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Consolidate Defaulted Student Loans to Get Out of Default Fast

December 4, 2019

Wondering can you consolidate defaulted student loans? Short answer, yes, you can consolidate federal loans that are in default. But there’s one big exception that I’ll get to later.

Quick Navigation

  1. What you need to know to consolidate defaulted student loans
  2. The 5 steps to consolidate defaulted student loans
  3. Monthly payments start 1 to 2 months after consolidation completes
  4. Consolidation does not remove the default status from your credit report

For now, let’s make sure we got the basics covered.

As a reminder, you default on federal loans after 270 days of missed loan payments. When you default, the government can garnish your wages, offset your tax refund, offset your Social Security Benefits, and deny you financial aid. And they can do those bad things to you without a court order.

Private lenders, on the other hand, need a court order to garnish your wages or levy your bank account.

Ordinarily, you have 4 options for getting federal student loans out of default:

  1. Payment in full
  2. Settlement/Compromise
  3. Loan Rehabilitation
  4. Loan Consolidation

For many of you, the first 2 options, paying the loan balance in full and settlement/compromise, aren’t doable. You simply don’t have enough to pay what the collection company is demanding after they added in collection fees, and interest capitalization.


It’s not uncommon when you default on student loan debt owed to the government for your loan balance to double. Defaulting allows the government to add your unpaid interest to your principal loan balance and charge you upwards of 20% of your loan balance in collection fees. Consolidation will force you to pay those collection fees. Loan rehabilitation, on the other hand, may allow those fees to be waived.

A settlement for what you borrowed would be nice. But unfortunately, that’s not an option either. Federal student loan settlements are expensive. The government typically won’t accept less than 85% of the current principal and interest. And they want that within 30 to 90 days.

Settlements with private lenders are a lot more favorable. I’ve negotiated settlements for less than 40% of the balanced owed for many loan borrowers. You can read about how I settled Eddie’s loans for $70 thousand less then he owed.

Because of that reality, most student loan borrowers who have defaulted will be choosing between loan rehabilitation and loan consolidation.

I’ve went over the loan rehabilitation program elsewhere, so I’ll refer you there if you want more information, but for now, let’s talk about consolidating defaulted student loans.

Unlike private student loans, you don’t need a good credit score or a cosigner to consolidate your loans. You just need to have an FSA ID.

Let’s start with…

What Do You Need to Know About Your Student Loans to Apply for Consolidation?

Let’s break this into two steps:

  1. finding out who has your loans and then
  2. finding out what’s going on with your loans


The first thing you want to do is know everything about your federal student loans.

The easiest way to do that is to visit the National Student Loan Data System.

National Student Loan Data System [NSLDS] homepage

The NSLDS website will tell you:

  • How many federal student loans you have
  • How much you owe in principal and interest (it won’t tell you what you owe in collection fees)
  • The interest rate on your loans
  • The payment status and history of your loans and
  • Which company has your loans currently

Once you have that information, the next thing I’d do is call the company that has your defaulted loan(s).

Related: The Dangers of Student Loan Default and How to Avoid Them

For many of you, your loans will have likely been sent to the Department of Education’s Default Resolution Group.

You can contact the DRG by calling them at 800-621-3115.

When you call, the automated system will ask you for your SSN and DOB.

From there, the system will tell you which collection company has your defaulted loans.

Call that company and confirm they have your loans and, more importantly, which loans they have.

Sometimes I’ve found that they may not have all of your defaulted student loans.

If that’s true for you, call DRG again and this time skip the automated system by pressing “0”. The live attendant should be able to tell you who to contact about your other loans.

#2 Find Out What’s Going On With Your Defaulted Student Loans

Now that you’ve tracked down who has your loans, you want to know the status of your loans.

Here’s the list of questions I ask the collection agency representative:

  • What’s the current balance
  • What’s the borrower’s account number
  • Is the borrower eligible for loan rehabilitation and
  • Has a garnishment order been sent to the employer? If not, has a notice of proposed garnishment been sent to the borrower?

The answer to the last question is key.

If a garnishment order has been sent to your employer, then you most likely won’t be able to consolidate the loan out of default.

The government has a rule that says you can consolidate federal loans only if their not under a current garnishment.


Every now and then I’ve been able to successfully consolidate federal loans while the employer was processing the garnishment order. The key is to move quickly


In practice, you’re under a current garnishment once the garnishment order has been sent to your employer. And that’s true even if your employer hasn’t taken the money out of your pay yet.

Your only option to get out of default at that point is the loan rehabilitation program or maybe filing a chapter 13 bankruptcy.

How to Consolidate Defaulted Student Loans in 5 Easy Steps

The process to consolidate your loans is super simple.

#1 Create an FSA ID

You should already have your Federal Student Aid ID if you logged into the National Student Loan Data System.

But if you don’t have it (or forgot the password) you can easily create an FSA ID by visiting fsaid.ed.gov.

#2 Visit studentloans.gov

IMO, the easiest way to consolidate defaulted student loans is to submit the consolidation application online at studentloans.gov.

Studentloans.gov homescreen

Once logged in, you’ll be taken this screen:

Main screen consolidation student loans

From there, click on the tab that says “Apply for Loan Consolidation”.

Screenshot of apply for loan consolidation

You’ll then be taken to the start screen.

Start screen student loan consolidation

#3 Decide Which Loans to Consolidate

Deciding which loans to include in your consolidation can be a complicated decision if you work for the government or a nonprofit or have Parent Plus Loans.

Screenshot of screen which lets you choose which loans to consolidate

Consolidation creates a brand new loan with its own payment history. So if you’re a teacher or a nonprofit and you’re trying to get your loans forgiven under the Public Service Loan Forgiveness program, consolidation will cause you to lose months you’ve earned toward loan forgiveness.

And if you have defaulted Parent Plus Loans, consolidating your Parent Plus Loans with your non-Parent Plus loans will kick you out of the best student loan repayment plans. This is because a Direct Consolidation loan that paid off a Parent Plus loans is eligible only for the income-contingent repayment plan. It is not eligible for REPAYE, PAYE, and IBR, all of which lead to lower payments.

Another thing to consider is if you have federal loans that you’re close to paying off. You’ll want to consider if you should include those federal loans in your consolidation or if you should just keep them where they are and just pay them off.

#4 Choose Your Loan Servicer

Consolidation is the one time you get to choose which loan servicer you want to work with.

Screenshot how to choose new loan servicer

So if you didn’t like your experience with Navient or FedLoan choose Cornerstone, Great Lakes, or Nelnet.


For those of you who work for the government or a nonprofit, your servicer is chosen for you — FedLoan. They’re the only servicer authorized to handle the Public Service Loan Forgiveness program.

In my opnion, there are all pretty much the same. While I’ve found Great Lakes easy to work with and their written communication to be pretty clear, I’ve experienced their reps giving misinformation. And that’s true of my experience with other loan servicers.

#5 Complete the Loan Consolidation Application

Now that you’ve decided which loans you want to include in your consolidation it’s time to complete the application.

To do that, you’re going to need:

  • Your driver’s license number
  • Your employer’s name, address, and phone number
  • 2 references (name, number, address, and relationship)

About the references.

Don’t worry about them being called about your loans being in default.

The Department of Education wants 2 references to call in case you default again.

After you provide that information, you’ll be asked to get your adjusted gross income from the IRS website.

Screenshot of IRS connection screen

If you filed a tax return in the past 2 years, you’ll be able to get your AGI so long as you remember your filing status and address. But if you haven’t filed a recent tax return or you can’t remember your status, then you’ll have to submit your income information to your new loan servicer.


I suggest faxing your tax return or pay stub with the income-driven repayment application to the servicer handling the consolidation and then following up 2 days later to confirm they got it. The last thing you want is for your consolidation to get rejected because they didn’t get your income information.

When Do Monthly Payments on Defaulted Consolidated Student Loans Start?

Your consolidation should complete in about 2 months. Your monthly payments on your new consolidation loan should start about a month or two after that. Until then, your loan will be in an administrative forbearance. You won’t have to make any payments during this time, but interest will be accruing.

When is the Student Loan Default Status Removed from My Credit Report After Consolidation?

When you consolidate, the default status will remain on your credit report.

This is because consolidation doesn’t remove the default status or any other negative information from your credit report.

Instead, the consolidation loan will be added to your credit report as a new loan. Your old student loan debt will report as paid off.


After you consolidate, your credit report will likely show two new loans in your name. Don’t worry, it’s just one loan broken into two portions: the subsidized and unsubsidized portions of the loan. The government pays some of the interest on the subsidized portion; The government never pays interest on unsubsidized loans. That’s your responsibility.

So if you’re worried about fixing your student loans to improve your credit score, explore the loan rehabilitation program.

What Are the Benefits of Working With an Attorney to Help Consolidate Defaulted Student Loans?

The truth is you can consolidate your student loans by yourself for free. You don’t need to hire someone to complete and submit the application for you. As I’ve shown above, for federal loans that’s easily done at studentloans.gov.

But the reason why you’d want to get professional help is to make sure consolidation doesn’t put you in a worse position — especially if you’re a public service employee and you’re seeking loan forgiveness.

In my opinion, student loans have too many tripwires to try and handle on your own without an experienced guide.

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