Reader Question: What do I do if my loan is in default?

I have not made payments on my loans in a long time and now my loans are in default. When I contacted my servicer, I was told my loans had been transferred elsewhere. What is going on, and what can I do?

Tony in Wisconsin

Hi, Tony!

If you have not paid your loans in at least 270 days, your loans go into default. After approximately one year, your loans may be sent to a collection agency. The collection agency can exact many painful penalties for your inability to repay your loan such as add collection fees and garnish your tax returns and paychecks.

You may feel like the world is caving in on you and you have no options. But the good news is there are a few things you can do:

  1. Repay your loans: Once you have defaulted, your loans are considered due in full. If you have not made payments on your loans in almost a year, this is probably not an option.
  2. Rehab your loans: This is a very common thing to do. Make arrangements with the agency handling your loans to make nine payments over a set period, which is typically 10 months. You must send your payments within 20 days of the due date. Your loans can then be eligible again for things like forbearances, deferments and repayment plan changes, and may be sent back to a servicer.
  3. Consolidation: After a set number of voluntary payments — typically three — you can consolidate eligible defaulted and non-defaulted loans. However, your consolidated debt may include both interest and collection fees, and consolidation could result in an elevated balance. You are also forced into an Income-Driven plan as part of consolidation.

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