Are you in default on your federal loan? Here’s how the new recycling rules change things.
A growing number of student loan borrowers are struggling to keep up with their payments; approximately 9 million federal mortgage borrowers were in default as of March 2026.
Under current rules, defaulting borrowers can refinance — get their credit back in good standing — just once. But thanks to the One Big Beautiful Bill Act (OBBBA), borrowers will be able to take advantage of student loan modification up to two times starting July 1, 2027.
What is student loan refinancing?
Defaulting on a federal loan can have serious consequences, including damaged credit, garnished wages, and the loss of your tax refund. Student loan rehabilitation is a program that allows borrowers who have defaulted on federal loans to recover and repay their current loans.
To get out of default, there are two main options: loan renewal and loan consolidation. With a loan modification, you agree to make nine voluntary, reasonable, and affordable payments within 20 days of the due date.
The repayment amount is determined by your loan officer or servicer, and can be 10% to 15% of your discretionary income (depending on when you took out your loan), divided by 12.
If you pay all nine payments in a 10-month period in a row, the loan renewal process is over, and you have no more payments. After that, you’re eligible for benefits like income-driven payment plans, and the default is removed from your credit report.
Related: How to get student loans without default
The pros and cons of refinancing a loan
Refinancing a loan can be helpful, but it’s not for everyone. Weigh the pros and cons before moving forward.
How to apply for loan repayment
To repay your loan, follow these steps:
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Contact your loan officer: For most auto loaners, your loan servicer is Auto Settlement Group. You can verify your loan servicer by logging into your StudentAid.gov account. Contact your operator to request a loan renewal.
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Mail or fax your application to: Your loan officer will send you a reinstatement request, and you’ll need to send copies of your tax returns by fax or mail.
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Wait for confirmation: The loan officer will send you a confirmation of the renewal request, and confirm your new payment amount and due date.
How the One Big Good Bill affects loan refinancing
President Donald Trump’s signature bill made major changes to the federal student loan program, including updates to loan repayment rules. There are two main changes that come into effect from 1 July 2027:
1. Changed the maximum usage
Previously, you could repay your loan only once. If you successfully fixed your loan before you defaulted a second time, you could not use the repayment plan again.
But OBBB changed this, allowing borrowers to take advantage of the opportunity to repay the loan twice. The new maximum repayment limit will apply to federal Direct, Federal Family Education Loan (FFEL), and Perkins Loans.
2. Set a new minimum payment
In the past, your loan payment at the time of adjustment could be as low as $5. OBBBA instituted a new fee: Effective July 1, 2027, the new minimum fee is $10.
Related: 8 things borrowers should consider before July 1
Renewal versus integration
Another way to handle federal student loans is to consolidate your debt with a Direct Consolidation Loan. It’s a quick process, but there are important differences to keep in mind:
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When you consolidate your loan, the accrued interest is added to the principal, and you will be charged interest on the new, higher balance.
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You must commit to a new payment plan when you consolidate your mortgage.
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Your defaulted loan stays on your credit report.
Default borrowers still have the option of consolidating their student loans, but there are different trade-offs. See what happens if you consolidate your loan after July 1, 2026.
How to manage a default loan today
If you have a loan default, contact your loan officer immediately to discuss your options. Credit restructuring may be the best option if your goal is to eliminate defaults on your credit.
Once you’ve completed the automatic adjustment process, follow these steps to keep your student loan payments on track:
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Sign up for a new payment plan that gives you a payment you can afford
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Sign up for automatic payments to avoid accidentally missing another payment (and qualify for an interest rate discount).
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Re-verify your income and family size every year to ensure you stay in the payment plan you chose.
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If you experience financial problems, access your service before you miss a payment.
Loan renewal FAQ
How often can I repay a federal student loan?
Currently, borrowers can renew their federal loan only once. But from 1 July 2027, borrowers will be allowed to repay the loan twice.
Does student loan renewal remove defaults from my credit report?
Once you make the nine required payments within 10 consecutive months, the default will be removed from your credit report. However, your late payments before default will still affect your credit.
How long does a student loan renewal take?
The student loan refinancing process takes nine monthly payments over 10 months, so you don’t miss a beat in less than a year.
Is loan restructuring better than loan consolidation?
Whether a loan restructuring is better than a consolidation depends on your goals. Recovery takes a long time, but it removes the bad credit from your credit report. In contrast, consolidation is quick, but defaults remain on your credit report.
Read more: Student loan FAQ: Everything borrowers ask about refinancing
