What Happens If You Default on a Student Loan?

If you’re struggling to keep up with your student loan payments and you’re worried about defaulting, you’re far from alone. Within three years of entering repayment, 7.3% of student loan borrowers enter default, according to the U.S. Department of Education.[1]

It takes 270 days before federal student loans officially enter default status. Before that, they’ll be considered delinquent, says Melanie Hanson, editor-in-chief at EDI Refinance, which provides data about the U.S. educational system. “This technically occurs any time you miss a payment but is generally not reported to credit agencies for up to 90 days,” she says.

Understanding what’s in store for you in the event of default on a student loan can potentially help motivate you to take steps sooner rather than later to avoid the process. Additionally, knowing how to get out of default can help you figure out which actions to take for your particular situation.

The default process and its impact on you will depend on the type of student loans you have. Here’s a quick summary of what to expect with both federal and private student loans.

Federal Student Loans

The federal loan default process begins after your loans have gone unpaid for 270 days, or nine months. If this happens, here are some steps your loan servicer can take:

• Report the default to the credit bureaus: Delinquencies on federal student loans are reported after 90 days, so your credit score has likely already been damaged. But adding a default to your credit reports can make matters even worse.

• Tack on collection costs: Both late fees and interest will continue to accrue on your loan balance, increasing how much you owe. You may also be charged 17.92% of your loan amount in collection fees.[2]

• Take your money in different ways: Your loan servicer may garnish your wages and take your income tax refund and Social Security check and apply the cash toward your defaulted balance.[3]

• Have your license suspended: If you work in a career field that requires licensing, you may have yours suspended indefinitely.[4]

• Make you ineligible for further student aid: If you decide to return to school, you won’t be able to rely on federal financial aid to help you cover the costs until you get out of default.[5]

• Keep you from qualifying for a government-backed mortgage loan: As long as you’re in default, you’ll be ineligible to apply for an FA loan, a USDA loan or a VA loan.[6]

• Keep you from joining the military: If you’re hoping to join the military to further your career or to get help with student loan repayment, you’ll have a hard time enlisting as long as your loans are in default.[7]

• Make you ineligible for deferment and forbearance: You’ll lose access to deferment and forbearance plans, and you also won’t have the ability to choose a repayment plan.[8]

Private Student Loans

Private student loan default typically occurs when you’ve missed 90 days of payments. If this happens, the lender may attempt to collect on their own or hire a collection agency to do the job. If they still can’t collect a payment, the lender or agency may take you to court, which could result in wage garnishments.[9]

If you have private student loans, your options are limited. “It is not possible to rehabilitate a private student loan,” says Hanson. That said, you may be able to negotiate a payment plan or to settle for less than what you owe, for which you may want to consult with an attorney.[10]

If you decide to work with an attorney, consider negotiating with your lender directly with behind-the-scenes advice and guidance from the attorney. If you have the attorney run the negotiations, the lender may take a stricter stance.

It’s especially important to ensure that the agreement settles the loans you want and will provide you with a paid-in-full statement for each loan. You can also negotiate to have the default removed from your credit history as part of the settlement agreement.

If you have federal loans, however, “there are several repayment options available to those in default,” says Hanson, “and while they are not as good as pre-default options, they are generally survivable if you act quickly and are disciplined.” Here’s what you can do:

• Repayment: If you can come up with the cash, you can simply pay off the loan balance. In some cases, you may even be able to negotiate a waiver of some of your fees or collection costs.[11]

• Rehabilitation: To rehabilitate your loans, you’ll agree to make nine voluntary, reasonable and affordable monthly payments within 20 days of your due date over a period of 10 consecutive months—your loan servicer will determine the payment amounts. If the payment is too high, you can object and the servicer will use an income-driven repayment plan to determine the payment.[12]

• Consolidation: You can get out of default on a student loan by consolidating your loans. To qualify, you’ll need to make three consecutive, voluntary, on-time, full monthly payments on the defaulted loans and agree to pay your new consolidated loan on an income-driven repayment plan.[12]

“Rehabilitation is a longer and more expensive process initially, but it is also the only way to officially remove the default from your credit report,” says Hanson. “Consolidation is quicker and easier to achieve but will result in more long-term damage to your credit rating.”

If you’ve fallen behind on your student loan payments, the best approach is to reach out to your lender or loan servicer before it’s too late. If you have federal loans, you can get on an income-driven repayment plan or a consolidation loan with repayment plans of up to 30 years.[8] And if you have private loans, you may be able to negotiate a modified repayment plan with your lender.

Whatever your approach, it can help save you from the headache of having to deal with default costs, collection agencies and more.