Defaulting on your federal student loans sucks. When you default, the U.S. Department of Education can enter an order for wage garnishment, seize your Social Security benefits, and offset your tax refund.
On top of that, you can’t get new federal student loans until you get out of default.[footnote]Your federal student loans go into default after 270 days of non-payment.[/footnote]
If you’re applying to grad school, the repayment status of your private student loans can affect your ability to get federal student aid. Grad Plus loans aren’t credit based. But they do check your credit history for adverse actions (late payments, foreclosure, bankruptcy etc.). And that’s where the nonpayment of your private loan can hurt you. Contact your private lender to learn how to get out of default.
You have two options to get out of default so you can go back to school and get additional federal student aid: loan rehabilitation and loan consolidation.
Loan rehabilitation allows you to get student aid after you make 6 monthly payments under a loan rehabilitation agreement. Loan consolidation gets you out of default in 2 to 3 months. You’ll be eligible for aid at that time.
But aside from speed, which is right for you?
TL;DR:If you’re starting school in less than 6 months, choose loan consolidation. But if you’re starting school later than that, choose loan rehabilitation.
In this post, I’ll give you the information you need so you can answer that question.
What is Loan Rehabilitation
Loan rehabilitation allows you to get out of default by making 9 monthly payments within 10 months.[footnote]Perkins loans have different rules. You have to make 9 monthly payments within 9 months.[/footnote] After your 9th payment, the default status will be removed, and your loans will be back in good standing.
You don’t have to wait 9 months to regain eligibility for student aid.
You can regain eligibility for additional federal student aid after you make 6 monthly payments under your repayment plan. You still have to make the remaining 3 payments to get out of default.
How to Start Loan Rehabilitation
To start the rehabilitation process, contact the Department of Education’s Default Resolution Group to find out who has your loans. The DRG will be able to tell you which collection agency (ConServe, General Revenue, etc.) has your loans.
Before you call, read How to Rehabilitate Your Student Loans so you can be prepared. In that article, I explain how the collection agency calculates the amount of your monthly rehabilitation payments. (Hint: they use your discretionary income).
Further reading. What to Do When You Can’t Rehabilitate Your Loans
This is a one-time benefit.
So if you default again, you won’t be able to regain eligibility for financial aid by making 6 monthly payments.
You’ll have to get your loan out of default completely.
After your monthly payment amount is calculated, you’ll make your first payment with a debit card or using your checking account information.
In my experience, scheduling your payments using your checking account information is the better way to go. That way, you don’t have to worry about updating the collection agency if your card is lost or stolen.
Once the payments are scheduled, the last thing for you to do is sign your loan rehabilitation agreement . This agreement provides the terms of the loan rehabilitation program and your responsibilities under it.
You’ll need to sign the loan rehab agreement and return it the collection agency.
From here, you wait. Make your payments. You’ll be out of default in 9 months.
What Happens After Student Loan Rehabilitation
If you choose CornerStone as your consolidating servicer, the consolidation process will be handled by Navient. Once the consolidation completes, Navient will transfer the loan to CornerStone for servicing.
You’ll need to contact your new servicer to get enrolled in an income-driven repayment plan.
- Income-Driven Repayment Plan Request Student Loans [How to Actually Save Money
- Why Does My Spouse Have to Sign My Income Driven Request Form
- Why Income-Based Repayment is the Right Choice for You
What is a Loan Consolidation
A consolidation loan takes your defaulted federal loan and combines it with another loan to create a new Direct Consolidation loan.
This option will have you out of default and eligible for financial aid in about 3 months.
The interest rate on your new Direct Loan consolidation will be the weighted average of the loans you consolidated.
How to Get a Consolidation Loan
You can consolidate your loans at studentloans.gov.
You’ll need a Federal Student AID ID to login to the site.
Once logged in, you’ll be able to view all of your loans. You can choose which loans you want to consolidate.
You may not want to consolidate all of your loans if you’ve begun earning credit towards Public Service Loan Forgiveness or Teacher Forgiveness.
Because you’re in default, you’ll need to apply to make your loan payments under an income-driven repayment plan.
You’ll also be able to import your adjusted gross income from the IRS by using your Social Security number.
You also have the option to submit a paper loan consolidation application .
With my clients, this is the option I prefer. We’re able to easily keep records of what documents we submitted, when we submitted those documents, and to whom we submitted them.
And trust, when dealing with these servicers, keeping records of that information is critical.
- Federal Direct Consolidation Loan Application
- Federal Direct Consolidation Loan Additional Loan Listing Sheet
- Income-Driven Repayment (IDR) Plan Request
Rehabilitation vs. Consolidation
Consolidation is a great choice because:
- It’s faster than rehabilitation
- You get to choose your loan servicer and
- You’re statistically less likely to re-default
The one negative is that your student loan debt will balloon with the consolidation loan. Collection fees and accrued interest are capitalized (added to your principal loan balance) when you consolidate.
And that brings me to the two pros of rehabilitation.
First, the US Department of Education that its policy is not to capitalize collection fees when you complete loan rehabilitation. So when you rehabilitate, your loan is transferred to a new loan servicer and your loan amount should include only your principal and interest.
Second, rehabilitation removes the default status from your credit report. And that could improve your credit score.
What loan rehabilitation does not do, however, is remove the late payment history reported by your loan holder. The history remains unless you can get it deleted.
Which Option is Best for You
It’s hard to say without knowing more about you. During a consultation, I’d want to know:
- How soon do you want to return to school?
- Have you earned credit towards forgiveness under one of the forgiveness programs?
- How many federal student loans do you have?
- What type of federal student loans do you have?
- What was your adjusted gross income for last year?
- What’s your family size? etc.
Your answers help me advise you. Can you wait to return to school? Cool, maybe we can rehabilitate and stop you from getting collection fees. Do you have loans made under the Federal Family Education Loan program but you work for the government? Maybe we need to consolidate to get you out of default and qualify you for forgiveness.
There’s no best answer on whether you should rehabilitate or consolidate to get your student loans out of default to go back to school. If you can wait, wait. But if you need to start school now, consolidation is your best option — even if causes your loan balance to balloon.