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Student Loan Default: What Is It? What Can I Do About It?

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In a Nutshell

You are not alone if you’re struggling to pay back student loans. Whether your loans are federal student loans or private student loans, there may be options to help you. You’re taking a good step in learning all you can about student loan repayment. A defaulted student loan is a serious matter. Read on to learn about what can happen with a defaulted student loan debt and how to get out of default.

Written by Attorney Jenni Klock Morel
Updated August 30, 2021

You are not alone if you’re struggling to pay back student loans. Whether your loans are federal student loans or private student loans, there may be options to help you. You’re taking a good step in learning all you can about student loan repayment. A defaulted student loan is a serious matter. Read on to learn about what can happen with a defaulted student loan debt and how to get out of default. 

When Does Student Loan Default Happen?

Default is when a loan isn’t paid according to the terms of the loan. There is a difference between a student loan that is delinquent and one that is in default. A student loan is delinquent as soon as a monthly payment is past due, but is not necessarily in default. If the borrower continues defaulting on payments, then the student loan will go into default. 

The number of days of non-payment for a student loan to move into default depends on the type of loan you received and the terms of your loan. Many federal student loans are considered in default after 270 days of missed payment. Some private student loans consider a loan in default after 90 days of missed payments. Your loan servicer can give you the details about your student loan. 

What Happens When Your Student Loans Default?

If you default on a federal student loan, the entire balance of the loan becomes due immediately. This is known as acceleration. There are far fewer repayment options for a loan that has been accelerated. Deferment, forbearance, and loan forgiveness are not available on an accelerated loan. Even if your federal student loan has been accelerated, you should still try to make repayment plan arrangements with the U.S. Department of Education. Your loan will be sent to a collection agency if you don’t make repayment arrangements and stick to it. 

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What Does It Mean if Your Student Loan Is in Default?

Student loans in default can affect you in many ways. Default can lead to serious financial and possibly even career consequences. It is best to contact your loan servicer before default and as soon as you miss or are about to miss a payment. Your loan servicer is the place where you send your monthly payments. The Federal Student Aid website has a list of student loan providers and contract information in case you need to track down your servicer. You can also call the Federal Student Aid Information Center (FSAIC) at 1-800-433-3243 to find the name of your loan provider.

Your Student Loan Lender Can Take Your Money

If you don’t make payments, federal student loan holders have more power to take your money than private student loan holders. 

To collect on a defaulted federal student loan, your loan holder can hire a collection agency to:

  • Garnish your wages (take money directly out of your paycheck)

  • Withhold your tax refunds and other government payments, like social security checks. 

These collection actions can be taken against you when you have a federal student loan in default. Unlike with private loans, federal student loan holders can use these aggressive collection tactics without filing a lawsuit against you. Collection will continue until the loan balance is paid off. 

To collect on a defaulted private student loan, your loan holder can garnish your wages or take money from your bank account, but first they must file a lawsuit against you for non-payment and get a court judgment before they can take your money directly. A private student loan lender can’t withhold your tax refund or other government payments. 

Loans in Default Cost More

Interest doesn’t stop on a loan when it goes into default. In fact, your interest rate may actually be higher once loan payments are delinquent or in default. Late fees and interest will continue to be added to the amount owed. Additionally, you will be charged the cost of collecting your defaulted student loans. Collection costs can be as much as 17.93% of your loan amount if your loan is held by the U.S. Department of Education. Other loan holders can charge different amounts. 

Lower Credit Score

Student loan payments more than 90 days late will be reported on your credit report. Your loan servicer will report the delinquent payments to the three credit bureaus — Equifax, Experian, and TransUnion. In some situations, if you were to cure your delinquency, this negative reporting would be removed. Once a student loan goes into default, it will be reported on your credit report for seven years. 

Negative reports of student loan delinquency or default can make borrowing harder and more expensive. Future loans for a car, house, or more schooling, will come at a higher interest rate or may not even be possible. Credit card offers will come with higher interest rates and annual fees. Defaulted student loans reported on your credit report can also harm your ability to rent an apartment or even get a job that requires a credit check. 

Impacts on Education

Student loan borrowers who default on a federal student loan lose eligibility for additional federal student aid. If you can’t take out additional student loans, you might not be able to return to school

How Do I Get Out of Default on Student Loans?

Two ways to get out of default on a student loan are loan rehabilitation and loan consolidation. Loan rehabilitation offers some benefits that you can’t get with loan consolidation, but it takes months to complete. You can get a loan consolidation done in much less time.

Student Loan Rehabilitation After Default

Student loan rehabilitation is a way to get your student loans out of default status. It is a one-time opportunity. After your loan is successfully rehabilitated, not only will default status be removed, you’ll also be eligible for deferment, forbearance, repayment plan options, loan forgiveness, and able to receive federal student aid again. 

The process starts with contacting your loan holder to discuss a student loan rehabilitation plan and providing documentation of your income. For a William D. Ford Direct Loan Program (Direct Loan) and a Federal Family Education Loan (FFEL), your payment for loan rehabilitation will be 15 percent of your annual discretionary income, divided by 12. 

Discretionary income has a complicated equation (it’s the amount of your adjusted gross income from your tax return that exceeds 150 of the federal poverty guideline amount for your family size) – but it can be understood as the standard way for your Direct Loan or FFEL lender to figure out what you can afford to pay. 

You can estimate your monthly payment under loan rehabilitation before calling your lender. Let’s say your adjusted gross income is $45,000 and you have a family of 4. For 2021, the federal poverty guideline is $26,500. First, we take $26,500 multiplied by 150% (or 1.5) and get $39,750. Then we subtract that number from your income. The difference between $45,000 and $39,750 is $5,250. Then we take 15% of $5,250, which is $787.50. Then, we divide that number by 12 to come up with a monthly payment of $65.63.

If you can’t afford the monthly payment calculated using discretionary income, you can ask for your payment to be calculated in a different way. An alternative payment can be calculated based on the amount of your monthly income that’s leftover after your reasonable monthly expenses have been subtracted. 

To rehabilitate a defaulted Direct Loan or FFEL loan you must agree in writing to make nine voluntary monthly payments, in the amount determined by your loan holder, within 20 days of the due date, and make all nine payments over 10 consecutive months. 

The required student loan rehabilitation payments required for a federal Perkins loan will be determined by the loan holder. To rehabilitate a defaulted Perkins loan, you must make full monthly payments, within 20 days of the due date, for nine months straight. 

After loan rehabilitation of a federal student loan, your credit report will continue to show late payments that were reported by your loan holder before the loan went into default, but the record of the default on the loan will be removed from your credit history. 

Student Loan Consolidation After Default

Loan consolidation is a way to get your student loans out of default status. A Direct Consolidation Loan allows you to pay off one or more student loans with a new loan that consolidates the previous loan(s). As with loan rehabilitation, after your loan is successfully consolidated, you’ll be eligible for deferment, forbearance, repayment plan options, and loan forgiveness. You’ll also be eligible to receive financial aid again. 

To consolidate a federal student loan in default into a new Direct Consolidation Loan, you must agree to repay the new loan under an income-driven repayment plan or make three consecutive, voluntary, on-time monthly payments, of a reasonable and affordable amount determined by the loan holder of the defaulted loan.

After Direct Loan Consolidation, nothing is removed from your credit report. Your credit history will continue to show the previous default status of the loan and the late payments that were reported before the loan went into default.

Collection Activity on Defaulted Student Loans Temporarily Stopped During the COVID-19 Emergency 

In response to the coronavirus emergency, the U.S. Department of Education has stopped collection activity on federal student loans in default. Also, interest is temporarily set at 0% on federally owned student aid debt. These measures will last from March 13, 2020, through at least September 30, 2021. Borrowers can still make payments if they are able. 

Let’s Summarize…

If your federal student loans go into default, the entire balance of the loan becomes due immediately. If this happens to you, there are two options to get out of default on a student loan: loan rehabilitation and loan consolidation. Both options bring back loan benefits that are not available while in default, including eligibility for deferment, forbearance, choice of a repayment plan, loan forgiveness, and the ability for the borrower to receive future federal student aid. 

If you’ve fallen behind on student loan payments or are about to, or if your loan is already in default, you can contact your loan servicer today to discuss your options.

Written By:

Attorney Jenni Klock Morel


Jenni Klock Morel is a writer, nonprofit leader, and Social Justice Law Scholar. For years she practiced consumer bankruptcy law exclusively as a debtor's attorney, helping individuals and families file for Chapter 7 or 13 bankruptcy protection. Jenni left the practice of law to... read more about Attorney Jenni Klock Morel

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