Can You Refinance Defaulted Student Loan Debt? Yes, Here's How

You can refinance private student loans in default, depending on your personal finances. Consolidating may be an option if you’ve defaulted on federal student loans.

It’s not impossible to refinance student loan debt after you default, but it is challenging. Defaulting on your loans hurts your credit score and financial situation by adding the late payments and default status to your credit report. If left unchecked, it also can lead to your wages being garnished, tax refund being seized, and Social Security benefits being withheld.

The U.S. Department of Education has two programs to help its borrowers return loans to good standing — student loan consolidation and loan rehabilitation. But private lenders don’t have those same repayment options. Instead, once you default on private student loans, your only option to get out of it is to negotiate a settlement or find a lender willing to work with you.

Ahead, learn your student loan refinancing options for loans that are in default.

***The federal government announced the coronavirus-related forbearance and interest rate freeze would be extended until Aug. 31, 2022. The department added that it would grant more than 7 million borrowers in default a “fresh start” and automatically return their accounts to good standing before the freeze ends. There’s no word yet on when this change will happen.

Latest on student loans

• Forgiveness update: $10,000 student loan forgiveness may happen later this year.

• Covid-19 moratorium extended: The newest student loan payment pause moved the repayment start date to Sept. 1, 2022.

• In default? Student loan garnishments are on hold until this fall.

• New deadline: The latest coronavirus forbearances moved the student loan recertification deadline to Nov. 2022.

You can refinance private student loans that you’ve defaulted on — if you can find a refinancing lender willing to look past the default status.

Most private lenders want borrowers to have a strong credit history, including a long track record of making timely student loan payments and taking few deferments and forbearances.

I know of only one lender that’s willing to refinance delinquent, defaulted, or charged-off loans: Yrefy.

Yrefy uses your credit score to help determine the interest rate of the refinanced loan, but it looks at other factors, including your debt-to-income ratio and whether you have a cosigner when it reviews your application. Read more about refinancing student loans with bad credit.

Can I refinance federal student loans that are in default? The Education Department doesn’t allow borrowers to refinance defaulted loans, but it does let them consolidate loans that are delinquent or in default.

Bad credit or a previous consolidation doesn’t prevent you from being eligible for a Direct Consolidation Loan. You’re eligible if you agree to pay the new Direct Consolidation Loan under an income-driven repayment plan or make three consecutive on-time payments based on 15% of your discretionary income. Read more about consolidating student loans more than once.

The interest rate for the new loan is the weighted average of the loans included in your application.

Not sure what type of loan you have? Federal student loans include Direct Loans, Federal Family Education Loans (FFEL), Perkins Loans, and PLUS Loans. Read more about how to tell if my student loans are federal?

Learn More: Can You Consolidate Defaulted Student Loans?

Private student loan forgiveness isn’t an option unless you’re permanently disabled or dead. And that’s unlikely to change even if President Biden fulfills his campaign pledge and cancels a portion of student loans for each borrower.

Throughout the pandemic, the Biden administration has limited its relief efforts to federal student loan borrowers. People struggling with private loans have had to sit on the sidelines and watch as the federal government has helped millions of its borrowers by:

• pausing monthly payments

• preventing interest from accruing

• halting collection efforts

• improving existing loan forgiveness programs like the Public Service Loan Forgiveness Program

• removing the default status from each credit bureau

So if you need help with your private loans, your best bet is to contact the loan holder and try to find a repayment plan that works for you. You might also explore student loan refinance options. You may be able to get a lower interest rate, better repayment terms, and a lower monthly payment. Read more about how to refinance student loans.

Learn More: Will Defaulted Student Loans Be Forgiven?

If you strike out on getting a new loan to pay off the defaulted loan balance, you still may be able to:

• Negotiate a payment plan or settlement with the creditor.

• File student loan bankruptcy to try and discharge the loans.

• Wait for the statute of limitations to expire (private student loans only).

Learn More: How to Get Rid of Private Student Loans

If the process of getting out of default sounds overwhelming, I’m here to help. I’ve helped people like you evaluate their repayment options to quickly get federal and private loans out of default.

Schedule a free 10-minute call with me today. We’ll work together to develop a plan that digs you out of default, stops wage garnishment, and helps clean up your credit score. That way you can meet your future goals.

UP NEXT: What Happens When Student Loans Default?