Attempting to Refinance Defaulted Student Loans — What to Know

A student loan moves into default status when you fail to make payments for an extended period. Default timelines vary depending on the type of loan you have. However, federal loans generally go into default if you don’t make payments for at least 270 days.

Federal student loan defaults were halted as a COVID-19 relief measure. Prior to the pandemic, 28 million borrowers were 271 days or more delinquent on their Direct Loans.

If your student loan is in default, you could face a slew of financial consequences. This might include owing your entire balance immediately or wage garnishment. Additionally, you could lose eligibility for federal benefits like loan forgiveness. Defaulting on your student loans also tanks your credit score, which can affect your finances for many years to come.

Fortunately, there are several ways to address your delinquency, which might include the option to refinance defaulted student loans. But this option is very limited, and it might not be the best course of action depending on your situation.

Here’s what you need to know about refinancing a defaulted student loan, and some alternative actions that can help you recover from missed payments.

Can you refinance a defaulted student loan?

If your student loan is in default or if it’s already been sent to collections, refinancing will be really difficult. Refinancing lenders require a good credit history, among other financial requirements. Your credit has likely taken a huge hit because of your defaulted loan.

But you might be able to refinance a defaulted student loan if your loan has been rehabilitated and you’ve worked to improve your credit score.

Even so, most lenders don’t offer the option to refinance defaulted student loans. However, a limited number of refinancing lenders will work with previously defaulted borrowers. But you’ll still need to meet their underwriting criteria.

If you don't qualify for student loan refinancing on your own, you might need to add a creditworthy cosigner. Be transparent about your situation as your cosigner will be responsible for your loan if history repeats itself.

Lenders that allow refinancing for a previously defaulted student loan

Here are a few private refinancing lenders that let borrowers refinance a student loan that was once in default. These lenders have great reputations among our readers.

• Earnest has flexible underwriting criteria that go beyond traditional financial data. This can be particularly beneficial for borrowers who have defaulted in the past.
• Credible allows you to fill out one application and receive offers from multiple lenders without extra legwork.
• Laurel Road is popular among students and professionals in the healthcare industry.

At the time of refinancing, the loan must not be in default status, and some lenders might require a specific number of years to have passed since the default. Additionally, each lender will have different credit history and eligibility requirements. Speak directly with the desired lender to determine your options.

Alternative options to refinancing your defaulted student loans

If you have a federal student loan in default, you can work to get your loan back in good standing.

Your first option is to pay your entire loan amount in full. However, most people don’t have the ability to make a huge lump sum payment. So, this isn’t a practical solution for most student loan borrowers.

This leaves two realistic options: student loan consolidation or loan rehabilitation.

Consolidate your defaulted student loan

Many borrowers often confuse consolidation with refinancing. But they’re two different student loan repayment strategies. Refinancing creates a new loan with a private lender, while consolidation lets you keep your loans with the U.S. Department of Education under a Direct Consolidation Loan.

To consolidate defaulted federal student loan debt, you must choose one of the following options:

1. Repay the new Direct Consolidation Loan under an income-driven repayment plan.
2. Make three consecutive, on-time payments on the defaulted loan before you consolidate.

The loan consolidation timeline is typically 30 to 45 business days without processing delays. This makes it a desirable choice for borrowers who want to get out of default as fast as possible.

Be aware that consolidating your loans resets the student loan forgiveness clock. This can be damaging for borrowers who have accumulated payment credit toward Public Service Loan Forgiveness (PSLF).

Enter loan rehabilitation

The loan rehabilitation program is a longer process. But it can significantly benefit your credit because any reference to the defaulted loan is removed from your credit report. However, any late payments that were reported prior to default will remain.

You’ll also regain eligibility for federal benefits, including deferment, forbearance and loan forgiveness.

To enter loan rehabilitation for your Direct Loan or Federal Family Education Loan (FFEL), you must agree to make nine affordable, on-time payments within ten consecutive months.

Your loan holder determines what a reasonable monthly payment is based on 15% of your discretionary income. If you can’t afford this monthly payment, you can request for your loan holder to calculate an alternative amount that factors in your monthly expenses.

Keep in mind that loan rehabilitation is a one-time opportunity, so you can’t use this option if you default again on your rehabilitated loan.

Options for private student loans

Private student loans don’t necessarily follow the 270-day default benchmark that federal loans carry. According to the Consumer Financial Protection Bureau, private student loans can enter default status after just three missed monthly payments or 120 days.

There are no standard recovery options for private student loans because each loan’s repayment terms and conditions vary from lender to lender.

For borrowers with a defaulted private student loan, you’ll need to contact your lender or loan servicer to determine your options for rehabilitating your loan. You might be able to claim an economic hardship forbearance or negotiate another solution that benefits both parties.

Additional considerations before refinancing your defaulted student loan

Even if you can refinance your previously defaulted student loan, there might be a better option for your given situation.

For example, if you’re dealing with private student debt, some lenders will allow you to settle your outstanding loan balance for less than you owe. Why would they do this?

There’s a statute of limitations for how long a private lender can sue you for repayment of your loan. So, a private lender might be more willing to negotiate your outstanding balance as this timeline dwindles down. But each state has its own rules, so it’s best to consult a student loan lawyer if you want to pursue this route.

Another potential option is filing for bankruptcy, but getting your student loans discharged can be challenging. However, if you have other forms of significant debt, bankruptcy could give you breathing room to hit reset on your finances, putting you in a better position to manage your student loan payments.

If you don’t have a path to settling or discharging your defaulted student loan, then refinancing might be a viable option for your student debt.