Getting out of student loan default: rehabilitation vs. consolidation

A federal Direct Loan goes into default when a payment has gone unpaid for 270 days, under the Education Department’s definition in 34 CFR 685.102. By then, your credit report has usually shown months of late payments, and the default notation lands on top of them.

Default is one of the few credit problems with a built-in exit that can change what your report says. Most negative items just age. A defaulted federal loan can be rehabilitated, and when that’s done, the law tells the government to ask the bureaus to remove the default record. That makes the choice of exit worth getting right.

Three ways out of default

The rules come from 34 CFR 685.211(f) for rehabilitation and 685.220(d) for consolidation. Payments taken through garnishment or a tax refund offset don’t count as voluntary, according to the definitions in 685.102.

How the rehabilitation payment is set

The starting offer is the amount you’d pay under an eligible income-driven repayment plan, with a minimum of $5 for now and $10 on or after July 1, 2027. If that number doesn’t work, you can ask for a recalculation based on your income, family size and reasonable expenses such as food, housing and utilities. Bring documents. A number that looks small on paper can still be too much if your rent ate the rest.

For instance, if your income-driven calculation comes out to $0, the rehabilitation payment is the $5 minimum. The math on that example:

• Payments needed: 9
• Total paid during rehabilitation: 9 x $5 = $45
• Window: 10 consecutive months, so you can miss one month and still finish on time
• Each payment must arrive within 20 days of its due date

The tenth month is your only cushion. Miss two payments inside the same 10-month stretch and you can’t reach nine in that window. Set up automatic payments if the servicer offers them, and keep proof of every payment.

If your wages are being garnished, the regulation says garnishment continues until you’ve made five qualifying rehabilitation payments. After that, the Department generally rescinds the order. Plan your budget for both at once in those first months.

What rehabilitation removes, and what it doesn’t

After rehabilitation, the regulation says the Department instructs the credit bureaus “to remove the default from the borrower’s credit history,” and the statute (20 U.S.C. 1078-6) carries the same requirement.

The removal covers the default. It doesn’t cover the late payments reported during the months before the loan defaulted. Expect those to stay on the account until they age off, which for most negative information is seven years. The loan itself goes back to normal repayment, and every on-time payment afterward adds positive history.

Consolidation works differently. It pays off the defaulted loan with a new one, so you’re out of default, but the rule that requires asking the bureaus to remove the default record is tied to rehabilitation. If clearing the default notation matters to you, for example because you’re planning a mortgage application in a year or two, rehabilitation is the route built for that. If collections are already hitting you and you need out fast, consolidation can be the more practical choice.

For the late payments that come before a default, see our guide to student loan delinquency and your credit.

Where collections stand in 2026

Collections on defaulted federal loans were paused early in the pandemic and resumed in May 2025, as the Georgia Recorder reported. On January 16, 2026, the Education Department announced a temporary delay of both administrative wage garnishment and the Treasury Offset Program, which takes tax refunds and certain federal payments. The Department gave no end date and said the pause would let it put repayment changes from the 2025 budget law in place, including a new income-driven plan available starting July 1, 2026.

In May 2026, The College Investor reported that wage garnishment was expected to restart in the fall of 2026, after a window for borrowers to enroll in the new plan. We couldn’t find an official restart date from the Department as of October 11, 2026. If a garnishment or offset notice arrives, check it against your own federal student aid account and respond before any deadline it gives.

The pause doesn’t change your credit report. Defaulted loans are still reported as defaulted while collections are on hold, which the Department’s own announcement notes. The pause just gives you time to choose an exit before money is taken.

Changes coming July 1, 2027

Two changes from the 2025 law (Public Law 119-21) and the regulations that followed take effect July 1, 2027:

• A second rehabilitation. The statute’s limit of one rehabilitation per loan becomes two.
• A $10 minimum payment. The regulation’s minimum rises from $5 to $10.

Under the current regulation, a loan rehabilitated before July 1, 2027 can’t be rehabilitated again if it returns to default. How the new second chance applies to a loan you rehabilitate before that date isn’t spelled out plainly, so ask your loan holder before counting on it. The safer plan is to choose a repayment plan you can keep up after you’re out of default, because the nine rehabilitation payments are usually the easier part.

What to do this month

1. Log in to your federal student aid account and confirm which loans are in default and who holds them.
2. Decide between rehabilitation and consolidation using the table above. If you have a mortgage or other big application within two years, lean toward rehabilitation.
3. Ask for a rehabilitation agreement in writing, with the monthly amount. If it’s too high, ask for the income-and-expenses recalculation and send proof.
4. Make every payment within 20 days of the due date and save confirmations.
5. About 60 days after rehabilitation is complete, pull your reports from AnnualCreditReport.com and confirm the default notation is gone. If it isn’t, dispute it with your completion letter.
6. Then build around the loan: our rebuild plan from near 500 shows what to add once the loan is current.

Be wary of companies that charge to “get you out of default.” Rehabilitation and consolidation are free to apply for directly, and anyone who contacts you about a defaulted federal loan should be checked against the information in your own account. Our page on what debt collectors can and can’t do covers the basics of handling collection contacts.