Default on a federal student loan is a federal debt problem first and a credit problem second. HUD Handbook 4000.1 prohibits lenders from processing an FHA application for a borrower with delinquent federal non-tax debt, and it requires every borrower to be checked against CAIVRS, the Credit Alert Verification Reporting System, a federal database of people behind on government debts. The fix is to get the loan out of default, and the Department of Education offers three ways to do it.
Where each program stands
| Program | Federal student loan in default |
|---|---|
| FHA | Not eligible until the debt is resolved with the agency owed |
| USDA | Not eligible while delinquent federal non-tax debt is present. A clear CAIVRS result is the only acceptable one |
| VA | Federal debts must be paid in full or under a written repayment agreement |
| Conventional | No CAIVRS check, but the default sits on the credit report and pulls the score down, so the same fixes help |
Three ways out of default
Rehabilitation. You sign an agreement for nine monthly payments over 10 consecutive months, each made within 20 days of its due date. The payment is based on your income and can be very small. When it's done, the record of the default comes off your credit history, though late payments reported before the default stay.
Consolidation. A new Direct Consolidation Loan pays off the defaulted loan. You either agree to repay it under an income-driven repayment plan, which sets the payment from your income and family size, or make three consecutive, on-time, full monthly payments on the defaulted loan first. Consolidation can get you out of default sooner than rehabilitation, but the record of the default stays on your credit history.
Repaying in full. Paying the whole balance ends the default at once, and for most buyers it's the least practical route.
The trade is speed against a cleaner credit report. If your score already clears 580, consolidation usually reopens FHA soonest. If the default is holding your score down, rehabilitation's 10 months can raise the score and clear FHA at the same time.
A worked example in Hillsborough County
A buyer has $28,000 in federal student loans in default, earns $5,200 a month and pays $285 on a car. The middle score is 611. The buyer consolidates into an income-driven plan, and the servicer's letter shows a $96 monthly payment. Once the consolidation is done, the default is resolved, and the lender gets written confirmation from the servicer in case CAIVRS hasn't updated yet.
FHA counts a documented student loan payment above $0 at its actual amount, so $96 goes into the ratios. If the plan had set the payment at $0, FHA would count 0.5% of the balance, $140. Here's a $285,000 single-family home with FHA at 3.5% down and a 5.75% rate on a 30-year fixed, taxes at 0.90% of the price and insurance at $250 a month:
| Payment piece | Amount |
|---|---|
| Down payment (3.5%) | $9,975 |
| Total loan with 1.75% upfront MIP | $279,837.94 |
| Principal and interest | $1,633.06 |
| Monthly mortgage insurance (0.55% a year) | $126.05 |
| Property taxes | $213.75 |
| Homeowners insurance | $250.00 |
| Total payment | $2,222.86 |
The house payment is 42.7% of income. With the car and the $96 student loan payment, the total ratio is 50.1%, and at the $140 figure it would be 50.9%. Both sit inside FHA's 46.9% and 56.9% limits for an automated approval, so this buyer qualifies for the home as soon as the default is resolved.
How the loan counts after default
After default, each program counts the student loan the same way it counts any other one. FHA and USDA use a documented payment above $0, or 0.5% of the balance when the payment is $0. Conventional counts 1% of the balance or the documented payment, and a documented $0 income-driven payment can count as $0. VA uses 5% of the balance divided by 12, or a lower payment shown on a servicer statement. The student loans and DTI guide has the details.
Steps to take now
- Call your loan holder. Find out which loans are in default and who holds them. Federal Student Aid lists your loans and servicer.
- Pick the route. Consolidation for speed, rehabilitation for a cleaner credit report.
- Get every payment in writing. The lender needs the servicer's letter with the monthly payment and proof the default is resolved.
- Keep everything else current. On-time rent and card payments while the student loans get fixed keep the score climbing.
Enter your balance and new payment in the student loan DTI calculator to see what each program counts. Call AAA Capital Funding at 888-601-8344 the week your default is resolved, and we'll check CAIVRS and start the approval that day.