Refinance Defaulted Student Loans - All You Need To Know

Defaulted on your Student Loans? Don't worry, here's how you can handle defaulted student loans. And yes, Refinancing can be your option.

Updated by Akshata Patil on 30th October 2019

A student loan gets into default when you fail to make the repayments as per your contract or promissory note. There are other reasons for your loan to default such as- you have not paid the payments for too long, you have violated the terms and conditions of the loan or you have committed fraud while enrolling for the student loan. 

But the major reason for the student loans to get default is non-payment for a long period. This default time varies depending on the type of loan. 

Table of Contents

Private student loan default 

First, you fall into delinquency for your private student loan and then you default. It means that your loan becomes delinquent when you miss a payment or three payments. Your loan will be delinquent for 90 days or 120 days, after this period your private lender will report the missed payments to the three major credit bureaus.

Private student loans go into default sooner than federal loans.

Note: The period for delinquency differs from lender to lender. On a general scale, the delinquency period may be from 90 to 120 days. Check with your lender or the promissory note that you have signed to know the specific period for delinquency.

Non-payment of loan → Delinquency → exceeds 90-120 days → Default


Federal student loan default 

You default on your federal student loan after failing to make payments for 270 days i.e nine months. Federal Perkins loan default immediately on nonpayment. The period for defaulting depends on the type of loan you have. You must know that once you default on a federal loan you will lose your eligibility for Public Service Loan Forgiveness.

If you have trouble making payments then you need to contact your loan lender as soon as possible. You can request a postponement of payments to be made or speak to your servicer for any other form of temporary relief.

Once in default, you will get the opportunity to experience the power of the government through its collection tactics. Which will be talked about in detail below. 

Non-payment of loan → Delinquency → exceeds 270 days → Default


Read more on student loan repayment


How to Refinance Defaulted Private Student Loans?

Unlike federal loans, private student loans do not have any specific recovery options. As the loan contract, terms and conditions differ from service lender to lender. It is the same situation for the recovery options provided.

You can contact your lender and ask for the available remedies. Negotiate with your lender and come to a student loan settlement for less than what you owe.

The private student loan market is not standard unlike the federal market and is complicated and unpredictable. You can opt for a lawyer who is specialized in student loans, understands the system and your rights.


How to Refinance Defaulted Federal Student Loans?

Refinancing your defaulted student loan is difficult but not impossible. To refinance your student loan you need to prove the lender that you have a good and stable income and a good credit history. But if you had a great income and a good credit score do you think you would default on your loans? Of course not. 

The only last option that you’re left with to qualify for refinancing is a cosigner. The lender may not accept you but will be ready to accept a cosigner with a good and stable income with a good credit score. The co-signer must meet the other eligibility criteria to qualify for refinancing like he must be a U.S citizen, must not have any defaults on his name and so on.


Read more student loan refinancing


Alternatives for Refinancing Federal Student Loans

When you don’t qualify for refinancing you can ask your parents, relatives or friends to be your cosigner if they qualify. In case, you don’t want to risk harming your co-signer's credit history and score or want to handle the loan independently you can go for the below alternatives.

  1. Loan Rehabilitation

  2. Loan Consolidation

  3. Repayment Option

1. Loan Rehabilitation

One way to get out of default for your federal student loan is loan rehabilitation. To qualify for rehabilitation within 10 consecutive months you have to make nine monthly payments.

Generally, the monthly payment is determined on 15% of your annual discretionary income. 

In case, you can't afford the above mentioned monthly payments you can ask for alternative monthly payments. This alternative monthly payment will be calculated on your net monthly income that you are left with after your monthly expenses are deducted. For which you have to provide necessary documents such as your monthly income and expenses and a completed Loan Rehabilitation: Income and Expense Information form.

If you want to improve your credit report loan rehabilitation is the best option.

Note: you can rehabilitate your student loans only once in a lifetime. Student loan rehabilitation is the only option that removes the default remark from your credit report. But that does not erase your previous late payments from your report. 

2. Loan Consolidation 

You can consolidate your defaulted student loans into a new loan and repay it as a new loan. You can qualify for loan consolidation by doing either of the following-

  • You can make three full, on-time, consecutive monthly payments on the defaulted loan

  • Consolidate all your loans into one new loan and repay your new loan under an income-driven repayment plan.

Compared to loan rehabilitation, loan consolidation is the quickest way to get rid of default. But consolidation is not the quickest way to get out of default, repayment is. Let us read how it is the quickest remedy.

If you want to resolve the default quickly, you can go for loan consolidation. 

Note: Consolidation does not remove the default remark from your credit report.

3. Repayment Option

When you default on your student loans, the entire amount becomes due. Under repayment, you can completely pay back your liable amount at once and become debt-free. But in case you are incapable of repaying the entire amount, you can negotiate with your lender and come up with student loan settlement whose amount will be less than what you owe. 

If you want to get rid of your debt at one pay, repayment is your chance.

Caution!

Dealing with the default student loans must be very tricky and painful but do not turn to personal loans to repay these default loans as they have higher interest rates than student loans.


Consequences of Defaulting on Student Loans

Going into default is not a good sign and has a long time consequence. It not only damages your credit score but also affects your working life in the following ways:

  • Your wages, tax refund and Social Security benefits will be garnished

  • You will lose your eligibility for deferment, forbearance and other repayment plans

  • You will lose your eligibility for future federal financial aid

  • You may be demanded for immediate repayment of your balance and interest

  • Be an obstacle preventing you from buying or selling real estate

  • You will be charged for the costs that come along with the collection process

  • Your credit report will be impacted negatively for 7 years

  • You will owe more money including late fees and interest amount

Beyond financial and professional life it also impacts personal life emotionally:

  • Due to failure of payment, you will develop a sense of disappointment 

  • It will spoil your relationship with cosigner since it affects their credit score

  • Relationship stress with spouse and parents

  • It affects your mental stability

Caution!

Dealing with the default student loans must be very tricky and painful but do not turn to personal loans to repay these default loans as they have higher interest rates than student loans.