If you are in default on your federal student loans, you still have options. Depending on the option you choose, you can regain your eligibility for financial aid, improve your credit, and, in some cases, remove the default status from your credit report.
Loan Rehabilitation
Loan rehabilitation is the only option that deletes the default status of your education loans from your credit report and reinstates your eligibility for federal student aid. To qualify for loan rehabilitation you generally must make at least nine consecutive, full payments within 20 days of the due date during a 10-month period. All payments must be voluntary and cannot be made as a result of legal proceedings, wage garnishment or a lump-sum prepayment on future installments. You are permitted to rehabilitate your loan only once. If you default a second time on that loan, you will be required to repay the loan in full to regain federal student aid eligibility, and the default record will remain on your credit history for years.
You can choose an eligible lender to repurchase the loans, or the guarantor may arrange for rehabilitation. Once the loans are rehabilitated, the guarantor and other loan holders will remove the default from your credit records. You will regain all remaining deferment options and be eligible for additional federal student financial assistance.
Your rehabilitated loans will be returned to repayment status. The scheduled payment amount must be sufficient to repay the loan within the term of the original promissory note and must at least satisfy accruing interest. Most terms are 10 years long.
Borrowers with NELA®-guaranteed loans who seek loan rehabilitation should contact NELA. Other borrowers should contact the agency that owns their loans.
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Restoring Eligibility for Aid
A one-time option of making satisfactory arrangements to repay a defaulted loan can restore your eligibility for federal student aid. To do so, you must make six consecutive, acceptable monthly payments within 15 days of the due date. Acceptable payments are either $50 or the monthly interest accrual, whichever is higher. Lump-sum payments and payments that are made involuntarily — such as those repaid by wage garnishment or tax offset — don't count toward restoring eligibility.
The owner — typically the guarantor — of the defaulted loan must verify that you have completed the reinstatement process. The guarantor's name should be on the promissory note and other correspondence you receive after you default. If you're not sure who owns your loan, check the National Student Loan Data System.
Before your school will certify your eligibility for a new loan, the school will require evidence that you've reinstated your eligibility. If you have NELA-guaranteed defaulted loans and need this documentation, please contact NELA.
Once you regain financial aid eligibility through this reinstatement process you will receive full deferment privileges but only on new loans. The fact that you defaulted on your loans will remain on your credit records, however, and payments must continue on the defaulted loans until paid in full.
Once you restore your eligibility for financial aid, you must continue making timely payments to qualify for further financial aid. If you miss any payments or fail to make any payment within 15 days of the due date, you will not be eligible for additional aid until the loan is paid in full.
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Loan Consolidation
Borrowers with defaulted loans can return to favorable repayment status through loan consolidation. In some cases, you may be required to make a minimum number of payments, typically three payments, before you will be permitted to consolidate your loans.
Consolidation combines multiple eligible federal loans into a single loan. Depending on the size of your debt, you may have between 10 and 30 years to repay your loans. The lender must take into account your entire education loan debt (not just those loans eligible for consolidation) when determining the repayment term. Borrowers who consolidate regain eligibility for deferment and Title IV aid. After consolidation, your credit records show the loans as paid in full but still in default. The default will remain on your credit record for years.
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Bankruptcy
Some people choose bankruptcy as an option to resolve debt and default problems. But when it comes to student loans, bankruptcy usually is not a good option. Student loans cannot be discharged under current bankruptcy laws unless the borrower can demonstrate to the bankruptcy court that repayment of the loan will impose a significant hardship.
Some borrowers who manage to discharge loans in bankruptcy remain eligible for federal student aid — depending on the claim type and bankruptcy plan.
If you have questions about Title IV eligibility on an active bankruptcy, please contact NELA.
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Contact Information
If you have a loan in default and would like to make arrangements to repay your debt or seek information on loan rehabilitation or consolidation, you can contact us in several ways:
- Visit our Contact Us page for specific contact information.
- To help education loan borrowers resolve their payment problems, NELA offers online access to account information. Visit NELA Loan SolutionsSM to help you understand, manage and repay your student loans.
- For defaulted loans handled or owned by the U.S. Department of Education, call 800.621.3115.
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