What Happens When You Default on Student Loans?

If your student loan payments seem unmanageable, you might be wondering what would happen if you stopped making payments. The consequences of defaulting on student loans can be severe.

The good news is, you may be able to prevent that from happening – even if you can’t afford to pay the amount shown on your bill.

So, what happens if you default on student loans? Here we look at what happens when you miss a student loan payment and some options for avoiding default.

Student loan delinquency vs. default

In most cases, one late payment won’t send your loans into default. There’s a step before default: delinquency.

When you miss a student loan payment, your loan becomes delinquent. It stays delinquent until you pay the amount due, make other arrangements (we’ll cover those other arrangements in more detail later), or go into default.
The timeline for a student loan default depends on the type of loan you received.

Most federal loans go into default if you don't make a payment for 270 days.

Private student loan default happens when you don’t make a payment for 90 days.

In this article

• What happens when you default on student loans?
• How to avoid student loan default
• Special student loan relief for COVID-19
• How to get your student loan out of default

What happens if you default on a student loans?

The consequences of stopping student loan payments can be serious and long-lasting.

They include:

1 - Damaged credit

Once your student loan has been delinquent for 90 days, your loan servicer will report the delinquency to the three major credit bureaus. A delinquency negatively impacts your credit score and the defaulted loans remain on your credit report for up to seven years.

During that time, it may be difficult for you to get a credit card, mortgage, car loan, or other types of credit.

2 - Increased costs

A poor credit rating costs money. If you do get approved for a loan or credit card, you’ll pay higher interest rates than people with higher credit scores.

You may also pay more for insurance, have a hard time getting approved to rent a home or apartment, and pay a larger security deposit when signing up for utilities.

3 - Collection charges

If your defaulted loan is sent to a collection agency, you’ll be responsible for the costs associated with collecting your loan. The amount of time a collection on credit report remains can vary.

For loans held by the U.S. Department of Education, these costs amount to 17.92% of your loan amount. Private student loan lenders may charge a higher amount.

4 - Wage garnishment

The federal government can order your employer to withhold up to 15% of your wages as payment toward your federal student loans without taking you to court.

Private student loan lenders need a court judgment to garnish your wages but may be able to garnish up to 25% of your pay, depending on the laws in your state.

This garnishment continues until your loan is paid in full.

5 - Seized tax refunds

Your lender may take any federal or state income tax refund owed to you through the Treasury Offset Program (TOP). This government program diverts tax refunds to pay certain debts.

6 - Garnished disability and retirement benefits

TOP also allows the federal government to withhold up to 15% of Social Security disability and retirement benefit payments to repay defaulted student loans.

7 - Loss of federal and state benefits

You won’t be eligible for any federal financial aid until you pay the loan in full or make a payment arrangement and pay at least six consecutive, on-time monthly payments.

This includes federal student loans, and FHA and VA mortgages. You may also be unable to renew professional licenses or enlist in the U.S. Armed Forces.

8 - Fewer options

Once your federal student loan goes into default, the loan is accelerated. This means the entire balance of the loan, including principal and interest, becomes due at once.

At this point, you no longer have access to options that might help you restructure or defer your payments.

9 - Withheld transcripts

Your school may withhold your academic transcripts until your defaulted student loan is paid in full or removed from default.

This can prevent you from continuing your education or applying for professional licenses or jobs that require copies of your academic credentials.

10 - Levies and liens

The lender may sue you to recover the debt. If their suit is successful, the lender can levy your bank account, essentially emptying your checking or savings accounts to repay your debt.

The lender can also place a lien on any real estate or other property you own. You won’t be able to refinance your mortgage with a lien on it, and if you sell the property, the lender gets first dibs on the sales proceeds.

How to avoid student loan default

The best way to avoid having your student loan go into default is to contact your loan servicer immediately.

Make the call as soon as you know you won’t be able to make your payment. Your loan servicer can help you understand your student loan repayment options.

Depending on the type of loan you have, you may be able to:

Option 1 - Switch repayment plans

If your federal student loans are currently on a standard repayment plan (that ensures your loans are paid off within 10 years), you may be able to change your repayment plan to a:

• Graduated repayment plan. Payments are lower at first, then gradually increase every two years. You still pay your loans off over 10 years (or 30 years for Consolidation Loans).
• Extended repayment plan. Payments may be fixed or graduated, but your repayment term is extended to 25 years.
• Revised Pay as You Earn Plan (REPAYE). Your monthly payments will be 10% of your discretionary income. Payments are recalculated each year based on your income and family size. Any outstanding balance on your loan will be forgiven after 20 years (or 25 years for loans taken out for graduate or professional studies).
• Income-Based Repayment Plan (IBR). Your monthly payments may be 10% or 15% of your discretionary income. Any outstanding balance on your loan will be forgiven after 20 or 25 years, depending on when you received your first loan.
• Income-Contingent Repayment Plan (ICR). Your monthly payment will be the lesser of 20% of your discretionary income or the amount you would pay on a 12-year fixed repayment plan. Any outstanding balance is forgiven after 25 years.
• Income-Sensitive Repayment Plan. Your monthly payment is based on your annual income but ensures your loan is paid in full within 15 years.

Option 2 - Consolidate your loans

If you're making payments on multiple federal student loans, you may be able to consolidate them into a single Direct Consolidation Loan. A direct loan can lower the amount you need to pay each month and simplify repayment since you'll only have to make one monthly payment.

Option 3 - Get a deferment

Deferment is a temporary postponement of your federal student loan payment.

It’s only a possibility if you’ve had a change in circumstances that makes it impossible for you to pay your loans under an income-driven repayment plan.

Some scenarios that might qualify for student loan deferment include:

• Undergoing cancer treatment
• Job loss or other economic hardships
• Enrolling at least half-time in a college, career school, or graduate fellowship program
• Being on active duty military service
• Enrolling in a vocational, drug abuse, mental health, or alcohol abuse rehabilitation program

Depending on the type of federal student loan you have, you may have to continue making interest payments on your loan during the deferment period.

The U.S. Department of Education maintains a table showing when you are responsible for paying interest during deferment.

Option 4 - Get a forbearance

Forbearance is a lot like deferment in that you can temporarily suspend making federal student loan payments. However, during student loan forbearance, you are still responsible for paying the interest that accrues on the loan.

You can either make interest-only payments during the forbearance period or have it added to your loan balance.

You can request forbearance if you are:

• Unable to make your payments due to financial difficulties, medical expenses, or a change in your employment
• Serving in the AmeriCorps, serving in a medical or dental internship or residency program
• A member of the National Guard who’s been activated by a governor

Special student loan relief for COVID

To help student loan borrowers during the COVID-19 pandemic, the U.S. Department of Education temporarily suspended monthly payments and stopped collection activity on federal student loans.

In addition, the interest rate is temporarily set at 0% on defaulted federal student loans. While this was initially set to run from March 13, 2020, through September 30, 2020, the period of student loan forbearance was recently extended to December 31, 2020.

Keep in mind, this automatic forbearance only applies to federal student loans.

However, many private student loan lenders have assistance options for borrowers who are experiencing difficulties due to the pandemic.

Depending on your servicer, you may be able to take advantage of:

• Short-term forbearance
• Temporary reduction of your interest rate and/or payment amount
• Interest-only payment options
• Extended repayment plans

Contact your loan servicer to discuss the options available to you.

How to get your student loan out of default

If your student loans are already in default, there are two good ways to get a federal student loan out of default and two options to avoid if possible.

Good option #1: Loan rehabilitation

Student loan rehabilitation is an agreement between you and your student loan servicer.

The servicer assigns you a monthly payment – usually 15% of your discretionary income. You make nine on-time monthly payments, and after 10 months your loan will no longer be in default.

One important point to keep in mind about student loan rehabilitation: if the federal government is already garnishing your wages, those garnishments may continue during your loan rehabilitation.

They won’t count toward your nine required monthly payments. Keep this in mind when negotiating your payment amount with the loan servicer.

If you successfully rehabilitate your loan, your credit report will no longer show that your loan is in default. However, the late payments leading up to your default will remain on your credit report for seven years.

You can only rehabilitate a defaulted federal student loan one time.

Once you enter into a loan rehabilitation agreement, make sure you have a plan to manage your student loans and avoid going into default again. If you face other financial troubles down the road, talk to your loan servicer about deferment or forbearance before your loan goes into default.

Good option #2: Student loan consolidation

Another possibility for getting federal student loans out of default is to consolidate your loans into a Direct Consolidation Loan.

Student loan consolidation combines several student loans into one new loan. However, to qualify for a federal Direct Consolidation Loan, you must either:

• Agree to an income-driven repayment plan for the new consolidated loan, or
• Make three consecutive, on-time payments on your defaulted loan before consolidation

Risky option #1: Wait it out

With some debts, you can just wait out the statute of limitations.

A statute of limitations limits the number of years a creditor can sue you for payment on a debt. Each state sets its own statute of limitations for different kinds of debt. In many states, the statute of limitations on private student loans is six years.

This doesn’t mean you no longer owe the money. It just means the lender has fewer collection options.

However, there is no statute of limitations on federal student loans.

No matter how old the student debt is, the lender can still garnish your wages or place a lien on property you own.

Risky option #2: Bankruptcy

Bankruptcy is a legal process in which the federal bankruptcy court helps individuals and businesses get out from under all or a part of their debt. But even bankruptcy can’t always get rid of federal student loan debt.

To have federal student loans discharged in bankruptcy, you must:

• File a separate action, known as an “adversary proceeding.”
• Prove that repaying your student loans would create a hardship for you and your dependents.

The bankruptcy court will review your case and decide whether to discharge your loan fully or partially or require you to repay your loan with different terms.

Keep in mind, bankruptcy can have a devastating effect on your credit. Depending on the type of bankruptcy you file, it may remain on your credit report for up to 10 years.

Bottom line

Defaulting on your student loans is no picnic. But there are options for avoiding or getting out of default. The first step is to discuss your options with your loan servicer.

As tough as it may be to discuss your financial troubles, remember that the employees who work for student loan servicers are used to having these conversations. They know every alternative available and can help you understand your options.

The sooner you get in contact with them, the sooner you can address the issue and minimize the negative impact on your credit and finances.

About the author

Janet Berry-Johnson is a Certified Public Accountant and freelance writer with a background in accounting and insurance. Her writing has appeared in Forbes, Freshbooks, The Penny Hoarder, and several other major outlets. See Janet on Linkedin and Twitter.

About the reviewer

Lauren Bringle is an Accredited Financial Counselor® with Self Financial– a financial technology company with a mission to help people build credit and savings. See Lauren on Linkedin and Twitter.