Should I Rehabilitate or Consolidate My Defaulted Federal Loans?

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If your federal student loans are in default, the stress of dealing with collections agents, wage garnishment, and tax offsets can be enough to make you want to bury your head in the sand.

But doing so will probably only make a bad situation worse.

Instead of ignoring student loan default, you can take action in one of two ways: student loan rehabilitation or consolidation. Each option has its pros and cons, but either will get your federal student loans out of default.

As for private student loans, you will have to speak with your loan servicer about your options. Private lenders rarely offer rehabilitation or consolidation, but they might allow for temporary forbearance during a period of financial hardship.

If your federal student loans have fallen into default, though, here’s what you need to know about getting your finances back on track.

What is default?

Your federal student loans go into default when you fail to make payments, but they don’t do so right away. After your first missed payments, your student loans are considered delinquent.

As long as you make a payment soon or contact your loan servicer to discuss your options, a delinquency will not necessarily hurt your standing or finances.

But if your loan is delinquent for 90 days, it will be reported to the credit bureaus and could hurt your credit score.

After 270 days of missed payments, your student loans go into default. At this point, you will need to take specific actions to get out of default beyond simply resuming payments.

While federal student loans don’t go into default for 270 days, private student loans work differently. Some lenders consider a loan to be in default immediately after you miss your first payment.

Others give you 120 days of leeway to start paying again before your loans are back on track. If you’re struggling to repay a private student loan, speak with your loan provider about your options.

What are the consequences of student loan default?

The consequences of student loan default differ for federal and private student loans. The government has wide-reaching powers when it comes to collecting on debt, so defaulting on federal student loans could have major consequences.

For one, you will lose eligibility for forbearance or deferment. Second, you could get your wages garnished or even face an offset on your taxes. Some older borrowers in student loan default have also been threatened with garnishment of their Social Security.

Whether you have federal or private student loans, going into default could also mean your loans go to a collections agency. As a result, debt collectors might start calling frequently asking for payment. Some even call friends, family, or a workplace to get ahold of a borrower.

Finally, 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 it could make it difficult to take out a mortgage or make other financial moves in the future.

Note that private lenders cannot garnish your wages, taxes, or Social Security, though they could potentially bring you to court to demand repayment. Private loans also have a statute of limitations, whereas federal student loans never go away until you pay them or get loan forgiveness.

3 options for getting out of default

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

1. Student loan rehabilitation

Rehabilitation allows you to remove federal student loans from their default status. If you have more than one student loan, you must apply to rehabilitate each one separately, and you may only rehabilitate a loan one time.

In order to rehabilitate, you must make nine payments within a ten-month period to have your default status removed. Your payments under rehabilitation are expected to be reasonable based upon your financial situation.

The loan servicer will request payments equal to 15 percent of your discretionary income. If you cannot 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.

Once you’ve made your nine payments, your loan is considered rehabilitated and the default is removed from your credit history — although the late payments will remain on your credit history. During the period of rehabilitation, you may still be contacted by collection agents since they may continue to pursue borrowers during the process of rehabilitation.

Rehabilitating your loan could result in fees of up to 16 percent of unpaid principal balance and accrued interest to the principal balance of the loan. However, rehabilitation will restore your eligibility for benefits like deferment, forbearance, loan forgiveness, and a choice of repayment plans.

That means you can make the necessary changes to your monthly payments to keep them affordable post-rehabilitation.

2. Student loan consolidation

The other 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 long repayment term.

Even if the government is already garnishing your wages, you can still roll your loans into a new Direct Consolidation loan. Once you take out the loan, your old loans will be paid off and your wages will no longer be garnished.

There are two ways to qualify for consolidation on a defaulted student loan:

  • Agree to repay your new loan under an income-driven repayment plan.
  • Make three consecutive monthly payments on your defaulted loan before you apply for consolidation.

Generally, consolidating defaulted student loans takes about 30 days.

Once you have consolidated your defaulted student loan, collections agents may no longer contact you. However, your credit report will still include the information about your default for up to seven years, meaning rehabilitation is the better option for borrowers who are worried about their credit history.

A borrower who is consolidating defaulted student loans will face fees up to 18.5 percent of the unpaid principal balance and accrued interest. But like rehabilitated loans, consolidated loans are once again eligible for benefits like deferment, forbearance, and loan forgiveness once the process is complete.

As with student loan rehabilitation, consolidation of a defaulted loan is a one-time opportunity. It will not be available to you again should you face another default.

3. Pay off your student loans in full

A third option for getting your student loan out of default, whether it’s federal or private, 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 are facing a steep amount of debt.

But if you can find room in your budget to make extra payments, take on a side hustle for more income, or even refinance your student loans for lower interest rates, you can work toward paying off your debt ahead of schedule.

How to choose the best option for your finances

When it comes to choosing between rehabilitation and consolidation, keep in mind that both options have pros and cons.

If you want to get your student loan out of default as fast as possible, consolidation could be the superior choice. Typically, it only takes about 30 days until you’re out of default, whereas rehabilitation requires months of repayment.

Rehabilitation, however, has an edge over consolidation when it comes to your credit score. After you rehabilitate your loans, your default will get removed from your credit report.

That said, your credit history could still show late and missed payments. Rehabilitation also might have slightly lower fees than consolidation — 16% as opposed to 18.5%.

Finally, remember that rehabilitation brings your old loans back from default, but consolidation essentially gives you a new, simplified loan.

If you have multiple loans, consolidating combines them into one loan with one monthly payment. This could make it easier for you to manage your debt and avoid default in the future.

In the end, both approaches accomplish your goal of getting your student loans out of default. Make sure to contact your loan servicer to work out an approach that will be most beneficial for your unique situation.

Emily Guy Birken contributed to this article.

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1 Important Disclosures for Earnest.

Earnest Disclosures

To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.

Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 5.87% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 5.87% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.

Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.

The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at hello@earnest.com, or call 888-601-2801 for more information on ourstudent loan refinance product.

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2 Important Disclosures for Laurel Road.

Laurel Road Disclosures

Savings example: average savings calculated based on single loans refinanced from 9/2013 to 12/2017 where borrowers’ previous rates were disclosed. Assumes same loan terms for previous and refinanced loans, and payments made to maturity with no prepayments. Actual savings for individual loans vary based on loan balance, interest rates, and other factors.

Application detail: 5 minutes indicates typical time it takes to complete application with applicant information readily available. It does not include time taken to provide underwriting decision or funding of the loan.

Instant rates mean a delivery of personalized rates for those individuals who provide sufficient information to return a rate. For instant rates a soft credit pull will be conducted, 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.

Total savings calculated by aggregating individual average savings across total borrower population from 9/2013 to 12/2017. Individual average savings calculation based on single loans refinanced from 9/2013 to 12/2017 where borrowers’ previous rates were provided. Assumes same loan terms for previous and refinanced loans, and payments made to maturity with no prepayments. Actual savings for individual loans vary based on loan balance, interest rates, and other factors.


3 Important Disclosures for SoFi.

SoFi Disclosures

  1. Student loan Refinance:Fixed rates from 3.899% APR to 7.804% APR (with AutoPay). Variable rates from 2.470% APR to 6.990% APR (with AutoPay). Interest rates on variable rate loans are capped at either 8.95% or 9.95% depending on term of loan. See APR examples and terms. Lowest variable rate of 2.470% APR assumes the current index rate derived from the 1-month LIBOR of 2.08% plus 0.64% margin minus 0.25% ACH discount. Not all borrowers receive the lowest rate. If approved for a loan, the fixed or variable interest rate offered will depend on your creditworthiness, and the term of the loan and other factors, and will be within the ranges of rates listed above. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR 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. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. *To check the rates and terms you qualify for, SoFi conducts a soft credit inquiry. Unlike hard credit inquiries, soft credit inquiries (or soft credit pulls) do not impact your credit score. Soft credit inquiries allow SoFi to show you what rates and terms SoFi can offer you up front. After seeing your rates, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit inquiry. Hard credit inquiries (or hard credit pulls) are required for SoFi to be able to issue you a loan. In addition to requiring your explicit permission, these credit pulls may impact your credit score.
  2. Terms and Conditions Apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)

4 Important Disclosures for LendKey.

LendKey Disclosures

Refinancing via LendKey.com 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 LendKey.com. 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 LendKey.com 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.


5 Important Disclosures for CommonBond.

CommonBond Disclosures

  1. Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). The following table displays the estimated monthly payment, total interest, and Annual Percentage Rates (APR) for a $10,000 loan. The Annual Percentage Rate (APR) shown for each in-school loan product reflects the accruing interest, the effect of one-time capitalization of interest at the end of a deferment period, a 2% origination fee, and the applicable Repayment Plan. All loans are eligible for a 0.25% reduction in interest rate by agreeing to automatic payment withdrawals once in repayment, which is reflected in the interest rates and APRs displayed. Variable rates may increase after consummation. All variable rates are based on a 1-month LIBOR assumption of 2.08% effective July 25, 2018.

6 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  1. Education Refinance Loan Rate DisclosureVariable rate, based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of October 1, 2018, the one-month LIBOR rate is 2.22%. Variable interest rates range from 2.72%-8.32% (2.72%-8.32% APR) and will fluctuate over the term of the borrower’s loan with changes in the LIBOR rate, and will vary based on applicable terms, level of degree earned and presence of a cosigner. Fixed interest rates range from 3.75%-8.69% (3.75%-8.69% APR) based on applicable terms, level of degree earned and presence of a cosigner. Lowest rates shown require application with a cosigner, are for eligible, creditworthy applicants with a graduate level degree, require a 5-year repayment term and include our Loyalty discount and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty and Automatic Payment Discount disclosures. The maximum variable rate on the Education Refinance Loan is the greater of 21.00% or Prime Rate plus 9.00%. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change. Please note: Due to federal regulations, Citizens Bank is required to provide every potential borrower with disclosure information before they apply for a private student loan. The borrower will be presented with an Application Disclosure and an Approval Disclosure within the application process before they accept the terms and conditions of their loan.
  2. Federal Loan vs. Private Loan Benefits: Some federal student loans include unique benefits that the borrower may not receive with a private student loan, some of which we do not offer with the Education Refinance Loan. Borrowers should carefully review their current benefits, especially if they work in public service, are in the military, are currently on or considering income based repayment options or are concerned about a steady source of future income and would want to lower their payments at some time in the future. When the borrower refinances, they waive any current and potential future benefits of their federal loans and replace those with the benefits of the Education Refinance Loan. For more information about federal student loan benefits and federal loan consolidation, visit http://studentaid.ed.gov/. We also have several resources available to help the borrower make a decision at http://www.citizensbank.com/EdRefinance, including Should I Refinance My Student Loans? and our FAQs. Should I Refinance My Student Loans? includes a comparison of federal and private student loan benefits that we encourage the borrower to review.
  3. Citizens Bank Education Refinance Loan Eligibility: Eligible applicants may not be currently enrolled. Applicants with an Associate’s degree or with no degree must have made at least 12 qualifying payments after leaving school. Qualifying payments are the most recent on time and consecutive payments of principal and interest on the loans being refinanced. Primary borrowers must be a U.S. citizen, permanent resident or resident alien with a valid U.S. Social Security Number residing in the United States. Resident aliens must apply with a cosigner who is a U.S. citizen or permanent resident. The cosigner (if applicable) must be a U.S. citizen or permanent resident with a valid U.S. Social Security Number residing in the United States. For applicants who have not attained the age of majority in their state of residence, a cosigner will be required. Citizens Bank reserves the right to modify eligibility criteria at anytime. Interest rate ranges subject to change. Education Refinance Loans are subject to credit qualification, completion of a loan application/consumer credit agreement, verification of application information, certification of borrower’s student loan amount(s) and highest degree earned.
  4. Loyalty Discount Disclosure: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower or their co-signer (if applicable) has a qualifying account in existence with us at the time the borrower and their co-signer (if applicable) have submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, or other student loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI, and VT and some products may have an associated cost. This discount will be reflected in the interest rate disclosed in the Loan Approval Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  5. Automatic Payment Discount Disclosure: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their student loans owned by Citizens Bank, N.A. during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. Discount is not available when payments are not due, such as during forbearance. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account three or more times within any 12-month period, the borrower will no longer be eligible for this discount.
  6. Co-signer Release: Borrowers may apply for co-signer release after making 36 consecutive on-time payments of principal and interest. For the purpose of the application for co-signer release, on-time payments are defined as payments received within 15 days of the due date. Interest only payments do not qualify. The borrower must meet certain credit and eligibility guidelines when applying for the co-signer release. Borrowers must complete an application for release and provide income verification documents as part of the review. Borrowers who use deferment or forbearance will need to make 36 consecutive on-time payments after reentering repayment to qualify for release. The borrower applying for co-signer release must be a U.S. citizen or permanent resident. If an application for co-signer release is denied, the borrower may not reapply for co-signer release until at least one year from the date the application for co-signer release was received. Terms and conditions apply.
  7. Estimated average savings amount is based on 14,659 Education Refinance Loan customers who saved on loans between August 1, 2017 and July 31, 2018. The calculation is derived by averaging monthly savings across Education Refinance Loan customers whose payment amounts decreased after refinancing, calculated by taking the monthly payment prior to refinancing minus the monthly payment after refinancing. We excluded monthly savings from customers that exceeded $4,375 and were lower than $20 to minimize risk of data error skewing the savings amounts. Savings will vary based on interest rates, balances and remaining repayment term of loans to be refinanced. Borrower’s overall repayment amount may be higher than the loans they are refinancing even if monthly payments are lower.

2.47% – 6.99%3Undergrad
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2.47% – 5.87%1Undergrad
& Graduate
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2.47% – 8.03%4Undergrad
& Graduate
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2.95% – 6.37%2Undergrad
& Graduate
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2.48% – 6.25%5Undergrad
& Graduate
Visit CommonBond
2.72% – 8.32%6Undergrad
& Graduate
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Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.