How to Go Back to School With Student Loans in Default

If you defaulted on your student loan payments, it can be extraordinarily difficult to finish school. You may lose your eligibility for federal student aid and have trouble taking out new loans to fund the rest of your education.

Luckily, you’re not without options. There are several ways you can fix your defaulted loans in order to return to school and finally get your degree.

In this article, we’ll go over some of the best strategies to make this happen.

What are my options?

Default comes at the end of a lengthy process when you are unable to make your required monthly payments. On the day after you miss your first payment, you become delinquent on your loans.

At this point, you can work with your loan servicer to come up with a plan to get your account current. This can include changing your repayment plan or using deferment or forbearance options to give you the time you need to get your finances back in order.

If you are unable to get caught up on your loan payments, your delinquent loan may go into default. The timeline for this can vary based on the type of federal student loan you have.

But in most cases, your loan goes into default after 270 days of delinquency. When this happens, your entire loan comes due immediately, including interest and fees.

Once you’re in default, you lose eligibility for future student aid. However, there are a few strategies you can use to put yourself in a position to return to school with defaulted student loans.

Learn More: What Happens When You Default on a Student Loan

1. Rehabilitate your defaulted student loans

Student loan rehabilitation is a formal agreement between you and your loan servicer that will get your loans out of default — if you complete it successfully. You agree to make nine consecutive voluntary payments, at an amount set by your loan servicer, within 20 days of their due date. These payments are usually for 10 consecutive months for Direct Loans and FFEL Federal Family Education Loans (FFEL) and nine months for Perkins loans.

But any involuntary payments you’re making while in default — like wage garnishment — are likely to continue in addition to your loan rehabilitation. Wage garnishment is when a portion of your paycheck is sent directly to your creditor, and this won’t count toward your nine voluntary loan payments. So, if your wages are currently being garnished, loan rehabilitation may not be a good option for you.

To rehabilitate your defaulted student loans, contact your loan servicer first. If you’re eligible for loan rehabilitation, your servicer will ask you to provide your latest tax return.

With this information, your loan servicer will determine a monthly payment you can reasonably afford, and send you a loan rehabilitation agreement within 15 days. Your “reasonable monthly payment” is generally determined by calculating 15% of your annual discretionary income, divided by 12.

When you sign and return this agreement, you can formally enroll in loan rehabilitation. Once you’ve made your nine payments successfully, your loans will no longer be in default and any wage garnishment or other collection procedures will end.

You’ll also once again be eligible for federal student aid, making it easier to afford to go back to school.

Loan rehabilitation is a one-time offer. If you default on your loans again, you will no longer be able to choose loan rehabilitation as an option.

Check Out: Defaulted Student Loans: Can You Refinance?

2. Consolidate your federal loans

Another way to fix your default status is to consolidate your loans into a federal Direct Consolidation Loan. This loan pays off and replaces your current education debt, combining your accounts into a single, new loan.

Your federal Direct Consolidation Loan will have an interest rate that’s an average of your former loans. If you have a loan in default, you can only use loan consolidation under two conditions.

1. Make three consecutive, voluntary on-time payments toward your defaulted student loan before consolidating it. The amount of these payments will be determined by your loan servicer, but the servicer is required to set the payment at a reasonable amount based on your budget.
2. Agree to pay back your Direct Consolidation Loan through an income-driven repayment (IDR) plan. Under these plans, your monthly payments are determined based on your income.

You have a few different options, but generally these payments will be set at a certain percentage of your discretionary income — in most cases, the difference between what you earn and 150% of the federal poverty line in your area.

But you are not eligible to consolidate your defaulted student loans if your wages are currently being garnished. You’ll need to have the garnishment order lifted or the judgment vacated in order to consolidate your loans.

You’ll also need to have another student loan to consolidate your defaulted loan with. If your defaulted student loan is the only one you have, you won’t be eligible for a consolidation loan.

What if I can’t make the student loan payments after a loan consolidation?

If you’re struggling to make payments on a federal consolidation loan, here are a few options to consider:

• Income-driven repayment plans: If you aren’t already on an IDR plan, signing up for one could be a good idea. Under an IDR plan, your payments are based on your income — typically, 10% to 20% of your discretionary income, which could be much more affordable than your current payments. Another major benefit: Any remaining balance on your Direct Consolidation Loan will be forgiven after 20 to 25 years, depending on the plan.
• Deferment: If you’re going through a temporary financial setback, you may be able to briefly pause payments through deferment. There are a variety of circumstances that could make you eligible for deferment, such as if you’re facing economic hardship, undergoing cancer treatment, or participating in an approved graduate fellowship program. You can also defer your payments if you’re enrolled at least half-time at an eligible school. Keep in mind that interest might continue to accrue on a deferred Direct Consolidation Loan, depending on the type of loan you consolidated.
• Forbearance: Another way to put your payments on hold is forbearance. There are two types of forbearance: general (or discretionary) forbearance at the discretion of your servicer and mandatory forbearance that your servicer must provide in certain situations.

3. Negotiate a student loan debt settlement

Depending on your loan servicer and the types of loans you have, you may also be able to negotiate a debt settlement. In general, a debt settlement is an agreement to accept a lower amount to consider your loan paid in full.

You’ll often need to make this payment as a lump sum or, at most, over the course of one year. Both federal student loans and private student loans are often eligible for debt settlement.

Debt settlement may be a good option if you’ve racked up a significant amount of unpaid interest and late fees. Your loan service may be willing to accept a settlement that waives a lot of the fines and fees, leaving you with your standard interest and fees to pay.

But make sure to watch out for companies that advertise debt settlement services. These companies may offer to settle your debt for you in exchange for an up-front fee. In some cases, these arrangements can lead to you being taken advantage of and can even run afoul of the law. So, research debt settlement companies before making a decision.

How to negotiate a settlement

If debt settlement seems like the right fit for your needs, follow these four steps:

1. Verify how much you owe. Before discussing payments or a payment plan with a loan holder or debt collector, you should first confirm that their record of the amount you owe is accurate. If you have federal student loans, you can check the payoff amount through your servicer. If you have private student loans, review your credit report to see your payoff amount — you can do this for free using Credible's credit monitoring tool.
2. Consider how much you can pay. Review your budget to determine what you can pay either in a single lump sum or in a few installments to get the loan out of default. Make sure the amount you decide on is something you can actually afford.
3. Negotiate with your loan holder. Contact your loan holder or debt collector to discuss a payment arrangement that you can afford. Be ready to fully explain your financial situation as well as what you’re prepared to pay. Also be sure to get any agreements in writing before making a payment.
4. Follow through with the agreement. If your loan holder or debt collector agrees to a payment arrangement, make sure to pay on time and in full to satisfy your agreement. For safe measure, be sure to ask for and receive a written confirmation from them once the student loan has been repaid fully.

Just remember that this will likely come with fees that you’ll have to pay on top of your settlement.

How to go back to school after defaulting on student loans

After resolving a student loan default, you could regain your eligibility for further federal financial aid and return to school. If you’re ready to go back to school and need help paying for it, follow these four steps:

1. Fill out the FAFSA. Your first step to pay for additional classes should be filling out the Free Application for Federal Student Aid (FAFSA). Remember that to qualify for federal aid, you must not have any federal student loans in default and must also meet the other eligibility requirements.
2. Apply for scholarships and grants. Unlike student loans, scholarships and grants don’t have to be repaid. There’s no limit to how many scholarships and grants you can get, so it’s a good idea to apply for as many as you can.
3. Take out federal student loans. If you were able to successfully get your federal loans out of default, you might be able to borrow more to cover your education costs. Many federal loans (excluding PLUS loans) don’t require a credit check, which can make them an especially good option if your credit was damaged by default.
4. Use private student loans to fill any gaps. After you’ve exhausted your scholarship, grant, and federal loan options, private loans could be a good way to fill any financial gaps left over. But keep in mind that unlike with federal loans, you’ll generally need good-to-excellent credit to get approved for a private loan. This higher credit requirement could make it hard to qualify after going through default.

If you decide to take out a private student loan, be sure to consider as many lenders as possible to find the right loan for your needs. Credible makes this easy — you can compare your prequalified rates from multiple lenders in two minutes.

The companies in the table below are Credible’s approved partner lenders. Whether you’re the borrower or cosigner, Credible makes it easy to compare rates from multiple private student loan providers.

Taylor Medine contributed to the reporting for this article.