Can You Refinance Defaulted Student Loans?

According to the most recent data, over a million student loans enter default each year. How do you know if your loans are among them? 

It’s easy to confuse default with delinquency, but delinquency is the precursor to default, where your payments are between one and 90 days late. After 90 days of past-due payments, your lender may begin reporting the delinquent status to the three major credit bureaus.

Defaulting on federal student loans means your payments are at least 270 days late. Private student loans are less lenient and often default after 90 days of missed payments. Default is followed by debt collection attempts or even legal notices if you have private loans. 

In this guide:

• Can I refinance with defaulted student loans?
• Do I have other options to change the terms on defaulted student loans?
• Can I refinance student loans that were in default but aren’t anymore?

Can I refinance with defaulted student loans?

Refinancing defaulted student loans is a challenge, but it isn’t impossible.

Default does severe damage to your credit score. This is important because a refinance involves qualifying for a new loan through a private lender. Any lender will analyze multiple aspects of your credit and finances to determine whether it’s wise to approve you for that new loan. 

Nine months (or more) of missed payments tells lenders that trend is likely to continue if it approves you for a refinance loan. So approval will be difficult, especially without taking several preliminary actions. 

Federal student loan borrowers have many protections in place in the event of default. You have four options if you’re looking to refinance defaulted federal student loans. (Two options below are also available for private student loans.)

Rehabilitate your loan

By contacting your loan holder within 20 days of default, you might qualify for a loan rehabilitation program to bring your federal student loans out of default. For Direct Loans and Federal Family Education Loan (FFEL) program loans, this involves making nine consecutive on-time payments over 10 months. 

Your monthly payment under rehabilitation is calculated as 15% of your annual discretionary income divided by 12. 

If you complete the rehabilitation, the default will be removed from your credit report. You’ll even get back the eligibility for benefits including:

• Forbearance
• Deferment
• Income-based repayment plans
• Loan forgiveness
• Federal student aid

If you choose to rehabilitate your defaulted loan, you should know this is a one-time offer. If you default again, it won’t be there. 

Consolidate your loans

For federal student loans, you can consolidate (not refinance) your loans. With a Direct Consolidation Loan, you can lower your monthly payment, combine all your federal student loan payments and bring yourself out of default. 

Note: This option doesn’t apply to private loans. 

Before consolidating a defaulted loan, you must do one of the following:

1. Make three consecutive payments on the loan.
2. Enroll to make payments through an income-driven repayment (IDR) plan. 

Repay the loan in full

If most student loan borrowers had the funds to repay the loan in full, they wouldn’t be behind on payments. 

But in case of a windfall, whether you’re a federal or private borrower, lenders are more than willing to accept full repayment. 

Refinance with a cosigner

If you’re past the time frame for rehabilitation or can’t consolidate, you might consider refinancing your loan with the help of a family member or close friend. This option works for federal and private student loans. 

With the added creditworthiness of a cosigner, a private lender may be willing to extend a refinance loan. It’s important to stay current with the payments since your family member or friend’s credit is on the line too. 

The options to refinance a private student loan differ from those for federal borrowers. Private student loan servicers aren’t required by law to offer programs to help borrowers out of default. 

However, most private lenders offer some sort of program to help. To get the specifics, you’ll want to reach out to your loan holder to find more. Most times, it’s in the form of a hardship forbearance. 

Why are defaulted student loans difficult to refinance?

Refinancing a defaulted loan is difficult because of the credit standards to qualify for a new loan. Just one late payment can cause a dip in your credit score. 

When you’ve missed payments for months, resulting in default, it can take years to recover from the damage to your credit score. To qualify to refinance a student loan, lenders check several factors to ensure you can meet the new payment obligation:

• Payment history
• Credit score
• Annual and monthly income
• Debt-to-income ratio

These factors inform credit decisions and lower lenders’ risk of losing money. If your credit history shows a default, it tells lenders you may be unable to manage current or future payment obligations. 

You must get your credit score back in good standing before applying for any new loans, even a refinanced loan. Check out our guide to student loan default if you’re unsure how to do that.

Do I have other options to change the terms on defaulted student loans without refinancing?

To change the terms of a defaulted federal student loan, you could enroll in an IDR plan when you consolidate. 

Four federal IDR plans calculate your monthly payment as a percentage of your income while accounting for the size of your family:

• Revised Pay As You Earn (REPAYE) Plan
• Pay As You Earn (PAYE) Plan
• Income-Based Repayment (IBR) Plan 
• Income-Contingent Repayment (ICR) Plan 

IDR plans extend your repayment term to as much as 25 years. If your income is low enough, you might qualify for a $0 monthly payment. 

Because the above programs are only available for federal student loans, we recommend contacting private lenders to find out what options are available.

Can I refinance student loans that were in default but aren’t anymore?

Defaulting on a student loan creates challenges, but plenty of borrowers have bounced back. 

If you’ve consolidated your student loans or completed the rehabilitation process, you’ll have more options to lessen the financial burden. 

What if you’re out of default but still struggling with medical bills, loss of income, or other challenges? 

Refinance

Another option is to refinance your student loans. That means you’ll pay off your loans with a new loan through a private lender. 

The goal here is often a lower interest rate or lower payment to make the loan more manageable. 

Paying down several debts with a larger loan and a single monthly payment can make your life easier. If you’ve worked to maintain good credit, it can also lower your interest rate and save you thousands over the life of your loan.

When looking for a lender to help you tackle a student loan refinance, be choosy about which lender you use. Assess lenders based on factors such as:

• Income-based repayment plans
• Minimal fees (application, origination, loan closing)
• Average credit score for approvals
• Maximum loan amount 
• Favorable repayment terms
• Excellent customer service 

Don’t be afraid to shop around for lenders to find the best rates and terms.

Deferment

If your financial situation hasn’t improved, a rehabilitated federal loan lets you apply for payment deferment. 

A deferment can help in the short term, although interest still accumulates during this period.