June 27, 2011

How to Recover From Student Loan Default

It’s no secret that managing your student loans can be challenging. If you’ve fallen behind on your payments, you may be afraid that there’s nothing you can do to get back on track. That’s not the case. At American Student Assistance® (ASA), we can help you handle even the most complex education debt issues—even student loan default.

If you have been making late payments or missing payments altogether, use our delinquency timeline to understand the repercussions. Federal student loans enter default when payments become more than 270 days past due. There are serious consequences for default, but there are also ways to repair the situation.

Options for Resolving Default

As a federal student loan borrower, there are options available to help you recover from default. ASA® can help determine the best plan to put you back on the path to successful repayment.

Loan Rehabilitation

You can enroll in loan rehabilitation by contacting your guarantor directly. Once you are enrolled, you will need to follow these steps:

  • Make at least 9 qualifying, on-time monthly payments to your guarantor.
  • Then, your guarantor will send you a rehabilitation agreement—you must sign and return the agreement to your guarantor.
  • You will receive an official notification from your guarantor stating that your loan is considered rehabilitated.
  • After you have returned the completed agreement, your guarantor transfers the loan to a new lender and servicer. The loan is then out of default.
  • You will continue making on-time monthly payments to your new servicer.
  • Instead of collection costs, you will be charged up to 18.5% of your total unpaid loan amount (your principal balance plus interest) upon sale of the loan.
  • Your guarantor will ask all of your previous loan holder and consumer reporting agencies to remove the default entry from your credit report.
  • Keep in mind that loans rehabilitated after August 14, 2008, are no longer eligible to be rehabilitated again in the event of another default—so be sure to stay on track once your loan is out of default.

As of July 2014, federal student loan holders will be required to initially calculate reasonable and affordable  Rehabilitation payment amounts using the income-based repayment formula. Under IBR, payments are 15 percent of the amount of your Adjusted Gross Income that exceeds 150 percent of the Department of Health and Human Services Poverty Guideline for your family size and state of residence. This amount is then divided by 12 to  calculate your Rehabilitation payments.Use our calculator to get an estimate.


Consolidating out of default gives you more time to repay your loan. However, before choosing this option, be sure to learn all of the pros and cons.

To consolidate out of default, you must do one of the following:

  • Arrange 3 consecutive payments with your current loan holder—this is called a satisfactory repayment arrangement.
  • Agree to repay the Consolidation loan under an income-based, income-contingent (Direct Consolidation loan), or income-sensitive (Federal Family Education Loan Program Consolidation loan) repayment plan.

You can consolidate with any lender offering Consolidation loans. Currently, the primary consolidation lender is the Direct Loan program, run by the U.S. Department of Education.

There are some significant differences between consolidating and rehabilitating your defaulted loans. For example, by consolidation, you will be charged a fee of 18.5% of your total unpaid loan amount (your principal balance plus interest), instead of collection costs. Also, unlike rehabilitation, consolidation does not remove the default entry from your credit report.

Other Options

Paying the total amount you owe—the loan plus any accrued interest and penalty fees—is the fastest way out of default. Paying in full may not make sense for you, but you should try to pay as much as you can right away. Collection costs of up to 25% are applied to your loan balance 120 days after your loan defaults, so decreasing your balance can help decrease these costs.

In some cases, you may be able to have your remaining student loan debt reduced or discharged. Student loan discharge is only available in special circumstances and you must meet specific eligibility requirements to qualify.

We’re on Your Side

At ASA, we’re here to help you—not to judge you. We specialize in helping borrowers make informed decisions to manage their education debt. Please contact us if you have questions about your loans at any point during your financial aid process—especially if you are about to miss a payment or have been late making payments.