Most federal student loan repayment options require that the borrower be out of default before being eligible. One option for getting a borrower out of default is through loan “consolidation”. Loan consolidation allows the borrower to pay off one or more federal student loans with a brand-new loan which consolidates two or more loans together.
To consolidate a defaulted federal student loan into a new Direct Consolidation Loan, the borrower must either:
- Agree to repay the new Direct Consolidation Loan under an income-driven repayment plan, or
- Make three consecutive, voluntary, on-time, full monthly payments on the defaulted loan before it is consolidated.
If the borrower chooses to consolidate under option 2, making “three payments on the defaulted loan before consolidation”, the required payment amount will be determined by the loan holder, but cannot be more than what is reasonable and affordable based on the total financial circumstances of the borrower.
There are special considerations if reconsolidating an existing Direct Consolidation Loan or Federal (FFEL) Consolidation Loan that is in default:
- To reconsolidate a defaulted Direct Consolidation Loan, the borrower must also include at least one other eligible loan in the consolidation. If the borrower has no other eligible loans that can be included in the consolidation, the borrower cannot get out of default by consolidating a defaulted Direct Consolidation Loan. The only remaining options are full repayment or loan rehabilitation.
- The borrower may reconsolidate a defaulted FFEL Consolidation Loan without including any additional loans in the consolidation, but only if the borrower agrees to repay the new Direct Consolidation Loan under an income-driven repayment plan.
Additionally, if the borrower wants to consolidate a defaulted loan that is being collected through an administrative wage garnishment, or that is being collected through a court order after an entry of a judgment, the borrower cannot consolidate the loan unless the wage garnishment order has been lifted or the judgment has been vacated.
If the borrower chooses to repay the new Direct Consolidation Loan under an income-driven plan, the borrower must select one of the available income-driven repayment plans at the time of application for the consolidation loan and provide income documentation.
If the borrower wants to consolidate a defaulted PLUS loan that was obtained as a parent to pay for their child’s education, the only income-driven plan available is the Income-Contingent Repayment Plan (ICR).
If the borrower chooses to make three consecutive, voluntary, on-time, full monthly payments on the defaulted loan before consolidation, the borrower may repay the new Direct Consolidation Loan under any eligible repayment plan.
Why Consolidate?
When consolidated, the defaulted loan is paid off and replaced with a new loan – the defaulted status will be removed from the loan, and collection of payments through wage garnishment or Treasury offset will stop. The borrower regains eligibility for benefits and repayment plans that were unavailable during default such as deferment, forbearance, choice of repayment plans, and loan forgiveness.
Downside to Rehabilitation
The debt collector will recover a 18.5%. The process may take 30-90 days.