Advertiser Disclosure

How to Avoid and Recover From Student Loan Default

Feb. 15, 2018
Loans, Student Loans
At NerdWallet, we adhere to strict standards of editorial integrity to help you make decisions with confidence. Many or all of the products featured here are from our partners. Here’s how we make money.

More than 1 in 10 federal student loan borrowers will default on their loans within three years.

Here’s what you need to know about how to avoid student loan default, your options if default occurs and how to get out of default.

What is default on student loans?

Student loan default means you broke your promise to repay the loans you borrowed to pay for college. It allows the lender to begin collection efforts.

Federal student loans. Your loan is considered delinquent as soon as you miss a federal student loan payment. Your loan servicer won’t report your late payment to credit bureaus until 90 days have passed. After 270 days without a payment, your federal loan is in default.

Private student loans. You are technically in default one day after you miss a payment — there’s no delinquency period, as there is with federal student loans. Private lenders can technically sue you after you miss one payment, but lenders don’t typically jump to a lawsuit that quickly.

A student loan default remains on your credit report for seven years, making borrowing for a car, home or additional schooling more expensive. Default can also hurt your ability to rent an apartment or sign up for a new cell phone plan.

Other consequences of default include:
• You lose options to lower or suspend your payments, which are available only for borrowers in good standing
• You can’t take on additional student loans or receive other federal aid to return to school
• The loan holder can sue you or send private debt collectors after you
• The government can garnish or withhold your wages, tax refunds and Social Security payments
• Late fees and interest will build on your debt, raising the total amount you owe
• Your school can choose to withhold your academic transcript until your debt is repaid

You can’t be arrested or imprisoned for not paying a student loan. But in many states if you’re sued and 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.

How to avoid student loan default

Avoiding default begins as early as borrowing to pay for college. Once your student loans are due, you also have options to prevent late payments from happening.

Seek out free money. Submit a Free Application for Federal Student Aid, or FAFSA, to get grants, scholarships and work-study. Accept all free aid and look for scholarships from nonprofits and private organizations before you take on any debt.

Opt for federal loans before private. Federal loans typically carry lower interest rates than private loans, so you’ll pay less over time. Unlike federal loans, private lenders will usually require a co-signer if you don’t have credit history. In addition, private loans generally have fewer repayment and forgiveness options if you have trouble making payments.

Interest rates on student loans are relatively low compared to some other types of debt, such as credit cards. So paying it off as quickly as possible isn’t a must. But you still must make payments each month to avoid default.

Know what you owe. Your first loan bill will arrive six months after you leave school for any reason. Contact your college’s financial aid department to find out what loans you have. If you have federal loans, log into the National Student Loan Data System to learn more. If you have private loans, contact the bank, credit union or online lender you borrowed from.

Estimate payments. When you know the principal amount, interest rate and repayment term on your loans, you can use a student loan calculator to estimate what your monthly payments will be.

Create a budget. As soon as you know how much your payments will be, budget for them along with your other financial obligations. You may want to use the 50/30/20 budget: 50% of your take-home income goes toward essentials like minimum loan payments, 30% is for wants and 20% goes into savings.

If you’re having difficulty making payments or you see potential trouble ahead, contact your servicer to discuss lowering your payment or taking a short-term break.

Choose a repayment plan. Federal loan borrowers can sign up for income-driven repayment, which caps your payments at a percentage of your discretionary income and lengthens your loan term. Depending on who your private lender is, there may also be repayment plans you can access for those loans.

Consider deferment and forbearance. All federal and most private lenders offer deferment and forbearance options, which let you pause payments temporarily. It can give you breathing room to get back on track, but interest will continue to grow, so this option should only be used as a short-term fix.


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

What to do if you’re heading toward default

If it looks like default seems inevitable, the biggest mistake is to ignore the problem. If you miss a payment, contact your lender immediately to discuss your options.

Your federal loan servicer can help you switch to an income-driven repayment plan that will cap your payments at a percentage of your income. For some borrowers that can be as little as $0.

Many private lenders will help you catch up on payments by temporarily lowering your monthly payment or allowing you to go into deferment or forbearance.

If you continue to fall behind on your payments — especially without talking to your lender — expect calls from a debt collector. The Consumer Financial Protection Bureau has sample letters you can use when responding to bill collectors. If collectors are harassing you over your federal or private loans, you can submit a complaint to the CFPB.
If other debts are the reason why you can’t meet your student loan payments, consider contacting a bankruptcy attorney. Student debt can’t be eliminated in bankruptcy, but getting rid of other debts could free up cash for student loan payments. Your credit will take a hit initially, but you’ll begin to see improvement soon after.

How to get out of default on student loans

If your student loans end up in default, there are different tactics to take for federal and private loans.

The Department of Education offers three clear default escape routes: repayment, consolidation and rehabilitation. After completing one of these paths, you still have to pay back the debt you owe, but your loans will be in good standing. The best one for you depends on your priorities.

Repayment is best if you can pay everything you owe upfront and want to get out of default as quickly as possible. You may be able to negotiate a student loan settlement for less than you owe, but don’t expect big savings. Do not take on a personal loan in order to pay your debt faster. Personal loans typically carry higher interest rates than student loans. Explore other remedies that won’t put you in more debt.

Consolidation is your next fastest route to exit default. First you must make three full, on-time, consecutive monthly payments on the defaulted loan. Then you can consolidate your loan or loans into a new Direct Consolidation Loan. Moving forward, you’ll make payments on an income-driven plan.

Rehabilitation will help your credit score, but you can do it only once. Rehabilitation will wipe the default from your credit report, though any late payments that were previously reported will remain. You must make nine monthly loan payments within 10 consecutive months and be no more than 20 days late on any payment. Your new monthly payment will be 15% of your discretionary income, or you may request a lower amount.

Contact your lender. 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.

Catch up on loan payments. Default can happen immediately when you miss a private loan payment. But when you’re in default, it’s important to catch up on your loan payments. Otherwise, after 120 to 180 days of not receiving payment your loan is considered “charged off,” or uncollectible, and can be sold to a collection agency. Once sold, the charged-off loan is still owed to the new collection agency. A charged-off loan will remain a negative mark on your credit report for seven years.

Contact a student loan lawyer. If you’re this deep into a private student loan default, it’s best to contact 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.


About the author