Can You Refinance a Student Loan in Default?

student loan in default

Student loan default can happen to anyone. All it takes is one unexpected event, such as a medical emergency or job loss, that leads to several missed payments during tight months.

Unfortunately, this is happening more and more. According to Time, 2016 saw 1.1 million people default on their federal student loans for the first time, leading to a 14 percent increase in defaults on federal student loans.

The question is, can you turn the ship around through student loan refinancing? Will refinancing even be an option once you have a student loan in default on your credit report?

Let’s find out.

Can you refinance a student loan in default – or after?

Let’s start with borrowers who currently have a student loan in default. If this sounds like you, refinancing will be likely impossible.

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. Defaulting on any type of loan, unfortunately, can wreak havoc on your credit score.

Chances are, a student loan in default will stand in the way between you and refinancing. However, that isn’t the case for loans previously in default that have since been rehabilitated.

While many lenders might turn you down because of a previous default, there are some that are willing to look past a not-so-perfect credit history. Some of these lenders might focus on your education and income growth to give you more of a chance.

In fact, our very own Student Loan Hero CEO, Andy Josuweit, 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.

It might not be easy to refinance your student loans if you’ve defaulted on them in the past, but it isn’t impossible. What it will require is first getting your loans back in good standing and then rebuilding your credit score.

If you need a faster option, adding a cosigner once you’re in good standing to refinance your student loans can do the trick. But know that your cosigner is on the hook if you default again, so this isn’t an agreement to walk into lightly 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 all of your 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 expected. According to Federal Student Aid, your options are:

If you have enough money saved to pay your loan in full, that’s great. Especially since, once you pay it in full, you’re finished with it forever.

However, since the average class of 2016 graduate has $37,172 in student loan debt, paying it all at once might not be realistic.

So let’s discuss the next two options: loan rehabilitation and consolidation.

To enter loan rehabilitation, you contact your servicer and agree to make nine on-time payments within 10 consecutive months. The amount you pay via these payments will be based off a percentage of your income.

The other option, consolidation, is not to be confused with refinancing. Remember, student loan refinancing happens through a private lender.

Federal student loan consolidation, however, 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 can make payments through an income-driven repayment plan. 

Alternatively, you can make three full monthly payments on your student loan in default and apply for the Direct Consolidation Loan.

However, if your defaulted student loans are private, a Direct Consolidation Loan will not be an option for you. In that case, you’ll need to work with your servicer to find out what their requirements are for rehabilitating your defaulted student loans.

There is life after a student loan default

Being in student loan default can feel hopeless, but it doesn’t have to be. While goals like refinancing your student loans might be far off because of a current or past default, there are other things you can do to tackle your student loans.

For example, you can go through the rehabilitation process to get your loan out of default. Then, sign up for income-driven repayment plans for lower payments. These two things can help to turn your situation around quickly.

What’s more, when the default is in the past, you can try refinancing. When you do, look for student loan refinancing lenders that evaluate more than just your income and credit score. That way, your chances of approval are likely higher and you can finally get that much-needed lower interest rate.

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 by using the strategies listed above.

Interested in refinancing student loans?

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