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Student Loan Default: What It Is and How to Recover

Borrowers can get federal student loans out of default with options like loan rehabilitation and consolidation.
May 20, 2019
Loans, Student Loans
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Student loan default can feel overwhelming. But if you’ve defaulted, you’re not alone: More than 10% of federal student loan borrowers default within three years of entering repayment, according to the Education Department.

The worst thing to do when student loans default is ignore them. You can get loans back in good standing with options like loan rehabilitation and consolidation. Take action as soon as possible to avoid or stop penalties like garnished wages and seized tax refunds.

What is student loan default?

Student loan default means you did not make payments as outlined in your loan’s contract, also known as its promissory note. Default timelines vary for different types of student loans.

  • Federal student loans. Most federal student loans enter default when payments are roughly nine months, or 270 days, past due. Federal Perkins loans can default immediately if you don’t make any scheduled payment by its due date.
  • Private student loans. The Consumer Financial Protection Bureau states that private student loans often default after three missed payments, or 120 days total, but check your loan’s promissory note to know the specific timing. Some private loans default after one missed payment.
Before federal student loans default, they enter a status known as delinquency. Loans are considered delinquent as soon as you miss a payment, although your servicer won’t report these late payments to credit bureaus until 90 days have passed.

Delinquent federal student loans are eligible for postponements and repayment plans that could make payments more affordable, such as income-driven repayment. You cannot use these options once loans default, so contact your servicer immediately if you fall behind on your payments.

Many private lenders will help you catch up on payments by temporarily lowering your monthly payment or allowing you to pause repayment with a deferment or forbearance.

Are your student loans in default?

If you aren’t sure if your student loans are in default, the easiest way to find out is to check with your servicer. If you aren’t sure who that is — or aren’t ready to have a conversation with them about your loans — you have a couple of other options.

  • Log in to StudentAid.gov. All federal student loan borrowers have a My Federal Student Aid account they can access with their FSA ID. Sign in to your account, select a loan and look at its repayment status to see if it’s listed as in default. Your account also includes information about your servicer, if you need it.
  • Pull your credit report. Your credit report will list federal and private student loan defaults under the negative information section. You can get a copy of your report for free once a year at annualcreditreport.com.

These resources may not be updated in real-time, so your loan could be in default and not show up as such. Confirming your loan’s status with your servicer is your best bet.

Receiving calls from a debt collector is another sign of student loan default.

Federal student loan holders can place defaulted student loans with a collection agency if you do not make payment arrangements with them. Private student loans are typically considered “charged off,” or uncollectible, after 120 days of missed payments and can be sold to a collection agency

Debt collectors are required to follow the Fair Debt Collection Practices Act (FDCPA) when contacting you. If collectors are harassing you over your federal or private loans, you can submit a complaint to the Consumer Financial Protection Bureau. The CFPB also has sample letters you can use when responding to bill collectors.

What happens if you default on student loans?

A student loan default can affect you in many ways. Penalties of default include the following.

To collect on federal student loans, your loan holder can garnish your wages and withhold your tax refunds and other government payments, like Social Security checks.

Private student loan holders can’t take your tax refunds or Social Security payments, but they can take you to court. If they receive a judgment in their favor, they can garnish money from your paychecks or even your bank accounts to pay your defaulted loan.

A student loan default and the late payments that preceded it can remain on your credit report for seven years. This negative mark can make borrowing for a car, home or additional schooling more expensive — or potentially impossible. Default can also hurt your ability to rent an apartment, sign up for a new cell phone plan or even get a job.
Late fees and interest will continue to build on your debt, increasing the amount you owe. You can also be charged costs for the collection of your defaulted loan. These collection costs may be up to 25% of your principal and interest.

For example, let’s say you owe $30,000 at the time of default. You could have to pay as much as $7,500 in collection costs on top of that $30,000 balance.

If you have a student loan default, you can’t take on additional student loans or receive other federal aid to return to school.

If you’ve already graduated, your school can choose to withhold your academic transcript until your debt is repaid.

License suspension laws and enforcement vary greatly from state to state. But if you work in a field like medicine or teaching, your state may suspend or revoke your professional license if your student loans default. This can happen with your driver’s license as well.

One penalty you don’t have to worry about is being arrested or imprisoned for not paying a student loan. However, your lender can sue you to repay your loans. In many states if your lender wins a court judgment against you, you can be arrested for not complying with the court’s order. Don’t ignore a court summons.

» MORE: Can’t pay parent PLUS loans? 4 ways to get back on track

How to get student loans out of default

The Education Department offers three clear ways to recover from federal student loan default: repayment, consolidation and rehabilitation. Each can prevent or halt the consequences of default if you act fast enough; the best one for you will likely depend on your priorities.

If you want to get out of debt entirely

Repayment

When student loans default, the full amount owed becomes due immediately. If you can afford that, you can pay off your loans and be done with your debt. Of course, that won’t be possible for most borrowers. You may be able to negotiate a student loan settlement for less than you owe, but don’t expect big savings.

Don’t take on a personal loan to pay your student loans — even if they’re in default. Personal loans typically carry higher interest rates than student loans. Explore other remedies that won’t put you in more debt.

You can discharge defaulted student loans via bankruptcy, but they’re trickier to get rid of through this process than other debts. Make sure bankruptcy is right for you because it has a long-term effect on your finances. If you go this route, look for a bankruptcy attorney who specializes in student loans.

If you want to help your credit

Rehabilitation

Rehabilitation is the best option in most cases because it’s the only one that removes the default from your credit report, though previously reported late payments will remain.

To rehabilitate your loans, you must make nine monthly loan payments within 10 consecutive months. Your monthly payments will be 15% of your discretionary income, or you may request a lower amount.

You can only rehabilitate a student loan once. If you choose this option, make sure you can afford your payments once you complete the process, likely by enrolling in an income-driven repayment plan.

If you want to resolve the default quickly or already rehabilitated the loan

Consolidation

Besides paying in full, student loan consolidation is the fastest route to exit default. You can do either of the following to qualify:

  • Make three full, on-time, consecutive monthly payments on the defaulted loan.
  • Agree to repay your new loan under an income-driven repayment plan.

Consolidation may make sense if you have to resolve the default quickly, for instance if you’re returning to school and need access to financial aid. Consolidation will not remove the default line from your credit report.

Private student loans don’t come with standard recovery options like federal loans.

Ask your lender about possibilities for getting out of default. It may have options similar to federal loan default programs, or you may be able to negotiate another resolution to repay or agree to a student loan settlement for less than you owe.

If you can’t work something out with your lender, consider contacting a lawyer who specializes in student loans. The private student loan market is especially complicated, so having someone who understands the system, your rights and your options is crucial.

» MORE: Is there a statute of limitations on student loans?

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