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How to Get Student Loans Out of Default: 4 Key Ways

Defaulting on student loans can feel stressful, but there are plenty of ways to take action and improve your financial situation.

July 14, 2022

No borrower wants to default on their loan, but it happens. The average student loan balance is almost $29,000. If you’ve fallen behind and you’re wondering how to get student loans out of default, there’s a light at the end of the tunnel. You need to choose a plan of action and stick to it.

To help you get there, we’ll outline:

  • How defaulting on student loans works

  • The options available to you if you default 

  • A few ways to avoid defaulting altogether in the future

How does defaulting on student loans work?

You can default on any debt, meaning you stop making payments, failing to fulfill your part of the loan agreement. Student loans are no exception.

Usually, you won’t go into default as soon as you miss a payment (although this can happen in some cases). Instead, your loan will be declared “delinquent.” A loan servicer typically notifies credit bureaus of delinquency after 90 days, which can hurt your credit score. Continued delinquency leads to default.

However, the exact process varies depending on the type of student loans you have.

Private vs. federal student loans

There are two main types of student loans: federal student loans and private student loans. 

In the case of federal student loans, you’ll default if you fail to make payments for 270 days if you have a William D. Ford Federal Direct Loan or a Federal Family Education Loan. In the case of Federal Perkins loans, you may default immediately if you miss the due date — meaning you’ll skip the delinquency stage entirely.

There’s more variation between private student loans, so read your promissory note carefully. In general, missing payments for three consecutive months is a common baseline. 

Your lender will usually contact you to let you know if you’re in default. If you have any doubt, you can check by:

  • Contacting your loan servicer or school

  • Logging into your My Federal Student Aid account (in the case of federal loans) 

  • Checking your credit report


What to expect from student loan default

Regardless of whether you have federal or private student loan debt, you can expect roughly the same thing once you fall into default.

In most cases, if you have a private student loan, your lender will pass your defaulted loan onto a collection agency (although some private lenders may handle the collections themselves).

Defaulted federal loans no longer go to private collection agencies; instead, the Education Department’s Default Resolution Group handles collections. 

In both cases, you’ll face collection costs that can be worth 25% of your loan principal and interest.

There are more potential consequences of defaulting, including: 

  • Wage garnishment (when your employer withholds money) 

  • Seized tax refunds

  • Withheld Social Security checks

  • Lost eligibility for financial aid programs

  • Lawsuits 

  • Withheld academic transcripts

  • Suspension of professional licenses

Plus, defaulting damages your credit score, and the information generally stays on your credit report for seven years

A note on students loan defaults during COVID-19

It’s worth pointing out the slight change to the process outlined above during the pandemic. The U.S. Department of Education passed a coronavirus relief bill, which temporarily paused loan payments (making it impossible to default) and stopped collections for loans already in default. This only applied to federal student loans.

This measure is set to end on August 31, 2022, making it the perfect time to get back on track and learn how to get student loans out of default once and for all.

How to get student loans out of default

Having a loan in default might feel overwhelming, but you can minimize the negative consequences by opting for one of the paths below.


The simplest way to get out of default is to make a payment worth your full loan balance. Admittedly, those defaulting in the first place are unlikely to be in a position to do so.

Yet if you’re lucky enough to have suddenly found the funds, consider negotiating a debt settlement, which allows you to pay the loan off for less than what you owe. Lenders are often willing to agree to a settlement because they’d rather receive something than nothing.

This can be a good option for private student loans since other options are limited. However, resist the temptation to use a credit card or other debt to get out of default, as this could result in more debt.

Loan rehabilitation

If you have federal student loans, rehabilitation is another option. It lowers your monthly payments and helps to improve your credit score by removing the default from your credit report. 

With rehabilitation, your payments are calculated based on your discretionary income, defined as the relevant poverty guideline in your area multiplied by 1.5, and then subtracted from your income. Your monthly payments will be 15% of your discretionary income (or sometimes even less).

However, you only get one shot at student loan rehabilitation, so do your best not to miss any payments.


Loan consolidation usually gives you access to a new loan, making it a good option for those who want a better interest rate or combine multiple loans. However, it can also be a way to get out of default if you have federal student loans. 

The Direct Consolidation Loan is open to student loan borrowers who make three monthly payments on time before joining the program.

Then, you’ll be able to continue to make payments under a repayment plan to make your payments more manageable. 


You may be able to discharge your student loan debt by declaring bankruptcy, even in the case of federal loans. However, it tends to be more difficult than other debt types.

Plus, there are long-term consequences. The bankruptcy will remain on your credit report for at least seven years, which can lower your credit score and make it harder for you to access credit in the future. 

Therefore, the other options above will likely be more desirable for most people.

How can you avoid defaulting on student loans?

In the world of traditional borrowing, there’s little you can do to stop yourself from defaulting other than paying, but student loan borrowers have a few more options at their disposal.

The options below are for those who want to avoid defaulting in the first place or want to ensure they don’t default again.

Repayment plans

If you have a federal loan, you may be eligible for an income-driven repayment plan, which lowers your monthly payments by how much you earn. Then, if you continually make your student loan payments for long enough, you’ll be eligible for loan forgiveness if you haven’t paid your balance in full after 20 or 25 years.

There are four options, which each work in slightly different ways:

  • Revised Pay As You Earn Repayment Plan (REPAYE Plan)

  • Pay As You Earn Repayment Plan (PAYE Plan)

  • Income-Based Repayment Plan (IBR Plan)

  • Income-Contingent Repayment Plan (ICR Plan)

You can determine how much you’d pay each month using an income-driven repayment plan calculator.

As mentioned earlier, if you take out a Direct Consolidation Loan, you’ll enroll in one of these plans.

Private lenders may also be willing to put you on an alternative plan that lowers your monthly payments to make them more affordable. Still, it won’t make you eligible for any forgiveness programs.


If you’re going through tough times, such as being fired from your job, you may be able to obtain a deferment, which reduces or pauses your payments temporarily for up to three years.

While your loan is deferred, you won’t have to pay interest if you have a Direct Subsidized Loan or Federal Perkins Loan.


Forbearance is similar to deferment, as both processes reduce or pause loan payments. However, unlike deferment, you’ll still accrue interest regardless of your loan type.

Also, you don’t need specific circumstances to be eligible for forbearance, meaning private lenders may be more likely to offer it and it may be easier to obtain.

Say goodbye to default

When it comes to how to get student loans out of default, there are various options, including settlement, rehabilitation or consolidation. Best of all, you can avoid a default in the first place by opting for a repayment plan, deferment or forbearance.

If you’re also struggling with credit card debt, consider trying the Tally† credit card repayment app to get it under control. By combining your higher-interest credit card debt into a lower-interest line of credit, the app makes it easier for you to manage your finances and pay down your balances.

To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.