Should I Rehabilitate or Consolidate My Defaulted Federal Loans?

 June 30, 2020
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student loan rehabilitation

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2.49% to 11.72% 1

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2.50% to 6.30% 2

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4.13% to 7.39% 3

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  • Variable APR

The situation for student loans has drastically changed due to the impact of the coronavirus pandemic, with the government temporarily suspending all federal student loan payments and interest charges, as well as stopping collection actions against defaulted loans. Visit the Student Loan Hero Coronavirus Information Center for details.

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If your federal student loans are in default (meaning that you’ve missed 270 days of payments), you can take action in one of two ways: student loan rehabilitation or consolidation. Each option has its pros and cons, but either should help get your federal student loans out of default and allow you to avoid the stress of dealing with collections agents, wage garnishment and tax offsets.

If your federal student loans have fallen into default, here’s what you need to know about student loan rehabilitation vs. consolidation.

What are the consequences of federal student loan default?

The government has wide-reaching powers when it comes to collecting on debt, so defaulting on federal student loans could have major consequences.

  • You will lose eligibility for forbearance or deferment.
  • You could have your wages garnished or even face an offset on your taxes.
  • Some older borrowers in student loan default have even been threatened with garnishment of their Social Security.
  • Defaulted student loans will likely get reported to the major credit bureaus, meaning your credit score could take a serious hit. A damaged credit score takes time to build back up, and this could make it difficult to take out a mortgage or make other big financial moves in the future.
  • Going into default could also mean your loans go to a collections agency. As a result, debt collectors might start calling asking for payment.

Note that this article focuses on the consequences for defaulting on federal student loans — the default process for private student loans is different. For one, private loans can go into default after just one missed payment, rather than having a 270-day buffer. Private loans also have a statute of limitations for default, whereas federal student loans do not.

3 options for getting out of default

The consequences of student loan default can be serious, so what can you do to get out of default? Here are three options:

1. Student loan rehabilitation
2. Student loan consolidation
3. Pay off your student loans in full

1. Student loan rehabilitation

Student loan rehabilitation allows you to change federal student loans from their default status to current. If you have more than one student loan, you must apply to rehabilitate each separately. It’s important to know that you may only go through the rehabilitation process once over the lifetime of a loan.

In order to rehabilitate, you must:

  • Have a Federal Direct, Family Education (FFEL) or Perkins Loan.
  • Contact your lender to start the process; if you aren’t sure who your lender is, you can go here and select “view loan servicer details.”
  • Agree in writing to make nine payments within 20 days of the due date and during a 10-month period if you have a Direct or Family Education Loan. For Perkins Loan repayments, the time period is nine months. Your payments under rehabilitation are expected to be reasonable based upon your financial situation and the number determined by the lender.

The loan servicer will request payments equal to 15% of your discretionary income, divided by 12. If you can’t afford those payments, you may ask your lender to recalculate the payment amount based on your documented income and expenses. It’s possible for borrowers in extreme financial distress to have rehabilitation payments as low as $5.

During the rehabilitation period, you may still have payments collected through garnishment of your wages or government payments. Rehabilitating your loan may also result in fees on the unpaid principal balance and accrued interest to the principal balance of the loan (the amount may vary, depending on factors like the collection agency and your state of residence). However, you may be able to get out of this if you enter into a satisfactory repayment agreement with your lender.

Benefits of student loan rehabilitation

  • Once you’ve made your nine payments, your loan is considered rehabilitated and the default is removed from your credit history.
  • You can rehabilitate loans that are already being paid through wage garnishment.
  • Collection of payments through wage garnishment or Treasury offset will cease.
  • You will regain eligibility for benefits lost when you were in default, including deferment, forbearance, a choice of repayment plans and loan forgiveness. That means you could make the necessary changes to your monthly payments to keep them affordable post-rehabilitation.
  • You’ll be eligible once again to receive federal student aid.

Drawbacks of student loan rehabilitation

  • While the default is removed after rehabilitation, your late payments from before you went into default will remain on your credit history.
  • The process is relatively lengthy, as your loans are not considered fully rehabilitated until you’ve made the final payment.
  • There may be fees involved, although these can be avoided.
  • If you have multiple loans, you must rehabilitate each separately.

2. Student loan consolidation

Another option for a borrower with federal student loans in default is consolidation. With Direct Loan consolidation, your defaulted loans will be paid off, leaving you with a single, larger loan with one monthly payment, a fixed interest rate and, in most cases, a longer repayment term.

If you are looking into a Direct Consolidation Loan, here’s what you should know:

  • Most federal loans are eligible for consolidation.
  • You should have at least one other eligible student loan you can combine into one if you are consolidating a Direct Loan.
  • You may reconsolidate a defaulted FFEL without including another loan, but only if you repay the new Direct Consolidation Loan through an income-driven repayment plan.
  • You must make three consecutive monthly payments on your defaulted loan before you apply for consolidation, or you would have to pay the consolidated loan under an income-driven repayment plan.
  • If you want to consolidate a defaulted loan that is already being garnished from your wages, or collected through a court order, you must ensure the garnishment order or judgment has been lifted.
  • You must complete a Direct Consolidation Loan Application. You can go here to start the process.

Benefits of Direct Loan consolidation

  • Once your loan is consolidated, you are out of default.
  • Having just one loan payment can simplify your life.
  • Your monthly bill may be lower because you will have a longer time to repay your loan.
  • Consolidation may allow for access to additional income-driven, deferment, forbearance and loan forgiveness options.
  • You can switch variable-rate loans to one fixed interest rate.
  • Once you have consolidated your defaulted student loan, collections agents may no longer contact you.

Drawbacks of Direct Loan consolidation

  • Your credit report will still include the information about your default for up to seven years.
  • You may make more payments and pay more interest in the end, due to the longer repayment time period.
  • Outstanding interest on the loans you consolidate becomes part of the new principal balance, which means you may be paying interest on a higher balance.
  • You may lose certain borrower benefits, including interest rate discounts, principal rebates or loan cancellation benefits that are tied to your current loans.
  • If you’re paying your current loans under an income-driven repayment plan, or if you’ve made payments toward a loan forgiveness program, you may lose credit for these payments made if you consolidate.

Loan Rehabilitation and Consolidation Comparison Chart

Benefit Regained Loan Rehabilitation Loan Consolidation
Eligibility for Deferment Yes Yes
Eligibility for Forbearance Yes Yes
Choice of Repayment Plans Yes Yes, but there may be limitations
Eligibility for Loan Forgiveness Programs Yes Yes
Eligibility to Receive Federal Student Aid Yes Yes
Removal of the Record of Default From Your Credit History Yes No

Source: Federal Student Aid

3. Pay off your student loans in full

A third option for getting your student loan out of default is to pay your loan off in full.

Providing a full payment will wipe out your debt and stop any consequences of default, such as wage garnishment or tax offsets, in their tracks.

Of course, this approach is probably not possible for most borrowers, especially not for those who end up in default in the first place, unless they have come into a financial windfall.

How to choose the best option for your finances

When it comes to choosing between rehabilitation and consolidation, keep in mind the pros and cons of each option, and consider your own unique situation. In the end, the key benefit is that both approaches accomplish your goal of getting your student loans out of default.

Remember as well that it is always best to avoid student loan default entirely if you can. There are several options available to you if you are having trouble managing your student loan payments, including deferment or forbearance, switching to an income-driven repayment plan and refinancing your loans.

Rebecca Stropoli and Emily Guy Birken contributed to this article.

Interested in refinancing student loans?

Here are the top 9 lenders of 2022!
LenderVariable APREligible Degrees 
2.49% – 11.72%1Undergrad
& Graduate

Visit Splash

2.50% – 6.30%2Undergrad
& Graduate

Visit Laurel Road

4.13% – 7.39%3Undergrad
& Graduate

Visit Lendkey

2.49% – 7.99%4Undergrad
& Graduate

Visit Earnest

2.49% – 7.99%5Undergrad
& Graduate

Visit NaviRefi

3.24% – 8.24%6Undergrad
& Graduate

Visit SoFi

2.48% – 7.98%Undergrad
& Graduate

Visit Elfi

1.74% – 7.99%7Undergrad
& Graduate

Visit Purefy

3.69% – 9.92%8Undergrad
& Graduate

Visit Citizens

Check out the testimonials and our in-depth reviews!
1 Important Disclosures for Splash Financial.

Splash Financial Disclosures

Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount.

The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.

To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of September 6, 2022.

2 Important Disclosures for Laurel Road.

Laurel Road Disclosures

All credit products are subject to credit approval.

Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $9 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit

As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.

  1. Checking your rate with Laurel Road only requires a soft credit pull, which will not affect your credit score. To proceed with an application, a hard credit pull will be required, which may affect your credit score.
  2. Savings vary based on rate and term of your existing and refinanced loan(s). Refinancing to a longer term may lower your monthly payments, but may also increase the total interest paid over the life of the loan. Refinancing to a shorter term may increase your monthly payments, but may lower the total interest paid over the life of the loan. Review your loan documentation for total cost of your refinanced loan.
  3. After loan disbursement, if a borrower documents a qualifying economic hardship, we may agree in our discretion to allow for full or partial forbearance of payments for one or more 3-month time periods (not to exceed 12 months in the aggregate during the term of your loan), provided that we receive acceptable documentation (including updating documentation) of the nature and expected duration of the borrower’s economic hardship. During any period of forbearance interest will continue to accrue. At the end of the forbearance period, any unpaid accrued interest will be capitalized and be added to the remaining principle amount of the loan.
  4. Automatic Payment (“AutoPay”) Discount: if the borrower chooses to make monthly payments automatically from a bank account, the interest rate will decrease by 0.25% and will increase back if the borrower stops making (or we stop accepting) monthly payments automatically from the borrower’s bank account. The 0.25% AutoPay discount will not reduce the monthly payment; instead, the discount is applied to the principal to help pay the loan down faster.

Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.

Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.

Interest Rate: A simple annual rate that is applied to an unpaid balance.

Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.


This information is current as of April 29, 2021. Information and rates are subject to change without notice.

3 Important Disclosures for LendKey.

LendKey Disclosures

Refinancing via is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it  endorse,  any educational institution.

Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised variable APR is only available for loan terms of  5 years and is reserved for applicants with FICO scores of at least 810.

As of 09/09/2022 student loan refinancing rates range from 4.13% APR – 7.39% Variable APR with AutoPay and 2.99% APR – 9.93% Fixed APR with AutoPay.

4 Rate range above includes optional 0.25% Auto Pay discount. Important Disclosures for Earnest.

Earnest Disclosures

You can choose between fixed and variable rates. Fixed interest rates are 3.99% – 8.74% APR (3.74% – 8.49% APR with Auto Pay discount). Starting variable interest rates are 2.74% APR to 8.24% APR (2.49% – 7.99% APR with Auto Pay discount). Variable rates are based on an index, the 30-day Average Secured Overnight Financing Rate (SOFR) plus a margin. Variable rates are reset monthly based on the fluctuation of the index. We do not currently offer variable rate loans in AK, CO, CT, HI, IL, KY, MA, MN, MS, NH, OH, OK, SC, TN, TX, and VA.

5 Important Disclosures for Navient.

Navient Disclosures

You can choose between fixed and variable rates. Fixed interest rates are 3.99% – 8.74% APR (3.74% – 8.49% APR with Auto Pay discount). Starting variable interest rates are 2.74% APR to 8.24% APR (2.49% – 7.99% APR with Auto Pay discount). Variable rates are based on an index, the 30-day Average Secured Overnight Financing Rate (SOFR) plus a margin. Variable rates are reset monthly based on the fluctuation of the index. We do not currently offer variable rate loans in AK, CO, CT, HI, IL, KY, MA, MN, MS, NH, OH, OK, SC, TN, TX, and VA.

6 Important Disclosures for SoFi.

SoFi Disclosures

Fixed rates range from 3.99% APR to 8.24% APR with a 0.25% autopay discount. Variable rates from 3.24% APR to 8.24% APR with a 0.25% autopay discount. Unless required to be lower to comply with applicable law, Variable Interest rates on 5-, 7-, and 10-year terms are capped at 8.95% APR; 15- and 20-year terms are capped at 9.95% APR. Your actual rate will be within the range of rates listed above and will depend on the term you select, evaluation of your creditworthiness, income, presence of a co-signer and a variety of other factors. Lowest rates reserved for the most creditworthy borrowers. For the SoFi variable-rate product, the variable interest rate for a given month is derived by adding a margin to the 30-day average SOFR index, published two business days preceding such calendar month, rounded up to the nearest one hundredth of one percent (0.01% or 0.0001). APRs for variable-rate loans may increase after origination if the SOFR index increases. The SoFi 0.25% autopay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. This benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. The benefit lowers your interest rate but does not change the amount of your monthly payment. This benefit is suspended during periods of deferment and forbearance. Autopay is not required to receive a loan from SoFi.

7 Important Disclosures for Purefy.

Purefy Disclosures

Purefy Student Loan Refinancing Rate and Terms Disclosure: Annual Percentage Rates (APR) ranges and examples are based on information provided to Purefy by lenders participating in Purefy’s rate comparison platform. For student loan refinancing, the participating lenders offer fixed rates ranging from 2.73% – 7.99% APR, and variable rates ranging from 1.74% – 7.99% APR. The maximum variable rate is 25.00%. Your interest rate will be based on the lender’s requirements. In most cases, lenders determine the interest rates based on your credit score, degree type and other credit and financial criteria. Only borrowers with excellent credit and meeting other lender criteria will qualify for the lowest rate available. Rates and terms are subject to change at any time without notice. Terms and conditions apply.  

8 Important Disclosures for Citizens.

CitizensBank Disclosures

Education Refinance Loan Rate Disclosure: Variable interest rates range from 3.69%-9.92% (3.69%-9.92% APR). Fixed interest rates range from  4.49%-10.11% (4.49%-10.11% APR). 

Undergraduate Rate Disclosure: Variable interest rates range from 6.39%- 9.60% (6.39% – 9.60% APR). Fixed interest rates range from 6.58% – 9.79% (6.58% – 9.79% APR).

Graduate Rate Disclosure: Variable interest rates range from 3.69% – 9.16% (3.69% – 9.16% APR). Fixed interest rates range from 4.49% – 9.35% (4.49% – 9.35% APR).

Education Refinance Loan for Parents Rate Disclosure: Variable interest rates range from 3.69%- 9.09% (3.69%- 9.09% APR). Fixed interest rates range from 4.49% – 9.28% (4.49% – 9.28% APR).

Medical Residency Refinance Loan Rate Disclosure: Variable interest rates range from 3.69% – 9.16% (3.69% – 9.16% APR). Fixed interest rates range from 4.49% – 9.35% (4.49% – 9.35% APR).