Default & Loan Rehabilitation

Federal student loans go into "default" when you've gone 270 days without making a payment. The consequences are significant — but unlike most defaulted debt, federal student loans have clear, federally-defined paths back to good standing.

What happens in default

• The entire loan balance becomes due immediately (acceleration)
• Your credit report shows the default, hurting your credit score significantly
• Your federal tax refund can be intercepted (Treasury Offset Program)
• Your wages can be garnished without a court order, up to 15% of disposable income
• You lose eligibility for new federal student aid
• You lose access to income-driven repayment plans, deferment, and forbearance until you cure the default

Path 1: Loan Rehabilitation

You make 9 voluntary monthly payments within 10 months at an amount the Department of Education agrees is "reasonable and affordable" — often as low as $5 per month. After the 9 payments, your loan is removed from default and the default notation is removed from your credit report (though late payments leading up to the default remain). Rehabilitation can only be used once per loan.

Path 2: Loan Consolidation

You consolidate the defaulted loan into a Direct Consolidation Loan. To do this, you generally need to agree to an income-driven repayment plan on the new consolidation loan, or make three on-time monthly payments on the defaulted loan before consolidating. Consolidation is faster than rehabilitation, but the default stays on your credit report (you've paid it off via the new loan, but the original default history remains).

Which path is right

Rehabilitation is generally better for your credit because it removes the default notation. Consolidation is faster and better if you need to access IDR or PSLF quickly. Talk to a strategist before choosing — the right answer depends on your goals, timeline, and the kind of loans you have.

What to avoid

Be wary of any company that offers to "settle" your federal student loan default for pennies on the dollar. Federal student loans rarely settle for less than principal plus interest plus collection fees — and the marketing claims you'll see online are almost always exaggerations of what's actually possible.