Can You Refinance a Student Loan in Default?

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Student loan default can happen to anyone. With federal loans, it usually occurs when you don’t make your monthly payment for 270 days. Refinancing student loans currently in default is usually not an option, but you may still be able to refinance student loans that you’ve defaulted on in the past.

Read on to understand what your refinancing options might be after a previous student loan default, as well as how to get loans currently in default back to good standing.

Can you refinance defaulted student loans?
How to get a student loan in default back in good standing
There is life after a student loan default

Can you refinance defaulted student loans?

Let’s start with borrowers who currently have a student loan in default. In this case, refinancing may likely be difficult.

That’s because approval for a student loan refinancing offer requires having a good income and a good credit score — or a cosigner who has both. Unfortunately, defaulting on any loan can wreak havoc on your credit score.

In other words, it’s likely a student loan in default will stand in the way between you and refinancing. The same goes for trying to refinance loans in collections.

However, that isn’t necessarily the case for loans that previously defaulted but has since been rehabilitated.

Steps to refinance a student loan in default
1. Rehabilitate the loan to become current.
2. Change repayment plans, if possible, to more easily afford your monthly dues.
3. Improve and monitor your credit score.
4. Consider applying to refinance with cosigner backing.

That’s because some student loan refinancing lenders are willing to look past a not-so-perfect credit history. Instead, they focus more on your education and income growth to give you a better chance at refinancing. That way, your chances of approval are likely higher and you can finally get that much-needed lower interest rate.

That’s what happened to our very own Student Loan Hero founder Andy Josuweit. He was able to work with student loan refinancing company Earnest to refinance his loans, even though he had a couple of defaulted student loans in his past.

To improve your refinancing chances, first work at getting your loans in good standing and then rebuilding your credit score. We’ll discuss both plans in more detail below.

If you need a faster option, consider adding a cosigner once you’re in good standing to up your refinancing prospects even more. However, if you’re considering this option, keep in mind that your cosigner would be on the hook if you default again, so this isn’t an arrangement to walk lightly into for you or your cosigner.

One of the best ways to rebuild credit is to make payments on all your bills on time. If you get your loans back in good standing and stay on top of monthly bills from then on, you’ll be able to improve your credit score in the process.

How to get a student loan in default back in good standing

If you have a federal student loan in default, getting back into good standing might be easier than you think. According to Federal Student Aid, an office of the Department of Education, your options are:

  1. Pay your entire loan balance in full
  2. Enter loan rehabilitation
  3. Consolidate your loan

Not surprisingly, the best option is to see if you have enough money to pay your loan off in full. Once your loan is paid off, you’re finished with it forever.

Still, for the Class of 2019, the average college graduate had $29,900 in education debt, according to our student loan statistics. That means paying off a loan all at once probably isn’t realistic for most people.

Read on to determine if the other options, rehabilitation or consolidation, are right for you…

Loan rehabilitation

To enter loan rehabilitation for either a direct loan or a Federal Family Education Loan (FFEL), you contact your servicer and agree to make nine reasonable on-time payments within 10 consecutive months. The amount you pay via these payments will be based on a percentage of your discretionary income, and your lender will determine the exact amount. For a defaulted Perkins loan, you are required to make a full monthly payment each month, also for nine consecutive months.

One advantage of a loan rehabilitation is that the record of your default is removed from your credit history. However, any late payments you made before the default remain in your records.

Consolidation

This is the second option for getting your defaulted loan in good standing again, and it’s important not to confuse this term with refinancing.

That’s because student loan refinancing happens through a private lender, while a federal student loan consolidation happens with a direct consolidation loan.

To use a direct consolidation loan to get out of default, you must first have at least one qualifying federal student loan in default. Once you complete the direct loan consolidation process, you will be required to make payments through an income-driven repayment (IDR) plan.

Another alternative is first to make three full monthly payments on your defaulted student loan, and then apply for the direct consolidation loan. This means you could avoid using IDR, which could end up costing you more in loan interest since your repayment period would be extended.

Rehabilitating a private student loan in default

If you’re facing a defaulted private loan, a direct consolidation loan will not be an option for you. In that case, you’ll need to work with your servicer to determine their requirements for rehabilitating student loans in default.

Your options could include an economic hardship forbearance — a temporary pause on your repayment. Be aware, though, that interest will accrue and capitalize onto your balance for any stretch that you’re not actively making payments.

There is life after a student loan default

Being in student loan default can feel hopeless, but it doesn’t have to be. Moreover, a current or past default doesn’t mean refinancing will never be an option.

For example, as discussed above, either a loan rehabilitation or consolidation may be able to get your loan out of default. You can also sign up for income-driven repayment plans for lower payments. These two steps can help turn around your refinancing prospects quickly. Applying for refinancing with a cosigner would also go a long way.

Remember, a student loan in default doesn’t have to define your repayment future. It’s a challenge, yes, but one that you can overcome using the strategies listed above.

Andrew Pentis and Carissa Chesanek contributed to this report.