Recovering From 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.

Federal student loans enter default when payments become more than 270 days past due. There are serious consequences of default, but there are also ways to repair the situation - paying the loan in full, entering a rehabilitation program, or consolidating out of default.

The benefits of completing these options include:

  • You can regain eligibility for additional financial aid.
  • Your wages and tax refunds will not be garnished.
  • Your loan will no longer be due in full.
  • You can regain access to unused deferment and forbearance time.

Payment in Full

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 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.

Loan Rehabilitation

To rehabilitate your loans, you need to make nine on-time monthly payments to your loan holder. You and the loan holder (or the collection agency working with the loan holder) will agree on a reasonable and affordable payment amount.

Remember, all nine payments must be consecutive, on-time (within 20 days of the due date) and voluntary in order to count towards rehabilitation.  If your wages are being garnished, you will have to make these voluntary payments in addition to the garnishment.  Once you make the first five payments under the rehabilitation program, the garnishment order will be suspended.  You may only receive the benefit of this suspension once so it’s important to keep making those rehabilitation payments on time.

Loans rehabilitated on or after August 14th, 2008 only receive the rehabilitation opportunity once, so it’s important to have a good plan in place for once your loan is out of default.

How much will your payment be?

You will have to provide your loan holder with your income information as well as the number of people in your family. Your payment will be initially calculated as 15% of your disposable income (which is your Adjusted Gross Income minus 150% of the poverty level for your family size).  You can estimate what your payment will be here. Just remember that you’ll be required to provide proof of your income if this initial payment amount is one you can afford.

If you can’t afford that amount, your loan holder will ask for more information about your expenses via this federal form in order to paint a more accurate picture of your total financial circumstances.  This often, but not always, results in a lower payment amount. You will then be able to choose between the 15% formula amount and the amount based off of the more detailed information. If neither payment amount is acceptable to you, you may not be able to participate in the rehabilitation program.

What happens after rehabilitation?

Once you have agreed upon a payment amount and made all the payments, your loan is considered rehabilitated and your loan will be sent to a new lender and servicer.  All future payments will be sent to this new loan servicer so make sure you have their payment address and contact information.  You’ll also need to work with them to develop a new payment plan that will allow you to keep your loan in good standing.   Remember that rehabilitated loans are eligible for lower payment options such as income-based repayment, extended repayment and others.

Not only will rehabilitation get your loans back on track, but it may also help your credit and lower your collection costs. And, if you are going back to school, you typically become eligible for additional financial aid once you’re six payments into the rehabilitation process.

To get started, contact your loan holder, which will be either your guarantor or the Department of Education. You can find out who this is on the National Student Loan Data System (NSLDS®).

Cost: Collection costs will be charged of up to 16% of the total unpaid amount, which includes interest.

Advantage: Once your loans are rehabilitated, the default will be removed from your credit history (though the delinquency will stay).

Disadvantage: Time. This takes 9 months. If you are looking to go back to school soon and need financial aid, this could delay your educational goals.


Consolidating out of default has benefits—like giving you more time to repay your loan and less expensive collection costs. But, before choosing this option, be aware of its potential disadvantages too.

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.


Cost: Collection costs will be charged of up to 18.5% of the total unpaid amount, which includes interest.

Advantage: Time. This can be done faster than rehabilitation.

Disadvantage: Consolidation does not remove the default from your credit report and can cost you more money over the lifetime of your loan.


There are some significant differences between consolidating and rehabilitating your defaulted loans. For example, by consolidation, you will be charged collection of up to 18.5% of your total unpaid loan amount (your principal balance plus interest) for loans held with ASA.  Also, unlike rehabilitation, consolidation does not remove the default entry from your credit report but it does show that the loan is now in good standing and the default resolved.

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.

Going Back to School?

You may be able to get additional financial aid if you make 6 consecutive, reasonable, and affordable payments on your loan. Contact ASA® to find out more.