece addresses federal student loans, as private loans may list different rules and regulations.

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What Does It Mean to Default on a Student Loan?

To develop a strategy for catching up on student loan payments, first know exactly where you stand. Depending on how long you’ve gone without making a payment, your situation will be different.

If it has been less than 270 days since you’ve made a payment, your loan is still in delinquency, which means it’s past due. If you’ve only missed your payment by a few days, there will likely be no consequences. But if you are delinquent for 90 days or more, your loan servicer will report the delinquency to the three major national credit bureaus, damaging your credit.

Before you default, you still have the chance to delay your loan payments legally through deferment or forbearance. Forbearance allows you to make lower payments or even stop making payments for a fixed period. However, during that time, interest will continue to accrue. If you’re eligible for federal deferment, you may not need to pay interest at all.

For most federal student loans, you will default if you have not made a payment in more than 270 days. At that point, you no longer qualify for deferment or forbearance.

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How to Get Out of Default on Student Loans

There are a few approaches to getting out of default so you can focus on going back to school. Discuss the three following options with your loan servicer, who can help you determine the right strategy. If you don’t know who to call, contact the Federal Student Aid Information Center at 1-800-433-3243.

  • Settlement

    Student loan settlements allow you to “settle” for an amount less than you owe after you’ve already defaulted. Some lenders accept 50-90% of your total loan if they determine that it’s the only feasible way you can pay off your remaining debt. However, loan holders usually garnish your wages and tax refunds to receive the full amount you owe.

    If you think you’re a candidate for settlement, first identify the collection agency your debt has been sold to at Contact the agency and tell them you would like to explore settling your student loan. If they are receptive, you can begin to negotiate a new payment plan and timeframe. Once you come to an agreement, ask for it to be sent to you in writing. When you’ve finished paying off your settlement, make sure you receive documentation that the student loan has been satisfied.

    After you’ve made all your payments, you should regain financial aid eligibility.

  • Consolidation

    A direct consolidation loan applies to those with multiple federal student loans. The process combines all your loans into one and usually lowers your total monthly payment.

    You can apply on or download a paper application and mail it to the Department of Education (ED). The application gives you a few repayment plan options, including the standard 10-year repayment, income-contingent repayment, and graduated repayment. Before the process is complete, you will receive a summary of your new plan. If you do not contact the ED within 15 days of application to stop the process, your consolidation will proceed automatically.

    Consolidation can lower your monthly payment by extending your repayment timeline by up to 30 years. However, you will end up paying more in interest in the long run.

  • Rehabilitation

    With direct loan rehabilitation, you agree to make nine monthly payments within a 10-month period on time. Each payment should occur within 20 days of the due date. With this option, you can regain eligibility for federal assistance after just six monthly payments, but you still need to pay the three remaining payments on time. So, if going back to school quickly is your priority, this may be your best option.

    To start the process, contact your loan holder, who can discuss the terms of rehabilitation with you. If you decide to move forward, the loan holder will determine the monthly amount you would pay using the IBR formula. They will likely ask you to provide documentation of your income in order to calculate this amount and finalize the agreement.

    Within 15 days of the determination, the loan holder must give you a written rehabilitation agreement. After completing student loan rehabilitation, your loan is usually assigned to a new servicer. Afterward, all collection activities such as wage garnishment stop.

    You can only rehabilitate your loan once. If you default on your loan again, you’ll need to find another option, such as loan consolidation.

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