Student Loan Default: What to Do If the Worst Happens
January 8, 2020
Student loan debt struggles aren’t uncommon in the U.S., and it’s easy to miss a payment or two if you can’t afford it. But if you’ve gone long enough without paying your bill, you may run into student loan default, which can wreak havoc on your finances.
If you think you may default on student loans or you’re already there, here’s what you need to know about the consequences and what you can do to get help.
What is federal student loan default?
If you simply miss a student loan payment, your loan will be delinquent but not in default. Once that payment is 90 days late, your student loan servicer will report it to the three national credit bureaus, Experian, Equifax and TransUnion.
Your student loans will remain delinquent until you pay off the past-due debt plus an applicable late fee, enter a deferment or forbearance period or get on an income-driven repayment plan.
If you stop making payments completely on your loans, however, they’ll enter student loan default after 270 days of non-payment, or about nine months.
In some cases, it’s possible for you to default on student loans without knowing it. For example, you may still be enrolled at least half-time in school, and your loan servicer may not have the correct information about your attendance. Or you’re in a period of deferment or forbearance, and loan servicer has incorrect information about the start and end dates for the program.
In either of these cases, you can provide documentation to your loan servicer to correct the mistake. Otherwise, you may be in for a long list of ramifications.
What happens if you default on federal student loans?
If you have a default student loan, there are several consequences that come with it. Unless you get student loan default help, here’s what to expect:
- The entire unpaid balance of your loan and any interest you owe becomes immediately due.
- You lose access to certain federal benefits, including access to deferment and forbearance programs and the ability to choose a repayment plan.
- You lose eligibility for additional federal student aid.
- The default will be reported to credit bureaus, which will further damage your credit beyond the initial delinquency.
- Your tax refunds and federal benefit payments may be withheld and applied toward repayment of your defaulted loan.
- Your employer may be required to withhold a portion of your paycheck and send it to your loan holder to repay your defaulted loan. This is called wage garnishment.
- Your loan holder can take you to court.
- You may not be able to purchase or sell assets such as real estate.
- You may be charged court costs, collection fees, attorney’s fees, and other costs associated with the collection process.
- Your school may withhold your academic transcript until your defaulted student loan is satisfied.
If you’re already struggling to make payments, having your entire balance become due immediately can be anxiety-inducing. On top of the balance itself, you’ll also have to foot the bill for collection charges, which can add up to 25% of the principal and interest.
What about private student loan default?
Most of our information is on federal student loan default because the U.S. Department of Education is very transparent about the process. If you have private student loans in default, however, the process can vary by lender. What’s more, you don’t have the same protections you get with federal loans.
In some cases, a lender may consider you in default if you miss just one payment, or it can be after a few months of non-payment. You could even end up with a defaulted student loan if your cosigner dies or enters bankruptcy or you file bankruptcy or default on another loan — yes, this can happen even if you’re making all of your private student loan payments on time.
Like federal student loan default, if you have private student loans in default, it can ruin your credit score. What’s more, your lender may send your debt to a collection agency, which can tack on collection fees, file a lawsuit, garnish your wages and more.
The worst part is that private lenders typically don’t provide any student loan default help. Once you default on student loans, it’s virtually impossible to reverse the process unless you can make a good case for it.
So if it happens, consider consulting with a student loan attorney who can provide you information about your rights and assistance with the process.
How to get student loans out of default
Can you default on student loans and then reverse it? If you have federal student loans, it is possible through consolidation or rehabilitation.
Student loan consolidation
The simpler way to get student loan default help is to consolidate your loans through the Direct Loan Consolidation program. To make it work, you need to make three consecutive, on-time, full monthly payments before you can request consolidation. They also need to be voluntary payments, which means that wage garnishment and offsets of your tax refund or federal benefits don’t count. You also need to agree to repay your new loan on an income-driven repayment plan.
A few things to note about this process:
- If your defaulted loans are subject to wage garnishment or are being collected subject to a court order, you can’t consolidate until after the garnishment order has been lifted, or the judgment has been vacated.
- The amount of your three requirement payments will be determined by your loan servicer, but won’t be more than is reasonable and affordable based on your financial situation.
- Consolidating your loans does not remove the record of default from your credit history.
Student loan rehabilitation
If you default on student loans, the Department of Education also allows you to rehabilitate them. While this process takes longer and requires more from you, but it will remove the default from your credit history, which can help repair some of the damage done.
To rehabilitate a defaulted student loan, you’ll need to do two things. First, agree in writing to make nine voluntary, reasonable and affordable monthly payments (as determined by your loan holder) within 20 days of the due date. Second, make all nine payments during a period of 10 consecutive months.
The reasonable monthly payment amount will be equal to 15% of your discretionary income, which is the amount of your adjusted gross income from your most recent tax return minus 150% of the poverty guideline for your state and family size. Your loan servicer divides that number by 12 to get your monthly payment.
A few things to consider about rehabilitation:
- Wage garnishments may continue while you’re working on rehabilitating your loans but won’t count toward your nine required payments.
- If you can’t afford the monthly payment amount using the traditional formula, you may ask your loan servicer to calculate an alternative monthly payment based on your income minus reasonable monthly expenses.
- While the default will be removed from your credit history upon completion of the rehabilitation process, the negative marks from your student loan delinquency will remain.
How to avoid student loan default in the first place
Your options are limited when you default on student loans, but you may not need student loan default help at all if you can simply avoid it.
If you’ve been struggling to make payments, contact your loan servicer or lender to talk about your options. It may not seem like they’re on your side, but they’re more likely to get back their investment when they help you versus leaving you stranded.
If you can’t afford your federal student loan payment, consider consolidating them with the Department of Education or refinancing them with a private lender to get a clean slate. If you’re keeping them with the federal government, also think about getting on an income-driven repayment plan if you’re not on one already.
Also, ask about deferment and forbearance options. If you’re experiencing acute financial hardship, there may be options available for you. And while interest may continue to accrue while you hit the pause button on payments, it’s better than defaulting.
Finally, look at other areas of your budget to see if you can free up some cash to put toward your student loan payments. This may not be possible if you’re legitimately spending more than you earn on necessary costs. But if you can get out of danger of default, even for just a moment, it can buy you some time as you search for more solutions.