What Happens If You Default on Student Loans?

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  • When your student loan is in default, it means you haven’t made payments for an extended period of time.
  • A student loan default can damage your credit and prompt your employer to withhold a portion of your pay.
  • If your student loans are in default, there are ways out – including rehab.

Student loans are a valuable tool to help you cover the costs of higher education, but they come with some risks. About a third of all federal student loan borrowers eventually go into default, meaning they miss payments for an extended period of time.

If you default on a student loan, you will face many consequences. It can hurt your credit score, use up your earnings, and reduce your tax refund and government benefits. If you’ve defaulted on your student loans or you’re worried, here’s what to do about it.

What does default on a student loan mean?

Your student loan is in default when you haven’t made a payment for at least 270 days (on federal loans) or 90 days (on private loans) — although the exact number of days can vary by lender.

Default is not the same as delinquency. Defaulting implies non-payment for an extended period. Delinquency means you’re late on your payments — even if you’re just one day past your payment due date.

“Student loans, like most loans, are considered delinquent when a single payment is late,” says Peg Keough, director of education at College Aid Pro. “The penalty for delinquency is often a late fee or sometimes a slap on the wrist other than ‘don’t do this again’ if delinquent payments are paid in short order.”

When you are delinquent, your lender will report late payments to the three major credit bureaus – Experian, TransUnion and Equifax. This will hurt your credit score and make it harder for you to get another loan, buy a home, or get a credit card.

How do you check if your loan is in default?

If you think you may have a student loan in default but aren’t sure, there are several ways to check. To check federal student loans, log into your StudentAid.gov account using your Federal Student Aid (FSA) ID. Once logged in, you can view the status of all your federal loans.

If you have a private student loan, check your credit report to see if it has been reported as in default. Every consumer receives a free annual credit report from each of the three credit bureaus. You can get yours at AnnualCreditReport.com. Your credit card company or bank may also offer free credit report monitoring.

If you don’t see your private loan on the report, contact your lender directly.

“There’s a chance they’ve fallen down the credit report,” Keough says. “In this situation, default information can be difficult to track down. A likely scenario is that the lender may have sold the loan to a debt collector, who will actively try to track you down.”

In some cases, your loan may be mistakenly placed in default. Maybe you’re in school and should have received an in-school suspension, or your servicer has approved you for forbearance and your payments are on hold.

If this happens to you, contact your school registrar and loan servicer.

“Be prepared to provide documentation such as bank statements or forbearance agreements,” says Keough. “You should also contact the credit bureaus and file a dispute.”

What happens when you default on a student loan?

Once you become delinquent on student loans, you will face some problems. Your credit score is likely to suffer, you may have to pay exorbitant fees, and you may find lenders unwilling to approve you for loans and credit cards.

When you enter the default, you will see additional, more severe consequences. For example:

  • Your entire loan balance can be paid off fasterThat means that – plus any interest you owe – will be paid immediately.
  • You will lose eligibility for federal loan benefits Such as forbearance, deferment and income based repayment plans. You may also be ineligible for additional federal student aid.
  • The government can withhold your tax refund and other federal benefits To offset your debt.
  • Your wages may be garnishedThat means your employer will withhold a portion of your paycheck to pay off your loan balance.
  • You may be sued. You can pay court costs, collect fees, attorney fees and more.
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Default will also hurt your credit, which can make it challenging to achieve other financial goals.

“For student loan borrowers who find themselves in default, the consequences are not pleasant,” says Keough.

How to Get Student Loans Out of Default

If your student loan is in default, there are ways out. Although unlikely, you will be able to pay off the debt in full. If not, you can choose to rehabilitate your debt.

When you rehabilitate your loan, you regain access to many federal student loan benefits for which you were previously eligible. These include deferment, forbearance, forgiveness and access to future assistance.

“After your loan is rehabilitated, the federal government will remove the default from your credit history and return your loan to current status,” says Mark Kantrowitz, student loan expert, author and president of PrivateStudentLoans.guru.

The exact steps to rehabilitate federal student loans depend on the type of loan you have. For a Perkins loan, you will need to make full payments for at least nine consecutive months.

For Direct Loans and Federal Family Education Loans, these payments must be “reasonable” (not full payments) and submitted within 10 months.

If you have a federal loan, the Fresh Start program is also an option for you to get out of default. This program is not considered rehabilitation and will:

  • Make sure you maintain access to federal loan programs
  • Stop collection attempts on your account
  • Give you access to future repayment options, such as income-based repayment plans, forbearance, deferment and student loan forgiveness
  • Restore your ability to rehabilitate future loans.

To be eligible, your defaulted loans must be Federal Direct Loans, Federal Family Education Loans or Perkins Loans. The Fresh Start initiative will go into effect after the COVID-19 federal student loan payment freeze on December 31, 2022.

“When federal student loan repayment begins, the Fresh Start initiative will return all defaulted federal student loans to current status, remove the default from the borrower’s credit history and remove other negative information related to the loan from the credit history,” says Kantrowitz. “The borrowers will have one year to choose a repayment plan and start making payments under the repayment plan. Otherwise, the default will be reinstated at the end of the one-year period.”

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The last option is to consolidate your debt. With federal loans, this requires taking out a direct consolidation loan and then using it to pay off all of your loan balances. This essentially rolls all your loans into a single loan, streamlining repayments. With a private loan, that simply means taking out a new, larger private loan — equal to the amount of your existing loan balance — and using that money to pay it off.

“This route is easier to take than loan rehabilitation, but the benefit is mainly process simplification, not necessarily financial relief,” says Keough.

Can you discharge defaulted student loans in bankruptcy?

Despite common misconceptions, it is possible to discharge your student loan debt through bankruptcy. This is true for both private and federal student loans.

The process for doing this depends on the type of loan you have, what the funds were used for, and your financial situation. In general, however, experts say the road is challenging.

“One of the hardest and most frustrating aspects of paying off student loans is how difficult they are to discharge in bankruptcy,” Keough says. “The scary reality is that most student loans will still require repayment after bankruptcy proceedings.”

To qualify for student debt discharge, your payments must be in the U.S. What the Bankruptcy Code calls “undue hardship” will need to be presented.

“This means that you cannot maintain a minimum standard of living while paying off the loan, that the status quo is likely to continue, and that you have made a good faith effort to pay off the loan,” Keough says. “Few will meet these strict standards.”

If you are considering bankruptcy, talk to a bankruptcy attorney first. They can advise you about the process and how it will affect your student loan.


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