If you’re one of the five million borrowers who have defaulted on their federal student loans, the Direct Consolidation Loan program can get you back on track. To qualify, you must make three consecutive payments and sign up for an income-driven repayment plan, and once approved, your defaulted federal student loans get rolled into one.

A major benefit is you get a low, affordable monthly loan payment, but consolidation isn’t the only way to get your student loans out of default.

Can I consolidate a defaulted student loan?

If you have federal student loans, you’re officially in default if you haven’t made your scheduled student loan payments in 270 days or missed a Perkins Loan payment. At that point, your entire balance plus interest and fees will be due, and your loan servicer may also tack collection fees on top of that.

Fortunately, there are a couple of ways to get out of default: You can rehabilitate your federal student loans or consolidate them through the Direct Consolidation Loan program. You may consolidate any defaulted federal student loan, with one exception. Defaulted Direct Consolidation Loans may be consolidated again only if you add another loan to the consolidation.

This applies only to federal student loans; private student loans cannot be consolidated in the same way. The specific rules for getting out of default depend on your lender.

Consolidating your defaulted federal student loans is a relatively straightforward process, which makes it a good option for getting out of default.

Pros of consolidating

  • You can get on a more affordable repayment plan.
  • Your student debt will no longer be due in full.
  • You can stop the default from doing further damage to your credit score.
  • You may be able to reduce your collection costs.
  • You may become eligible for loan forgiveness

Cons of consolidating

  • Unlike with rehabilitation, the default will remain on your credit reports after you consolidate them.
  • It may not help if you were previously on an income-driven repayment plan.
  • You may still owe collection costs.
  • Outstanding interest and fees will be capitalized and added to your student loan balance.
  • Certain loan benefits may no longer be available

How to consolidate defaulted student loans

If you have federal student loans, you’ll apply for loan consolidation through the Federal Student Aid website. Before you begin, though, you must meet one of two requirements (though you can choose both):

  • Agree to pay your new loan under an income-driven repayment plan.
  • Make three consecutive, voluntary, on-time, full monthly payments on the defaulted loan.

While the first option is much easier, it’s also more limiting. By signing up for an income-driven repayment plan, your repayment period will be either 20 or 25 years. By making the three full payments, you’ll be able to choose among a wider variety of repayment options.

Additionally, while consolidating your federal loans gets you out of default, you’ll still be on the hook for collection fees. If you choose the income-driven repayment plan option, you’ll pay $150 or up to 18.5 percent of the principal and interest that’s still outstanding. If you make the three payments, you’ll pay 2.8 percent of the outstanding principal and interest.

How long does it take to consolidate defaulted student loans?

The application process to consolidate defaulted federal student loans may take only a few minutes, but it can take between four and six weeks to complete the consolidation process. And if you want to make three payments before you start the process, you’ll need to tack on an extra three months to your timeline.

While you’re waiting for the consolidation process to complete, it’s important to keep making on-time payments to show that you’re serious about avoiding default again in the future. This will also ensure you’ll stop being hit with late payment fees.

How consolidating defaulted student loans affects your credit

When you consolidate, you won’t have to worry about a hard inquiry on your credit report or any other major damage to your credit. However, unlike with rehabilitation, consolidating your defaulted federal loans won’t take the default off of your credit reports, so the damage that’s already been done will remain. The default and late payments will remain on your credit reports for seven years from your first missed payment.

Additionally, when you consolidate your federal loans, it creates a new loan account, which can impact your average age of accounts. This likely won’t do a lot of damage to your credit score, though, and it’s more important to focus on making on-time payments going forward.

The bottom line

Consolidating defaulted federal student loans can be a good way to avoid having to immediately pay the full balance of what you owe, and it can also stop your credit score from taking any further damage from your missed payments.

However, it’s important to consider all of your options, particularly if rehabilitation is on the table. While it requires more work on your part, rehabilitation can remove some of the damage done to your credit score by the default.

If you do decide to move forward with consolidation, consider whether you can make three monthly payments before consolidating or whether you need to enroll in an income-driven repayment plan; making the three monthly payments beforehand will save you money and give you more flexibility with your payments, but an income-driven repayment plan may be best if you need lower payments moving forward.

Frequently asked questions

  • Student loan consolidation will get your loan out of default, but the default, as well as any missed or late payments, may remain on your credit report for up to seven years.
  • The process of consolidating a defaulted student loan can take between four and six to complete once the application is received.
  • Consolidating defaulted student loans may have a slight impact on your credit since it is a new account. When new accounts are added to your credit report, it lowers the age of your account, but it also adds to the credit mix factor, which shows creditors and lenders you can manage different types of debt.
  • Student loan consolidation does not have a minimum credit score requirement. To qualify, borrowers must make three consecutive payments on their defaulted loans and sign up for an income-driven repayment plan.