by Aidan Kang, CFA
Senior Writer
UPDATED: August 03, 2021

Are you in the process of going back to school only to find out that you cannot qualify for further financial aid because of a previous student loan that is in default? This can be a very frustrating experience especially if you currently do not have the required funds to pay for your tuition and at the same time, you are not in the position to continue paying your old student debts.

This does not mean, however, that you cannot go to school anymore. You can still go back to school as long as you get your student loan out of default. There are different ways that you can do this. In this article, we will discuss the different routes that you could take so you can go back to school.

How to Get a Student Loan Out of Default to Go Back to School?

Do you know that 1 in 4 Americans defaulted on their student loans? If you are a part of this statistic, don’t worry because there are ways on how to get student loans out of default so you can go back to school. You have to understand, however, that these options may only be possible if you have a federal student loan and not a private student loan. 

What is the difference between the two?

Most of the student loans in the United States are federal student loans, which means they are offered by the government. Federal student loans are typically better than private loans because they have lower interest rates, repayment options, and benefits like deferment, forbearance, and loan forgiveness. If you miss payment for 270 days, your loan will be in default.

On the other hand, private student loans are offered by private lenders. Unlike federal student loans, private student loans will typically have higher interest rates and your loan could be in default after 120 days or 4 months of missed payments. Most private lenders do not have programs that will get you out of default but some may be willing to refinance your loan. If you are looking for defaulted student loan assistance for private loans, you have to check with your private lender independently.

 If you have a federal student loan and you are planning to borrow again from the government to finance your school’s tuition fees when you go back to school, there are the three options that you have.

1. Full Repayment

This is the first and quite obvious option to get out of default. When your loan goes into default, your full loan amount becomes due immediately. However, your ability to pay the loan amount will depend on how much money you still owe. If you do not have the money to pay the entire amount or you cannot borrow interest-free from your family, this will not be possible for you.

Of course, you can always take out other types of loans to pay for your student loans but that is a big mistake. Don’t get a personal loan from a private lender or worse, a credit card cash advance to finance the payment of your student loan. This is because the interests and fees from private lenders are usually much higher and it will most likely bury you further in debt.

2. Loan Consolidation

You might be wondering: Can I consolidate defaulted student loans? 

Yes, you can! One of the quickest ways to get your student loan out of default without having to shell out a large amount of money is to go for loan consolidation. This process will only take 30 to 90 days to get your loan out of default. This makes it a good option if you’re thinking to go back to school immediately.

What you need to do is to consolidate your defaulted federal student loan into what is called a Direct Consolidation Loan. There are two ways to go about this process.

  1. You must agree that you will pay the new Direct Consolidation Loan under an income-driven repayment plan, which is a repayment program that allows you to pay your monthly student loan at an amount based on your income and family size, rather than the loan amount. Because it is based on your current financial situation, your payment could be as low as $0 per month.
  2. You must make 3 consecutive, on-time, full monthly payments on the defaulted loan before you consolidate it. This amount should be voluntary payments because automatic wage garnishment will not count. 

If you choose this option, the amount you’ll have to pay will be determined by your loan holder. However, this amount cannot be more than what is affordable or reasonable based on your overall financial status.

If I Consolidate My Student Loans, Can I Go Back to School?

Yes. When you consolidate defaulted student loans, your student loan will return to good standing. It is no longer in default. This means that you are once again eligible for federal benefits including receiving further financial aid.

Will Consolidating Student Loans Hurt My Credit?

Consolidating your loans in itself will not hurt your credit. It is actually a way for you to manage your debts better and if you make regular payments, it could help repair and rebuild your credit score.

What will hurt your credit score is if you have several missed payments and if your student loan defaulted. Unlike a loan rehabilitation, a student loan consolidation will not remove the default status in your credit report. This information will stay in your credit report even after you already consolidated the loan and are making consistent payments.

3. Loan Rehabilitation

If you are concerned about your credit score, you can go for student loan rehabilitation to get out of default. This is a repayment program wherein you can rehabilitate your defaulted student loan for a period of 10 consecutive months by making 9 payments. After completing your required payments, your loan will be out of default and at the same time, the default status will be removed from your credit report. Only the late payments reported by your loan holder before your student loan went into default will appear in your credit history.

However, the good news is you don’t have to wait for 9 or 10 months to get back to school. You can be eligible for additional federal student aid after making 6 monthly payments under the loan rehabilitation plan. This means you can go back to school in 6 to 7 months. Keep in mind that you still need to pay the remaining three payments to get your student loan out of default.

A loan rehabilitation is only a one-time deal, meaning you can only rehabilitate your loan once. If you default on your loan again after the loan rehabilitation program, you may need to find other options such as loan consolidation.

How Much Will My Monthly Payment be During Loan Rehabilitation?

The amount that you will pay during this 10-month period will be based on your current capacity to pay and will be determined by the loan holder. This monthly payment amount will be equal to only 15% your discretionary income divided by 12. Discretionary income is calculated by taking the difference between your annual income and 150% of the poverty guideline for your family size and state of residence. According to the Student Aid website, your monthly payment under a loan rehabilitation program could be as low as $5 depending on your income.

How Long Does it Take to Get Student Loans Out of Default Before I Can Go Back to School?

The length of time your student loan will get out of default will depend on the repayment program that you choose. Paying in full will immediately remove it out of default. If you go for a loan consolidation, this will take 30 to 90 days.

While the entire process of a loan rehabilitation takes 10 months, you only need to make 6 monthly payments to become eligible for further financial aid, which will allow you to go back to school in 6 months.

What If I Can’t Make the Student Loan Payments After a Loan Consolidation or Rehabilitation?

A common problem faced by students who have recently consolidated or rehabilitated their loan is meeting the monthly payments while they are still in school. Many borrowers who go back to school can only get part-time jobs which may not be enough to finance their living expenses and cover their loan payments.

If you feel that you are having a difficult time meeting your monthly loan payments, do not just ignore them and let them go into default again. Because you already have rehabilitated or consolidated your loan, it is now out of default. This makes you eligible for loan deferment

A loan deferment allows you to postpone your monthly payments towards your student loan but not everyone is eligible for loan deferment. 

Some of the considerations that will get you approved for a student loan deferment are the following:

  • You are attending school at least half the time
  • You’re unemployed
  • You are receiving state or federal assistance. Ex: Temporary Assistance for Needy Families or Supplemental Nutrition Assistance Program
  • Your monthly income is less than 150% of your state’s poverty guidelines.
  • You are on active military duty or in the Peace Corps.
  • You are undergoing cancer treatment

When you get approved for a loan deferment, you can stop paying the loan for up to three years. This does not mean, however, that your loan is forgiven. Your loan does not go away yet and you still have to pay the loan after the deferment period.

Why Do You Need to Get a Student Loan Out of Default to Go Back to School?

Many students pay for their college tuition by getting a federal student loan from the US government. The monthly payments will only start six months after they leave school, like graduating or dropping out.

After the six-month grace period, the borrowers have to meet the monthly payments for a federal student loan or else the loan will be considered delinquent after 90 days of non-payment and will go into default after 270 days of non-payment.

If you have a defaulted federal student loan, this makes you ineligible to apply for additional federal student financial aid in case you decide to go back to school to finish your undergraduate program or enroll in a Graduate program. Not having a source of funds can be a definite roadblock if you want to go back to school.

Do Student Loans Affect Buying a House?

Defaulting on a student loan can result in various consequences. Not only will it affect your credit score, it may also have a negative impact when you’re applying for an FHA or VA mortgage when you want to buy a house.

The Best Way to Get Your Student Loan Out of Default When Going Back to School

Depending on your individual circumstances, you can select between rehabilitating and consolidating your loan. If you are more concerned about doing it quickly, then loan consolidation may be better for you. If you are not planning to go to school within the next six month, the better option is to go first for a loan rehabilitation as this has an added benefit on your credit report.

If you are struggling with your student loan payments and went into default, remember that there is still a way out. The process to get out of your student loan debt may not be easy but it can be done.