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Everything You Need To Know About Student Loan Default

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In a Nutshell

Simply put, defaulting on a student loan means you failed to repay the loan according to the terms you agreed on. Many federal student loan servicers consider these loans to be in default after 270 days of missed payment. Some private student loan lenders put loans into default after 90 days of missed payments. You can contact the servicer of your student loan to verify how many days of nonpayment you have before the servicer considers your account to be in default. Note that federal student loans have been protected against default and its consequences (like wage garnishment, withholding tax refunds, or sending your account to collections) for several years as part of a COVID-19 emergency relief program. Payments have also been paused, and interest has not been accumulating on student loans. Interest will begin to accrue again as of Sept. 1, 2023 and student loan repayment will begin in October 2023.

Written by Attorney Jenni Klock Morel
Updated June 21, 2023


Note to readers: The information provided below reflects the general process and consequences for defaulting on student loans. Federal student loan borrowers have had more protections against defaulted student loans in recent years due to COVID-19 emergency relief protections. 

If you are concerned about what will happen with your student loans that were in default prior to the pandemic, please visit the Department of Education’s page on the Fresh Start Program. This one-time program can help you get onto an income-driven repayment plan and get your loans out of default status even after the student loan payment pause ends.

How Many Days After Missing a Student Loan Payment Do Your Loans Go Into Default?

Each student loan servicer defines the timeline for default for its loans. Many federal student loans are considered in default after 270 days (about nine months) of missed payments. Some private student loans consider a loan in default after 90 days (about three months) of missed payments. Your loan servicer can give you the details about your student loan. 

Is Delinquency the Same as Default?

No. 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.

If you’ve defaulted on your student loans, you’re not alone. Some 3 million borrowers have defaulted on their loans, owing over $86 billion.[1][2] Many student loan borrowers have gotten a break through COVID-19 emergency relief programs in recent years. But as those programs begin to sunset, many borrowers are starting to worry about how to deal with debt and loans in default.

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What Happens When You Default on a Student Loan?

The consequences of defaulting on a student loan depend on the type of loan you have. Broadly speaking, there are two categories of student loans: federal and private student loans. 

Federal student loans are issued by the federal government and their terms and conditions are set by federal law. Private student loans are loans backed directly by banks or other private lenders. The terms and conditions of private loans are set by the lender. What constitutes a default will be defined in your student loan agreement.

If you default on your student loans, the lender may

  • Accelerate the loan (which means the total loan amount becomes due immediately)

  • Garnish your wages (private lenders must get a court judgment first) 

  • Turn your account over to a collection agency 

  • Report your nonpayment to the major credit bureaus

Additionally, defaulting on federal student loans can result in:

  • Having your academic transcripts withheld

  • Having your wages, tax refund, or federal benefits garnished

  • Losing access to repayment programs and benefits like deferment and forbearance

What Happens if You Default on Federal Student Loans?

If you default on a federal student loan, the entire balance of the loan becomes due immediately. This is called acceleration. If your loan servicer accelerates your loan, you’ll have fewer repayment options. For example, if your loan is accelerated, you can’t take advantage of deferment or forbearance programs or special payment plans. You won’t be eligible to receive any additional federal student aid, and the loan servicer will report the default to the credit bureaus, which will likely hurt your credit score

If you default on your student loan, the lender can also garnish up to 15% of your wages without going to court. The federal government can also keep your tax refunds and other federal benefits, including your Social Security benefits, if you default on a federal student loan. 

If you default on your student loans, your school can also withhold your academic transcript. Since an academic transcript is school property, the school, not the U.S. Department of Education or your loan servicer, decides whether to release your transcript to you. This may interfere with your attempts to find a job, but typically a school will not withhold your transcript unless it is your student loan lender.

After defaulting, your loan may be turned over to a collection agency. The U.S. Department of Education contracts with several collection agencies to collect defaulted federal loans. If your lender or servicer turns your loan over to a collection agency, you will be responsible for any collection fees or other expenses associated with trying to collect on your account.

Can You Get Financial Aid if Your Student Loans Are in Default?

No. You can’t usually get federal financial aid if your student loans are currently in default status. You may be able to get your loans out of default to restore your access to financial aid if you’re still in school. More on this below.

What Happens if You Default on Private Student Loans?

The consequences of defaulting on a private student loan are similar to that of federal student loans. One difference is that a private lender or servicer cannot take your tax refunds or federal benefits to satisfy student loan debt. Like federal loans, when you default on a private student loan, your loan is accelerated. This means that the entire amount of the loan becomes due immediately. The default will appear on your credit report and affect your credit score, which can hurt your future attempts to get credit.

If you default on your loan and the loan servicer’s collection efforts fail, your loan will be turned over to a private collection agency. The timeline for this will vary and depends on your private loan servicer.

You may be sued if the collection agency can’t collect any portion of the debt. Again, since this involves a private lender or servicer rather than the Department of Education, these timeframes may vary by the servicer. Because private student loan lenders don’t have as many options as federal lenders, they often use debt collection lawsuits as their main method to collect on defaulted loans.

Unlike federal student loan lenders, parties trying to collect private student loans must file a lawsuit. They will be awarded a judgment if they win this lawsuit. As judgment-creditors, they can now garnish your wages or seize money from your bank account.

How Do You Get Your Student Loans Out of Default?

If you defaulted on your student loan, all hope is not lost! You may be able to do student loan rehabilitation or loan consolidation to get your loans out of default. Loan rehabilitation offers some benefits that you can’t get with loan consolidation, but it takes months to complete. You can consolidate your loan in much less time. Let’s take a closer look at each option.

How To Get Your Student Loans Out of Default Using Student Loan Rehabilitation

Student loan rehabilitation is a way to get your student loans out of default status. It is a one-time opportunity. If you successfully rehabilitate your student loan, the default status will be removed, and you’ll also be eligible for deferment, forbearance, loan repayment plan options, and loan forgiveness. You’ll also be able to receive federal student aid again. 

To start, contact your loan servicer and tell them you want to do a student loan rehabilitation plan. The servicer will probably ask you to provide documentation of your income because this will determine your monthly payment under the plan. For a Direct Loan Program loan (Direct Loan) or a Federal Family Education Loan (FFEL), your monthly payment is based on the 15% formula. 

According to studentaid.gov, “The 15% formula means 15% of the amount by which your Adjusted Gross Income exceeds 150% of the poverty guideline amount that is applicable to your family size and state, divided by 12.” 

How To Estimate Your Monthly Payment Under a Loan Rehabilitation Plan

You can estimate your monthly payment under loan rehabilitation before calling your lender. Let’s say your adjusted gross income is $50,000 and you have a family of four. For 2023, the federal poverty guideline is $30,000. First, we take $30,000 multiplied by 150% (or 1.5) and get $45,000. Then we subtract that number from your income. The difference between $50,000 and $45,000 is $5,000. Then we take 15% of $5,000, which is $750. Finally, to get your estimated monthly payment, divide $750 by 12, which is $62.50. 

If you can’t afford the monthly payment calculated using discretionary income, you can ask the lender to calculate your payment based on the amount of monthly income you have left after paying (reasonable) monthly expenses.

Other Requirements for Student Loan Rehabilitation

To rehabilitate a defaulted Direct Loan or FFEL, you must agree in writing to make nine voluntary on-time payments (in the amount determined by your loan holder) within 20 days of the due date. And you must 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 lender or servicer. To rehabilitate a defaulted Perkins loan, you must make full monthly payments, within 20 days of the due date, for nine months straight. 

If you rehabilitate your federal student loans, your credit report will still show the late payments your lender or loan servicer reported before the loan went into default, but the record of the default on the loan will be removed from your credit history. 

How To Get Your Student Loans Out of Default Using Student Loan Consolidation

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 loans. 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 lender/loan servicer 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.

Let’s Summarize…

If your federal student loans go into default, the entire loan balance 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 give you access to 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.


Sources:

  1. Federal Student Loan. (n.d.). (LOANS-22-09) National Default Rate Briefing for FY 2019 Official Cohort Default Rates (Updated Dec. 15, 2022). (LOANS-22-09) National Default Rate Briefing for FY 2019 Official Cohort Default Rates (Updated Dec. 15, 2022). Retrieved from https://fsapartners.ed.gov/knowledge-center/library/electronic-announcements/2022-10-03/national-default-rate-briefing-fy-2019-official-cohort-default-rates-updated-dec-15-2022
  2. Federal Reserve. (n.d.). Three Key Facts from the Center for Microeconomic Data’s 2022 Student Loan Update. Retrieved May 1, 2023, from https://libertystreeteconomics.newyorkfed.org/2022/08/three-key-facts-from-the-center-for-microeconomic-datas-2022-student-loan-update/

Written By:

Attorney Jenni Klock Morel

LinkedIn

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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